Theoritical Aspects of Consolidated Balance Sheet of a Holding Company - An Overview


By

Dr. N. Subburaj
Professor in Management Studies
St. Michael College of Engg &Tech.
Kalayarkoil-630551, Sivaganga Dist, TamilNadu
 


INTRODUCTION

A company may purchase either the whole or the majority of shares of another company so as to have controlling interest in such a company or companies. The controlling company is known as the holding company and the company so controlled is known as subsidiary company. Holding company has the power to nominate the majority of the directors of subsidiary company. Consolidated balance sheet is a single balance sheet of holding and subsidiary companies. In India, it is not compulsory on the part of the holding company to prepare the consolidated balance sheet. But in England, it is a must on the part of the holding company to prepare the consolidated balance sheet in addition to its normal balance sheet.

This paper explains the important adjustments made while preparing the consolidated balance sheet. In this paper H Ltd refers to holding company and S Ltd refers to subsidiary company.

'H' LTD'S INVESTMENT IN SHARES OF 'S' LTD

The share of S Ltd is held by H Ltd as investments. This represents the ownership of H Ltd in the equity or net assets of S Ltd. If the entire shares of S Ltd are held by H Ltd, the investment of H Ltd in the share of S Ltd is replaced by the capital of S Ltd, while preparing the consolidated balance sheet.

MINORITY INTEREST

When the outsiders hold some of the shares of S Ltd, their proportionate share in the assets and liabilities of S Ltd is known as minority interest. The majority interest is calculated by using the following equation:

Paid up value of shares held by outsiders
Add: Outsiders' share of capital profits
         Outsiders' share of revenue profits
Less: Outsiders' share of capital loss
         Outsiders' share of revenue loss
   Minority interest


xxx
xxx

Xxx

Xxx

xxx
xxx


Xxx

 

Xxx


If  preference shares of S Ltd are held by outsiders, the face value of such shares with dividend due there on will be included in the minority interest. Minority interest is shown as a liability in the consolidated balance sheet.

CAPITAL PROFITS / LOSSES

These are otherwise known as pre-acquisition profits or losses. These are reverses/P&L (Cr) or (Dr) balance on the date of purchase of shares of S ltd by H ltd. These profits/losses are to be divided among H Ltd and outsiders on the basis of their shareholding proportions. H Ltd' share of capital profits/losses is adjusted on the calculation of cost of control(good will)/capital reserve. The outsiders' share of capital profits/losses is adjusted on minority interest.

REVENUE PROFITS / LOSSES

These are otherwise known as post-acquisition profits/losses. These profits/losses are earned By S Ltd after the acquisition shares by H Ltd. These profits/losses are to divided among h Ltd and outsiders on th ebasis of their shareholding proportions. H Ltd' share of revenue profits/losses is added/deducted from its P&l account in the consolidated balance sheet. The outsiders' share of revenue profits/losses is adjusted on minority interest.

COST OF CONTROL (GOOD WILL)/CAPITAL RESERVE

If H Ltd purchases the shares of S Ltd at a higher price than their actual value, the excess payment is known as cost of control or good will (Loss on purchase of shares of S Ltd). On the other hand, if the shares are purchased at a lower price than their actual value, the extent of lower payment is known as capital reserve (profit on purchase of shares of S Ltd). The cost of control/capital reserve is calculated as follows:

Amount paid for 'N' shares of S Ltd
Paid up value of shares held by H Ltd
Add: H Ltd' share of capital profits
                      (or)
Less: H Ltd' share of capital losses
Cost of control/capital reserve


xxx
xxx

xxxx

xxx

xxx

xxx

 

Xxx*


*If it is positive, the amount will be treated as cost of control and if it is negative, the amount will be treated as capital reserve. The amount of cost of control is shown in the asset side of the consolidated balance sheet and the capital reserve is shown in the liability of the consolidated balance sheet.

INTER COMPANY BALANCES (MUTUAL OWINGS)

In preparing the consolidated balance sheet mutual Owings between H Ltd and S Ltd are to be eliminated. Such transactions are:

1. Goods sold on credit by H Ltd to S Ltd and vice versa.
2. Bills drawn by H Ltd accepted by S Ltd and vice versa.
3. Loans advanced by H Ltd to S Ltd and vice versa.
4. Debentures issued by H Ltd and held by S Ltd and vice versa.

The effects of the above transactions are involved in the consolidated balance sheet is shown below:                                 CONSOLIDATED BALANCE SHEET

Liabilities

Rs

Rs

Assets

Rs

Rs

Sundry creditors(H Ltd + S Ltd)
Less: Mutual Owings

xxx
xxx


xxx

Sundry debtors(H Ltd + S Ltd)
Less: Mutual Owings

xxx
xxx


xxx

Bills payable(H Ltd + S Ltd)
Less: Mutual Owings

xxx
xxx


xxx

Bills receivable(H Ltd + S Ltd)
Less: Mutual Owings

xxx
xxx


xxx

Loans(H Ltd + S Ltd)
Less: Mutual Owings

xxx
xxx


xxx

Loans(H Ltd + S Ltd)
Less: Mutual Owings

xxx
xxx


xxx

Debentures(H Ltd + S Ltd)
Less: Mutual Owings

xxx
xxx


xxx

Investment in debentures(H Ltd
+ S Ltd)
Less: Mutual Owings

xxx

xxx



xxx

xxx

xxx


UNREALISED PROFIT ON STOCK OR STOCK RESERVE

If intercompany transfer of stock takes place at a profit, there may be an unrealized profit on stock unsold at the close of financial year. The unrealized profits on stock should be deducted from stock on the asset side of the consolidated balance sheet. In the liability side, the amount of stock reserve should be deducted from the P& L account. For example, if H Ltd purchased from S Ltd goods worth Rs. 40,000 on which S Ltd had charged a profit of 25 percent on cost and goods worth Rs.25,000 remained unsold at the end of the financial year. The unrealized profit on stock is (25/125% of 25,000) 5,000. The effect of this transaction on the consolidated balance sheet is shown below:

CONSOLIDATED BALANCE SHEET

Liabilities

Rs

Rs

Assets

Rs

Rs

P & L Account
Less: Stock reserve

xxx
xxx


xxx

Stock-    H Ltd
              S Ltd
Less: Stock reserve

xxx
xxx

 

xxx
xxx


Xxx

xxx

 

xxx


REVALUATION OF ASSETS AND LIABILITIES

If assets and liabilities of S Ltd are revalued at the time of acquisition of shares, there will be revaluation profits/losses. The revaluation profits/losses are treated as capital profits/losses. Profits at the end of the year will be charged with depreciation on the revised values in case the value of fixed assets appreciates and excess depreciation will be credited back to the profit, in case the value of assets depreciates. H Ltd' share of revaluation profits/losses is adjusted in the calculation of Good will/Capital reserve. S Ltd' share of revaluation profits/losses is adjusted in the calculation of minority interest.

ISSUE OF BONUS SHARES BY S LTD

S Ltd issues bonus shares either out to capital profits or revenue profits. If bonus shares are issued out of capital profits, there will be no effect on consolidated balance sheet. This is because H Ltd' share of capital profits is reduced on account of issue of bonus shares and on the other hand, paid up value of shares are held by H Ltd and outsiders increases. There will be no change in the values of the cost of control/capital reserve or minority interest.

Bonus shares issued out of revenue profits will have effect on the consolidated balance sheet. The value of shares held by H Ltd and outsiders will increase. The increased paid up value of shares of H Ltd will reduce the cost of control or increase the capital reserve. But there will be no change in the minority interest.

TREATMENT OF DIVIDEND

S Ltd may declare dividend from either capital profits or revenue profits. The effect of dividend declared out of capital profits on the consolidated balance sheet is shown below:

CONSOLIDATED BALANCE SHEET

Liabilities

Rs

Rs

Assets

Rs

Rs

     

Investments in shares of S Ltd
Less: H Ltd share of dividend


Cash/ Bank
Add: H Ltd share of dividend

xxx
xxx


xxx



xxx

xxx
xxx

xxx

Xxx*


* This amount will be the amount paid for the purchase of shares for  calculating the cost of control/capital reserve.

If dividend is declared out of revenue profits, the effect on the consolidated balance sheet is shown below:

CONSOLIDATED BALANCE SHEET

Liabilities

Rs

Rs

Assets

Rs

Rs

P & L Account(H Ltd)
Add: H Ltd share of dividend

xxx
xxx

 

Cash/ Bank
Add: H Ltd share of dividend

xxx
xxx

 

xxx

xxx


Note: Outsiders' share of dividend will not affect the consolidated balance sheet. The outsiders receive the dividend in cash and use the dividend amount as they like.
 

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Source: E-mail December 15, 2010

          

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