EXECUTIVE SUMMARY

One of the popular firms of business combination is by means of holding company or Parent
Company. A holding company is one which directly or indirectly acquires either all or more than
half the number of Equity shares in one or more companies so as to secure a controlling interest
in such companies, which are then known as subsidiary companies. Holding companies are able
to nominate the majority of the directors of subsidiary company and therefore control such
companies. Holding company meet directly from such subsidiary company or it may acquired
majority OR shares in existing company. Such company also considered as subsidiary company
in which holding company acquired majority shares.
The reason why we need to study about Accounting for Holding Companies is because after
studying we will be able to

Discuss the relevance of holding companies

Understand the concept of subsidiary companies

Know the importance and problems of holding and subsidiary

companies

Explain the consolidated financial statements and accounts

Describe cash flow basis accounting

Introduction
Financial accounts of holding and subsidiary companies are concerned with classifying,
measuring and recording the transactions of their business. At the end of a period (typically a
year), the following financial statements are prepared to show the performance and position of
the business:

Describing the trading performance of the business over the accounting period

Statement of assets and liabilities at the end of the accounting period (a "snapshot") of
the business

Describing the cash inflows and outflows during the accounting period

Additional details that have to be disclosed to comply with Accounting Standards and the
Companies Act

Description by the Directors of the performance of the business during the accounting
period + various additional disclosures, particularly in relation to directors' shareholdings,
remuneration etc

Financial accounts are geared towards external users of accounting information. To answer their
needs, financial accountants draw up the profit and loss account, balance sheet and cash flow
statement for the company as a whole in order for users to answer questions such as:
o "Should I invest my money in this company?"
o "Should I lend money to this business?"

o "What are the profits on which this company must pay tax?"
Company Law Requirements for Financial Accounts
Every Indian company registered under the Companies Act 1956, is required to prepare a set of
accounts that give a true and fair view of its profit or loss for the year and of its state of affairs at
the year end. Annual accounts for Companies Act purposes generally include:

A directors report

An audit report

A profit and loss account

A balance sheet

A statement of total recognised gains and losses

A cash flow statement

Notes to the accounts

If the company is a "parent company", (in other words, the company also owns other companies
- subsidiaries) then "consolidated accounts" must also be prepared. Again there are exceptions to
this requirement.
Comparative figures should also be given for almost all items and analysis given in the year end
financial statements. Exceptions to this rule are given individually. For example, there is no
requirement to give comparative figures for the notes detailing the movements in the year on
fixed asset or reserves balances.

Let us now discuss holding and subsidiary companies to have deeper understanding of accounts
and problems related to these companies.

Holding Companies
When a company acquires majority of shares in the ownership or is in a
position to control the management of the other company, the company is
called a holding company and the other is called a subsidiary company. A
holding company is able to exercise control over the management of other
companies is to promote combination movement so that competition may be
eliminated, also advantages of monopoly or near monopoly may be enjoyed
and economics in management and production may be secured. Under the
following circumstances a company can become a subsidiary to other
company: (i) If a company acquires all or majority of equity shares in other
company (ii) If the other company controls the management or the
composition of its Board of directors (iii)If the company becomes a subsidiary
of another company which itself is a subsidiary of a third company.

Explanation with Example

Suppose, H is holding company of S because 51 % shares are of H in S. S is also of holding
Company of R because S have power to appoint the board of directors of R Company and then H
is also holding Company of R.

A holding company is a company or firm that owns other companies' outstanding stock. It
usually refers to a company which does not produce goods or services itself; rather its only
purpose is owning shares of other companies. Holding companies allow the reduction of risk for
the owners and can allow the ownership and control of a number of different companies. In the
U.S., 80% or more of stock, in voting and value, must be owned before tax consolidation
benefits such as tax-free dividends can be claimed.
Sometimes a company intended to be a pure holding company identifies itself as such by adding
"Holdings" or "(Holdings)" to its name, as in Sears Holdings.
In fact, A holding company is a parent company that owns enough voting stock in a subsidiary to
dictate policy and make management decisions. This is generally done through influence of the
company's board of directors.
This doesn't mean that the holding company owns all of the subsidiary's stock, or even a majority
of it. However, holding companies that control 80% or more of the subsidiary's voting stock gain
the benefits of tax consolidation, which include tax-free dividends for the parent company and
the ability to share operating losses.

Main features of Holding Company

1. Holding Company provides the power to work independently to subsidiary company. Because
relationship of holding and subsidiary company is not amalgamation or merge but both company
joins for cutting the cost of competition and getting the benefits of monopoly.
2. Holding company can also deal with subsidiary company and it is also recorded in both
books .

3. Under Company act of India 1956 , it is required to attach the copy of final accounts of
subsidiary company with the annual report of holding company .

Advantages of Holding Companies

Acquiring a controlling interest in a subsidiary as a holding company has certain advantages over
a merger:

The ability to control operations with a small percentage of ownership and, thus, smaller
up-front investment

Holding companies can take risks through subsidiaries, and limit this risk to the
subsidiary alone rather than placing the parent company on the line

Expansion can happen through simple stock purchases in the public market, which avoids
the difficult step of gaining approval from the subsidiary's board of directors

Through a holding company operation, a firm may buy 5, 10, or 50 percent of the stock of
another corporation. Such fractional ownership may be sufficient to give the holding company
effective working control over the operations of the company in which it has acquired stock
ownership. Working control is often considered to entail more than 25 percent of the common
stock, but it can be as low as 10 percent if the stock is widely distributed. One financier says that
the attitude of management is more important than the number of shares owned: If management
thinks you can control the company, then you do. In addition, control on a very slim margin can
be held through relationships with large stockholders outside the holding company group.

Because the various operating companies in a holding company system are separate legal
entities, the obligations of any one unit are separate from those of the other units. Therefore,
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catastrophic losses incurred by one unit of the holding company system may not be translatable
into claims on the assets of the other units. However, we should note that while this is a
customary generalization, it is not always valid. First, the parent company may feel obligated to
make good on the subsidiarys debts, even though it is not legally bound to do so, in order to
keep its good name and to retain customers.
An example of this was American Expresss payment of more than Rs.100 million in connection
with a swindle that was the responsibility of one of its subsidiaries.

Second, a parent company may feel obligated to supply capital to an affiliate in order to protect
its initial investment; General Public Utilities continued support of its subsidiaries Three Mile
Island nuclear plant after the accident at that plant is an example.
And, third, when lending to one of the units of a holding company system, an astute loan officer
may require a guarantee by the parent holding company. To some degree, therefore, the assets in
the various elements of a holding company are not really separate. Still, a catastrophic loss, as
could occur if a drug companys subsidiary distributed a batch of toxic medicine, may be avoided

Problems of Holding Companies

The holding company model has the following problems:
1. If less than 80% of the subsidiary is owned by the parent, the holding company pays multiple
taxes on the federal, state, and local levels.

Provided the holding company owns at least 80 percent of a subsidiarys voting stock, the IRS
permits the filing of consolidated returns, in which case dividends received by the parent are not
taxed. However, if less than 80 percent of the stock is owned, and then tax returns cannot be
consolidated. Firms that own more than 20 percent but less than 80 percent of another
corporation can deduct 80 percent of the dividends received, while firms that own less than 20
percent may deduct only 70 percent of the dividends received. This partial double taxation
somewhat offsets the benefits of holding company control with limited ownership, but whether
the tax penalty is sufficient to offset other possible advantages is a matter that must be decided in
individual situations.

2. A holding company can be forced to dissolve more easily than a single merged operation. It is
relatively easy to require dissolution by disposal of stock ownership of a holding company
operation found guilty of antitrust violations. For instance, in the 1950s Du Pont was required to
dispose of its 23 percent stock interest in General Motors Corporation, acquired in the early
1920s.

Because there was no fusion between the corporations, there were no difficulties from an
operating standpoint in requiring the separation of the two companies. However, if complete
amalgamation had taken place, it would have been much more difficult to break up the company
after so many years, and the likelihood of forced divestiture would have been reduced.
3. A holding company may expand through the use of leverage or debt, building a complex
corporate structure that can include unrealized values, and creating a risk if interest rates on debt
or the valuation of the assets posted as collateral for loans change dramatically.

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Subsidiary Company
Section 4 of the companies Act, 1956 defines a subsidiary company as
A company is a subsidiary of another if and only if
a) That other company controls the composition of its Board of Directors; or
b) That other
i) Where the first mentioned company is an existing company in respect of which the
holders of Preference shares issued before the commencement of this Act have the same voting
rights in all respect as the holders of Equity shares exercises or controls more than half of the
total voting power of such company.
ii) Where the first mentioned company is any other company, holds more than half in
nominal value of its Equity share capitals. OR
iii) The company is a subsidiary of any company which is that other companys
subsidiary.
A subsidiary, in business matters, is an entity that is controlled by a separate higher entity. The
controlled entity is called a company, corporation, or limited liability company; and in some
cases can be a government or state-owned enterprise, and the controlling entity is called its
parent (or the parent company). The reason for this distinction is that a lone company cannot be a
subsidiary of any organization; only an entity representing a legal fiction as a separate entity can
be a subsidiary. Contrary to popular belief, a parent company does not have to be the larger or

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"more powerful" entity; it is possible for the parent company to be smaller than a subsidiary, or
the parent may be larger than some or all of its subsidiaries (if it has more than one).
The parent and the subsidiary do not necessarily have to operate in the same locations, or operate
the same businesses, but it is also possible that they could conceivably be competitors in the
marketplace. Also, because a parent company and a subsidiary are separate entities, it is entirely
possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency,
indictment and/or under investigation, while the other is not.
The most common way that control of a subsidiary is achieved, is through the ownership of
shares in the subsidiary by the parent. These shares give the parent the necessary votes to
determine the composition of the board of the subsidiary, and so exercise control. This gives rise
to the common presumption that 50% plus one share is enough to create a subsidiary. There are,
however, other ways that control can come about, and the exact rules both as to what control is
needed, and how it is achieved, can be complex (see below). A subsidiary may itself have
subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its
subsidiaries together are called a "group", although this term can also apply to cooperating
companies and their subsidiaries with varying degrees of shared ownership.
Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For
this reason, they differ from divisions, which are businesses fully integrated within the main
company, and not legally or otherwise distinct from it.
Subsidiaries are a common feature of business life, and most if not all major businesses organize
their operations in this way. Examples include holding companies such as Berkshire Hathaway as

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in this listing of its subsidiaries, Time Warner, or Citigroup; as well as more focused companies
such as IBM, or Xerox Corporation. These, and others, organize their businesses into national or
functional subsidiaries, sometimes with multiple levels of subsidiaries.
An operating subsidiary is a business term frequently used within the United States railroad
industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its
own identity, locomotives and rolling stock.
In contrast, a non-operating subsidiary would exist on paper only (i.e. stocks, bonds, articles of
incorporation) and would use the identity and rolling stock of the parent company

Types of Subsidiaries
Three types of Subsidiaries can be formed namely:

Public Limited Liability

Minimum Capital - Must be paid by the founders (minimum two members)

Shares - Can issue nominative or bearer shares

Management - Should have at least three directors. One director should be a permanent
resident of the country

Private Limited Liability

Minimum Capital - Must be paid by the founders

Shares - Shares need to be nominative. Bearer shares cannot be subscribed

Management - Managed by one or more managers

Co-operative Company with limited liability

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Minimum Capital - Three partners are needed. One quarter of capital contribution must
be paid-in

Shares - Shares are nominative

Management - A co-operative company with limited liability and managed by one or

more managers.

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Advantages and Problems of Subsidiary

Advantages

Considerable tax advantages and legal protections

Ability to offset profits and losses of one part of a business with another

Some countries allow subsidiaries to file tax returns on the profits obtained in that
country

Liabilities and credit claims are locked in that subsidiary and cannot be passed on to the
parent company

Allows for joint ventures with other companies with each owning a portion of the new
business operation

Problems of subsidiaries

Legal Risks: As long as the parent company holds its subsidiary accountable for the
expectations of its board of directors there is little risk for the parent to be found liable for
the wrong doings of the subsidiary. But, if the parent company exercises excessive
control for example has the same board of directors, use of common letterhead, in such
case the parent company and the subsidiary are treated as one and the parent company is
responsible for the subsidiaries debts etc.

Legal paperwork involved with creating a subsidiary can be lengthy and expensive

Control also becomes an issue when a subsidiary is partially owned by another outside
organization

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There are a few vital points that act against the concept of setting up a wholly owned subsidiary.
Once can even consider these points as major problems of going ahead and setting up a
subsidiary.
The first and foremost point to be considered while setting up a subsidiary is the huge amount of
initial investment capital. The firm will have no other option but to bear all of the establishment
costs for setting up the subsidiary on foreign land and operational costs to cover the global
operations of this subsidiary.
The second and most dangerous problem is that there is the risk associated with becoming a
subsidiary. This risk is the risk of failure. The situation can go out of the hand, especially if a
foreign subsidiary rushes ahead recklessly without trying to get familiarized with the cultural
aspects and market swings in the host country. Often, it is seen that the subsidiary comes down
crashing in no time. The main cause behind the failure of a subsidiary on foreign land is the fact
that a subsidiary ends up being ignorant of the host countrys market situation and fluctuating
market trends. The subsidiaries often end up misjudging the host countrys market situation and
make erroneous decisions.
Especially when you consider the huge amount of capital to be invested, setting up a wholly
owned subsidiary seems to be all the more risky. Such a high amount of investment coupled with
a high degree of risk of failure often discourages people from opting for a wholly owned
subsidiary.

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Parent Company - Subsidiary Relation

It is important that the subsidiary is recognized as an independent corporation managed by the
board of directors even though it was incorporated by the parent company. This does not mean
that the subsidiary is uncontrolled. The parent company has the legal authority to hold the
subsidiary accountable to meet the financial objectives.
For the Parent company to control the independent subsidiary it should be:

The sole shareholder

Include voting control provisions in subsidiary article

Prepare bylaws defining the authority of the

officers, their term in the office and removal

Prohibit bylaws amendment without shareholder's

approval

HOLDING
COMPANY

CONTROL
COMPOSITIO
N OF BOARD

HOLDING
COMPANY

HOLS THE
HOLDING
CO.

HOLDING
COMPANY

HOLD MORE
THAN HALF OF
EQUITY SHARE
CAPITAL

HOLDING
COMPANY

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PRESENTATION OF ACCOUNTS BY HOLDING COMPANIES

As laid down in section (212) of the companies Act, 1956. A holding company requires to
attach its balance sheet. The following documents and present the same to its shareholders.
a) A copy of the Balance Sheet of the subsidiary.
b) A copy of the Profit and Loss Account of the subsidiary.
c) A copy of the Report of the Board of Directors of the subsidiary.
d) A copy of the Auditors Report of subsidiary.
e) A statement indicating the extent of holding companys interest in the subsidiary at the
end of the accounting year of the subsidiary.
f) Where the financial year of the subsidiary company does not coincident with the
financial year of the holding company. a statement showing the following.
i) Whether there are any changes in holding companies interest in subsidiary
company since the close of financial year of the subsidiary company.
ii) Details of material changes which have occurred between the end of the
financial year or the subsidiary company an end of the financial year of the holding
company.

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AS. 21 Consolidation of Financial statement

AS. 21 come into effect in respect of accounting periods commencing on or after 1st April i.e. for
year ending 31st March 2002. The A.S. 21 is applicable to all the enterprises that prepare
consolidated financial statement. It is mandatory for Listed companies and Banking companies. 4
As per AS 21, The Consolidated financial statements would include:
i) Profit & Loss A/c
ii) Balance sheet
iii) Cash flow statement
iv) Notes of Accounts except typical notes.
v) Segment reporting AS 21 also desire various import terms, as well as treatment
and same while preparing consolidated financial statement. Consolidated financial
statements should be prepared for both domestic as well as foreign subsidiaries.
Consolidated financial statements are financial statements that factor the holding company's
subsidiaries into its aggregated accounting figure. It is a representation of how the holding
company is doing as a group. The consolidated accounts should provide a true and fair view of
the financial and operating conditions of the group. Doing so typically requires a complex set of
eliminating and consolidating entries to work back from individual financial statements to a
group financial statement that is an accurate representation of operations.

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The consolidated P & L includes the profits of subsidiaries and the company's share of profits
made by associates and joint ventures. If any subsidiaries are not fully owned then a deduction
will be made further down the P & L for the profits attributable to minority interests.
The consolidated balance sheet similarly shows the amounts of assets and liabilities of the
company and all its subsidiaries. It also shows The value of holdings in associates and joint
ventures.
In contrast the company balance sheet and P & L only shows only shows the value of assets,
liabilities and profits of the company itself. The impact of subsidiaries, associates and joint
ventures is limited to the value of shares in them and dividends paid by them.

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How to prepare consolidated financial statements

A consolidated profit and loss account is prepared so that shareholders and other
interested parties can see the results of the group for a period as though it were a single
entity. It will also show how much of the profit accrues to the shareholders of the
parent company and how much to the minority and how the directors will distribute
the profit accruing to the shareholders.
A parent company which is not a wholly-owned subsidiary must publish:
Its own balance sheet
A consolidated balance sheet
its own profit and loss account
A consolidated profit and loss account
However a parent company may, and many do, take advantage of a dispensation
offered by CA 85 - the ability not to publish its own profit and loss account if group
accounts have been prepared in line with CA 85 and its own profit is disclosed in a
note to the balance sheet.

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Consolidated Balance Sheet

Under Indian Company Act, there is no need to prepare combined or consolidated final accounts
of holding and subsidiary company in the books of holding company but holding company
attaches the copy of balance sheet, one copy of profit and loss account and one copy of audit
report of subsidiary company with his final accounts. But for showing true financial position,
often holding company prepare consolidated balance sheet.
It is easy to understand that consolidated balance sheet is a balance sheet in which all the assets
and liabilities of holding company and subsidiary company are added with each other but
practically, it is tough to make consolidated balance sheet of holding and subsidiary company.
A holding company is required to present to its shareholders consolidated balance sheet of
holding company and its subsidiaries. Consolidated balance sheet is nothing but addicting of up
or combining the balance sheet of holding and its subsidiary together. However assets and
liabilities are straight forward, i.e. added line to line and combination of share capital, reserves,
and accumulated losses are not directly added in consolidated balance sheet.
The following points need special attention while preparing consolidated balance sheet.
1) Share of holding company and share of minority (outside shareholders).
2) Date of Balance sheet of holding company and that of various subsidiary companies must be
same. If they are not so necessary adjustment must be made before consolidation.
3) Date of Acquisition of control in subsidiary companies.
4) Inter company owing.

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5) Revaluation of fixed assets as on date of acquisition, depreciation, adjustment on revaluation

amount etc.

Steps for preparing consolidated balance Sheet of the holding company and its subsidiarycompany.
1st-Step
Add all the assets of subsidiary company with the assets of holding company. But Investment of
holding company in Subsidiary company will not shown in consolidated balance sheet because,
investment in subsidiary company will automatically adjust with the amount of share capital of
subsidiary company in holding company.

2nd-step
Add all the liabilities of subsidiary company with the liabilities of holding company. But Share
capital of subsidiary company in holding company will not shown in the consolidated balance
sheet in the books of holding company. Because, this share capital automatically adjust with the
amount of the investment of holding company in to subsidiary company .

3rd-Step
Calculate of Minority Interest
First of all we should know what minority interest is. Minority interest is the shareholder but
there is not holding companys shareholder. So, when holding company shows consolidated
balance sheet, it is the duty of accountant to show minority interest in the liability side of

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consolidated balance sheet.

We can calculate minority interest with following formula
Total share capital of Subsidiary company = XXXXX
Less Investment of Holding company in to subsidiary company = - XXXX
-----------------------------------------------------------------------Add proportionate share of the subsidiary companys profit and
Reserves or increase in the value of assets + XXXX
----------------------------------------------------------------------------Less proportionate share of the subsidiary companys loss and decrease
In the value of total assets of company - XXXXX
-----------------------------------------------------------------------------Value of Minority Interest XXXXX
-------------------------------------------------------------------------------

4th Step
Calculate cost of capital / Goodwill or Capital Reserve
If holding company purchases shares of subsidiary company at premium, then the value of
premium will be deemed as goodwill or cost of capital and shows as goodwill on the assets side
of consolidated balance sheet.

But if holding company purchases the shares of subsidiary company at discount, then this value
of discount will be capital reserve and show in the liability side of consolidated balance sheet.

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5th Step
Treatment of Pre Acquisition of reserve and profit
Pre acquisition profit and reserve of subsidiary company will be shown as capital reserve in
consolidated balance sheet but the value of minority interests profit or reserves deducts from it
and add in minority interest value.
Total profit before acquisition of subsidiary company = XXXX
Less share of minority interest - XXXX
Value of profit X minority interests value of shares in subsidiary company / total share capital of
subsidiary company.
_____________________________________________________
Pre acquisition profit and reserve shown as capital reserve XXX
--------------------------------------------------------------------------------------

6th Step
Calculate post acquisition profits
After the date of purchasing the shares of subsidiary company , profit of subsidiary company will
also deem of holding company and it include in the profit of holding company and we also
separate the part of profit of minority interest and add in minority interests value and shown in
liability side .

7th Step
Elimination of common transactions
All common transaction between holding company and subsidiary company will not show in the
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consolidated balance. There following common transaction:

1. Goods sold and goods purchase on credit and the value of debtor or creditor either subsidiary
company or holding company will not show in consolidated balance sheet
2. Value of bill payable or bill receivable of holding company on subsidiary company will also
not shown but if some bills value is discounted from third party then either of both companys
payable value shown as liability in the consolidated balance sheet .

8th Step
Treatment of Unrealized profit
If subsidiary company sells the goods to holding company or holding company sells the goods to
subsidiary company at profit and if such goods will not sold in third party , then the profit will
not realized , so such unrealized profit will not credited to profit and loss account . At this time a
stock reserve account is opened and all amounts of unrealized profit transfers to this account and
this accounts total amount is deducted from closing stock of consolidated balance sheet.
Suppose
Closing stock of H 50000
Closing stock of S 50000
________________________
100000
Less stock reserve
2000
--------------------------------98000
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---------------------------------If subsidiary company has also other outsiders shares then holding company makes reserve up
to his shares proportion.

9th Step
Treatment of Dividends
if holding company gets the dividends from subsidiary company, then this will divide into two
parts. If subsidiary company declare dividend out of capital profits, then this will add in capital
reserves in consolidated balance sheet. But, if subsidiary company has declared the profit out of
revenue gains, then this dividend will add in general profit and loss account and will shown in
the liability side of consolidated balance sheet.

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Figure 1
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CONSOLIDATED PROFIT AND LOSS ACCOUNT

The consolidated profit and loss account of the holding company and its subsidiaries are
prepared to show the operating activities of the companies comprising the groups. While
preparing the consolidated profit and loss account of the holding company and its subsidiary, the
items appearing in the profit and loss account of the holding company and the subsidiary
companies have to be aggregated. But while doing so, the following adjustment have to be made.
1) Prepare profit and loss account in columnar form Amounts relating to inter company
transactions are entered in the adjustment column against the respective items and are subtracted
while entering amounts in the total columns.
2) All inter company operating transactions are eliminated such as purchase and sale of goods,
interest on loans among the group companies.
3) All inter company profits are adjusted.
4) Dividends received from the subsidiary company by the holding company should be
eliminated from both the sides of consolidated profit and loss account.
5) Interest accrued and outstanding on Debenture of the subsidiary company held by the holding
company should be 23 accounted by holding and subsidiary company both and then its should be
eliminated.
6) Readjustment of Depreciation on Revaluation on fixed Assets at the time of acquisition of
shares by the holding company should be adjusted in consolidated balance sheet and respective
fixed assets and in the consolidated profit and loss account.

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7) The minority interest in the profit of subsidiary company should be transferred minority
interest account, in the proportion of total profit after adjustment of revaluation of fixed Assets,
but before adjusting unrealized profit on stock.
8) The share of holding company in pre-acquisition profit should be transferred to cost of
control, in case shares are acquired during the year.
9) Share of holding company in the past acquisition profits shall be considered as revenue
profits.
10) The balance in holding company columns will represents the total profit or loss made or
suffered by the group as a whole.

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LAYOUTS FOR CONSOLIDATED PROFIT AND LOSS

ACCOUNTS AND BALANCE SHEETS
The consolidated profit and loss account should be drawn up according to the following format:
CONSOLIDATED PROFIT AND LOSS ACCOUNT
1. Commission income
2. Net income from securities transactions and foreign exchange dealing
(a) Net income from securities transactions
(b) Net income from foreign exchange dealing
3. Income from equity investments
4. Interest income
5. Other operating income
6. NET INCOME FROM INVESTMENT SERVICES
7. Commission expenses
8. Interest expenses
9. Administrative expenses
(a) Staff costs
(aa) Salaries and fees
(ab) Staff-related costs

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(aba) Pension costs

(abb) Other staff-related costs
(b) Other administrative expenses

10. Depreciation and write-downs on tangible and intangible assets

11. Other operating expenses
12. Loan and guarantee losses
13. Write-downs on securities held as financial fixed assets
14. Share of profit/loss of undertakings included in the consolidated accounts using the equity
method
15. NET OPERATING PROFIT (LOSS)
16. Extraordinary items
(a) Extraordinary income
(b) Extraordinary expenses
17. PROFIT (LOSS) BEFORE APPROPRIATIONS AND TAXES
18. Income taxes
(a) Taxes for the financial year and previous financial years
(b) Change in imputed taxes due
19. Other direct taxes
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20. Share of profit/loss for the financial year attributable to minority interests
21. PROFIT (LOSS) FOR THE FINANCIAL YEAR

The consolidated balance sheet should be drawn up according to the following layout:

CONSOLIDATED BALANCE SHEET

ASSETS
1. Liquid assets
2. Claims on credit institutions
3. Claims on the public and public sector entities
4. Debt securities
(a) On public sector entities
(b) Other
5. Shares and participations
6. Participating interests
7. Shares and participations in group undertakings
8. Intangible assets
(b) Goodwill
(c) Other long-term expenditure

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9. Tangible assets
(a) Real estate and shares and participations in real estate corporations
(b) Other tangible assets
10. Claims in respect of share, investment share capital and original fund issues
11. Own retained shares and participations
12. Other assets
13. Accrued income and prepayments
14. Imputed tax claims

LIABILITIES
A. LIABILITIES
1. Liabilities to credit institutions
2. Liabilities to the public and public sector entities
3. Debt securities issued to the public
(a) Bonds
(b) Other
4. Other liabilities
5. Accrued expenses and deferred income

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6. Compulsory provisions
(a) Pension provisions
(b) Provisions for taxes
(c) Other provisions
7. Subordinated liabilities
8. Imputed taxes due
9. Negative consolidation difference
10. Minority interests

B. EQUITY CAPITAL
11. Share capital
12. Share premium account
13. Revaluation reserve
14. Other restricted reserves
(a) Reserve fund
(b) Reserves provided for by the articles of association
(c) Other reserves
15. Capital loans
16. Non-restricted reserves
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(a) Reserve for own retained shares

(b) Other reserves
17. Profit (loss) brought forward
18. Profit (loss) for the financial year

OFF-BALANCE SHEET COMMITMENTS

1. Commitments given to a third party on behalf of a customer
(a) Guarantees and pledges
(b) Other
2. Irrevocable commitments given in favour of a customer
(a) Securities repurchase commitments
(b) Other
3. Undelivered securities transactions

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Foreign Subsidiaries
Foreign subsidiaries companies final A/c should be consolidated along with other subsidiary
companies in the usual manner. The trial balance of the subsidiary or balance sheet and profit and
loss A/c of the foreign subsidiary is the first converted into home currency. The rules of
conversion are the same as for foreign branches which can be summarized as under. a) Fixed
Assets and fixed liabilities should be converted at the rate of exchange prevailing as on date
when such assets were purchased or such liabilities are incurred or the payment was made if they
are acquired or raised after acquisitions of shares.
b) Floating assets and liabilities should be converted at the rate of exchange prevailing on the
last day of the accounting year.
c) Revenue items or net profit for the year should converted at the average rate of exchange
ruling during the period under review.
d) Opening stock should be converted at the rate of exchange at the beginning of the year.
e) Share capital and Reserves of subsidiary company as on date of acquisition, should be
converted at the rate of exchange prevailing on date of acquisition.
f) Any remittances for purchases of goods by subsidiary company from holding company or
vice-versa should be converted at the actual rates prevailing on the date of purchase or date of
receipt of remittances.
g) Fixed assets / Fixed liabilities as on date of acquisition which are carried forward should be
converted at the rate of exchange prevailing on date of acquisition of shares; if rate on date of
acquisition on fixed assets not given.
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After converting the various items of trial balance a new trial balance can be prepared, difference
if any in the new trial balance should be transferred to exchange fluctuation account. Such
difference may be carried and shown in the Balance sheet either as an asset or as a liability
depending on whether balance debit or credit, alternatively difference in exchange can be
transferred to profits & loss account

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Illustration
The following are the summarized Balance Sheets of X Ltd. and Y Ltd. as at 31st December
2010.

1) X Ltd. acquired its interest in Y Ltd. on 1st January, 2010 when the balance to the General
Reserve Account of Y Ltd. was Rs. 1,80,000.
2) The Balance to the Profit & Loss Account of Y Ltd. as on 31st December, 2010 was arrived at
as under

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3) Balance to the Profit and Loss Account of Y Ltd. as on 1-1- 2010 was after providing for
dividends on Preference shares and 10% dividends on Equity shares for the year ended 31st
December, 2009, these dividends were paid in cash by Y Ltd. in May 2010.
4) No entries have been made in the books of X Ltd. for debenture interest due or for proposed dividends
of Y Ltd. for the year ended 31-12-2010.
5) Mutual indebtedness of Rs. 24,000 is reflected in the balances shown in the Balance Sheets.
6) Y Ltd. in October 2010 issued fully paid up bonus shares in the ratio of one share for every four shares
held by utilising its general reserve. This was not recorded in the books of both the companies.
7) Dividend paid by Y Ltd. for 2009 was credited to profit & Loss A/c of X Ltd. instead of crediting to
investments in Subsidiary Company A/c. 8) X Ltd. acquired both the Equity shares and Preference shares
of Y Ltd. on 1st January, 2010. From the above information, you are required to prepare the Consolidated
Balance Sheet of X Ltd. and its subsidiary Y Ltd. as at 31st December, 2010. All workings are to form
part of your answer.

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BIBLIOGRAPHY
1. http://archive.mu.ac.in/myweb_test/MCOM-%20Ac-%20Paper%20%20I.pdf
2. http://icaitv.com/live/icai210913/WebcastAccountingStandards21-233.
4.
5.
6.

27V1p3.pdf
http://www.svtuition.org/2009/03/how-to-prepare-consolidated-balance.html
http://www.svtuition.org/2009/03/what-is-holding-company.html
http://www.federalreserve.gov/reportforms/forms/FR_Y-9C20130331_i.pdf
http://vinodkothari.com/wpcontent/uploads/2014/01/accounting-standard-

7.

AS-21-consolidation.pdf
http://www.classifiedsonweb.com/backend/uploads/17.Accounts%20of
%20Holding%20Companies(Theory).pdf

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