Key Takeaways:
- Understand the structure and consolidation process for holding and subsidiary companies.
- Learn core adjustments: minority interest, cost of control (goodwill/capital reserve), inter-company balances, and unrealized profits.
- Apply concepts through a structured example with stepwise consolidation.
Source: Pixabay
Definition of Holding and Subsidiary Company
Holding Company is an enterprise that controls one or more other companies by owning more than half their equity share capital or by controlling the composition of their board of directors. The companies so controlled are called Subsidiary companies.
For instance, if Alpha Ltd. acquires 80% of the shares in Beta Ltd., Alpha is the holding (or parent) company, and Beta is the subsidiary.
Consolidated Balance Sheet as per AS-21
AS-21 (Accounting Standard 21) governs the preparation and presentation of consolidated financial statements. These statements combine the financials of the holding company and its subsidiaries as if they were a single economic entity.
Preparation of a consolidated balance sheet is mandatory for every parent company with one or more subsidiaries. The objective: report the financial position and performance of the entire group, not just the parent company.
a. Structure and Presentation
The consolidated balance sheet includes assets, liabilities, and equity of both the holding and subsidiary companies. Critical adjustments ensure that figures do not double-count inter-company transactions and reflect the real group position.
b. Key Adjustments in Consolidation
- Minority Interest: Represents the share of profit and net assets belonging to shareholders of the subsidiary who are not part of the holding company.
- Cost of Control (Goodwill/Capital Reserve): The difference between the cost paid by the holding company for acquiring shares in the subsidiary and its corresponding share in the net assets of the subsidiary.
- Inter-company Balances: Amounts owed between holding and subsidiary are eliminated, so group financials reflect only external relationships.
- Unrealized Profits: Profits from intra-group transactions (e.g., inventory sold but not yet resold externally) are removed to avoid inflating group profits.
Minority Interest
Minority interest (also called non-controlling interest) is the portion of net assets and profits of the subsidiary attributable to shareholders other than the holding company.
It's shown as a separate item in the consolidated balance sheet, usually under equity and liabilities.
| Particulars | ₹ |
|---|---|
| Share Capital (Minority) | Value |
| Reserves and Surplus (Minority's share) | Value |
| Share in Revenue Profits | Value |
Cost of Control (Goodwill/Capital Reserve)
The cost of control is calculated as the difference between the price paid by the holding company to acquire the shares of the subsidiary and its share in the net assets of the subsidiary at the acquisition date.
- If the cost exceeds the net assets, the excess is goodwill (an intangible asset).
- If the cost is less, the difference is a capital reserve (a gain).
But what happens to the firm's hidden value, its goodwill? This intangible often reflects reputation, customer loyalty, and synergies expected from the combination.
Inter-company Balances
Any receivables or payables between the holding and subsidiary companies are eliminated during consolidation. For example, if the holding company has advanced ₹10,000 to its subsidiary, this appears as an asset in one and a liability in the other. Both are cancelled out in the consolidated balance sheet.
Unrealized Profits
Profits from transactions between the holding and subsidiary—such as stock transfers at a markup—are not considered realized until the inventory is sold to outsiders. The unrealized portion must be eliminated from consolidated profits and group assets.
Example
Let’s walk through a structured example with Alpha Ltd. (Holding) acquiring 80% of Beta Ltd. (Subsidiary).
| Particulars | Alpha Ltd. (₹) | Beta Ltd. (₹) |
|---|---|---|
| Share Capital | 500,000 | 200,000 |
| Reserves | 300,000 | 50,000 |
| Profit & Loss A/c | 100,000 | 30,000 |
| Investment in Beta Ltd. | 180,000 | - |
| Fixed Assets | 600,000 | 150,000 |
| Current Assets | 300,000 | 80,000 |
| Current Liabilities | 200,000 | 60,000 |
Step 1: Compute Net Assets of Beta Ltd. on Acquisition Date
- Share Capital: ₹200,000
- Reserves: ₹50,000
- P&L A/c: ₹30,000
- Total Net Assets: ₹280,000
Step 2: Holding Company’s Share in Net Assets
80% of ₹280,000 = ₹224,000
Step 3: Cost of Investment
Investment shown in Alpha Ltd.: ₹180,000
Alpha Ltd.'s share in net assets: ₹224,000
Capital Reserve = ₹224,000 - ₹180,000 = ₹44,000 (since net assets exceed the investment)
Step 4: Minority Interest Calculation
20% of ₹280,000 = ₹56,000
Step 5: Prepare the Consolidated Balance Sheet Extract
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Share Capital (Alpha Ltd.) | 500,000 | Fixed Assets (Group Total) | 750,000 |
| Reserves (Alpha + Beta’s share) | 300,000+40,000* | Current Assets (Group Total) | 380,000 |
| Profit & Loss (Alpha + Beta’s share) | 100,000+24,000* | ||
| Capital Reserve | 44,000 | ||
| Minority Interest | 56,000 | ||
| Current Liabilities (Group Total) | 260,000 | ||
| Total | 1,264,000 | Total | 1,264,000 |
*Beta’s post-acquisition profits are apportioned: 80% to holding, 20% to minority.
Notice how the investment in Beta Ltd. shown in Alpha’s books is replaced by Alpha’s share in Beta’s net assets. Inter-company balances (if any) and unrealized profits (such as unsold inventory markup) would be eliminated as appropriate. This ensures the consolidated balance sheet presents the group as a single economic entity, accurately reflecting ownership and performance.