ACCOUNTS OF HOLDING COMPANIES

1. Introduction
A Holding Company is one, which controls one or more other companies either by means of holding
the shares in that company or companies or by having power to appoint the whole or majority of the
directors of those companies. A company controlled by a Holding Company is known as a Subsidiary
Company.
Holding Company’s entity is different from that of its Subsidiary Company. Holding Company and
its Subsidiary Company prepares their financial statements separately. But, the Holding Company prepares a
Consolidated Financial Statements by consolidating the financial statements of its own with that of its
Subsidiary Company. Here, only the procedure for the preparation of Consolidated Statement of Financial
Position has been mentioned.
2. Preparing the Consolidated Statement of Financial Position
The fundamental principal of consolidation is the aggregation of the assets and liabilities of the
Holding and Subsidiary Companies, after elimination of inter-company investments, inter-company
balances, unrealized inter-company profits on transfer of stocks and on other stocks and on other assets held
at Statement of Financial Position date, and after making such other adjustments as to enable the
Consolidated Statement of Financial Position to reflect the financial position of the group.
2.1 Interest of Holding Company in the Subsidiary company
Interest of Holding Company in Subsidiary Company is to be calculated by comparing between the
subscribed number of shares of Subsidiary Company and the shares purchased by the Holding Company.
Subscribed number of shares can be found in the Statement of Financial Position of Subsidiary Company.
The invested number of shares can be found in the assets side of the Statement of Financial Position of
Holding Company.
If, for example, a Holding Company buys 60,000 of the 100,000 subscribed shares its Subsidiary
60,000
Company, then the interest of the Holding Company in its subsidiary will be = 100,000 x 100 = 60%. The
remaining 40% will be of the minority shareholders.
2.2 Share Capital to be shown in the Consolidated Statement of Financial Position
Share capital the Holding Company is to be shown in the Consolidated Statement of Financial
Position.

2.3 Inter-Company Transactions (Indebtedness)

All the transactions between the Holding Company and its Subsidiary are to be mentioned. Inter-
company transactions begin with the credit purchase and sale between the two companies.

Accounts Receivable and Accounts Payable: When a company sells goods to another company on
credit, and the transaction(s) is(are) not settled within Statement of Financial Position date, then the
seller company’s Statement of Financial Position will show Account Receivable and the buyer
company’s Statement of Financial Position will show Account Payable of same amount. This
amount will be written off from the combined (total) Account Receivable & Accounts Payable of
the Holding Company and Subsidiary Company.
Notes Receivable and Notes Payable: If the payee company issues notes in favor of the other
company, then Notes Payable will be seen in the Statement of Financial Position of the payee
company whereas Notes Receivable will be seen in the Statement of Financial Position of the other
company. This amount will to be written off from the combined Notes Receivable and Notes
Payable in the Consolidated Statement of Financial Position.

Discounted or Endorsed Notes: Where, however, the creditor company has discounted or endorsed
any such notes, the same will continue to appear as a liability in the Consolidated Statement of
Financial Position, for such notes are no longer mutual debts and the accepting company will to pay
such notes to outsiders on due date. The Statement of Financial Position of the company, which has
discounted notes, must include a bill to show the contingent liability in this respect. No such note
will be required in Consolidated Statement of Financial Position as it will remain an actual liability.

Unrealized profits: Where one company in the group holds some inventory purchased from another
an adjustment is necessary, while preparing Consolidated Statement of Financial Position, to
eliminate any profit made by the selling company on such inventory. Such profit is true profit from
individual company’s point of view, but from the point of view of the group as a whole such profit is
not true. The inventories have not passed to another outside the group and therefore, the profit has
not been realized by the group. As the consolidated Statement of Financial Position is concerned
with an overall picture of the group, such unrealized profit should be eliminated. This can be given
effect to by reducing the Inventory of the buying company and the profit & loss of the selling
company by the amount of unrealized profit. Where a minority interest is involved, only the Holding
Company’s share of unrealized profit should be eliminated, because so far as the minority
shareholders are concerned the profit is realized.

Some authorities are of the opinion that the whole of the unrealized profit should be eliminated in
all cases, because this will result in showing the relevant asset at its original cost to the group.
Where such profits have been made by the Subsidiary company, deduction should be made after
setting out Minority Interest in profits.

Inter-company Balances: Inter-company balances arising from transactions, such as, loans, bill of
exchange, and ordinary trade balances are eliminated from the Consolidated Statement of Financial
Position. Inter-company balances can be found in the consolidated Statement of Financial Position
in the name of Current A/c. Such inter-company balances appear as liability in the Statement of
Financial Position of one company and as asset in the Statement of Financial Position of another.
Their presence in the Consolidated Statement of Financial Position would simply inflate the value of
assets and liabilities. Sometimes inter-company balances are not same due to some goods or
remittance in transit, which should be shown separately in the consolidated Statement of Financial
Position.

Revaluation of Fixed Assets: Sometimes fixed assets of the Subsidiary Company are revalued for
the purpose of determining the price to be paid for acquiring controlling shares but without making
any actual adjustment in the books of the subsidiary Company. While preparing consolidated
Statement of Financial Position the revised values should be considered and any profit or loss on
such revaluation should be considered as capital profit or loss. As effect of revaluation is not given
in the books of the Subsidiary company, depreciation since acquisition is provided on the basis of
original valuation. Hence an adjustment in this respect is also to be made reducing or increasing the
revenue profit. In case of profit on revaluation, additional provision for depreciation will be
necessary. Conversely, in case of revaluation loss excess provision for depreciation should be
written back.

Proposed Dividend: When a dividend is proposed by the Subsidiary Company, it is debited to its
profit & Loss Appropriation A/c and credited to proposed Dividend A/c, which is show as a current
liability in its Statement of Financial Position. While preparing Consolidated Statement of Financial
Position, only that part of the proposed dividend, which belongs to the Minority Shareholders, will
be shown as a current liability and the rest which belongs to the Holding company, will be added to
the Consolidated Comprehensive Income Statement or capital Reserve depending upon whether the
dividend has been proposed out of post- or pre-acquisition profits.

It must be noted that nothing that has been said refers in any way to the proposed dividend of the
Holding Company the whole amount of proposed dividend of the Holding will be shown as a current
liability in the consolidated Statement of Financial Position.

Dividend: No adjustment is required while preparing Consolidated Statement of Financial Position

if a dividend has been declared and actually paid by the Subsidiary company, provided the dividend
so received by the Holding Company has been correctly recorded in its books. If, however, the
dividend received out of pre-acquisition profits of the Subsidiary Company, have been shown in the
 Comprehensive Income Statement of the Holding Company, should be adjusted with Other Income
in the Comprehensive Income Statement and Investment A/c. Payment of Interim dividend is treated
exactly in the same way.
Bonus Shares: Where the Subsidiary Company has already passed entries for the issue of bonus
shares no adjustment will be needed while preparing the Consolidated Statement of Financial
Position. Where the Subsidiary Company has not yet passed entries for the bonus issue, for the
purpose of the Consolidated Statement of Financial Position, the face value of shares held by the
Holding Company and the Minority Shareholders is increased and the amount of capital reserves or
Revenue Reserves is correspondingly reduced.

2.4 Pre-and Post-acquisition Profits

As already noted, Reserves and accumulated profits of Subsidiary Company must be allocated
between pre-acquisition and post-acquisition periods. Profits earned by Subsidiary Company before the date
of investment by Holding Company, is pre-acquisition profit. Whereas, the profit earned after the date of
investment is post-acquisition profit. Pre-acquisition profits of Subsidiary Company, to the extent of the
Holding Company’s share, is capital profit, it be considered as Capital Reserve and adjusted against Cost of
Control.
Capital Reserve and Share Premium A/C appearing in the Statement of Financial Position be treated
as Capital reserve, which, however, may not be adjusted against Cost of Control if they arose during the
post- acquisition period.
Share of Holding Company in the post-acquisition profits of subsidiary company is revenue profit,
which may be shown in the Consolidated Statement of Financial Position under different heads, as General
Reserve, Accumulated profit etc. or may be lumped under Revenue Reserves.
2.5 Cost of Control
Shares acquired in Subsidiary Company appear in the Holding Company’s Statement of Financial
Position as Investment. In the Consolidated Statement of Financial Position this Investment is cancelled
against what it represents. Investment in Subsidiary represents ownership of Holding Company in the Net
Worth or Equity of the Subsidiary Company. In case of a wholly owned subsidiary, if cost of investment is
equal to the equity of Subsidiary Company, the items simply cancel out each other. In the cost of investment
is more than the equity the excess represents payment for Goodwill (which is also termed as Cost of control)
and will appear in the Consolidated Statement of Financial Position. If the cost of investment is less than the
equity, the difference is capital Reserve and will be shown as such in the Consolidated Statement of
Financial Position. If the Holding Company holds some preference shares in the Subsidiary Company, in the
Consolidated Statement of Financial Position these will be eliminated against Investment of Holding
Company and the difference between the cost price and the paid up value of shares held will be transferred
to Cost of Control. Preference Shares held by outside shareholders will simply be shown as part of the
Minority Interest in the Consolidated Statement of Financial Position, each share being shown at nominal
value.
If debentures of Subsidiary Company are held by the Holding Company are to be eliminated against
Investment of Holding Company in the Consolidated Statement of Financial Position. Any difference
between the cost and the paid up value of debentures held will be transferred to Cost of control.
Thus Cost of control may be calculated as under-

Investment in Subsidiary Company xxx

Less: Face value of shares as invested xxx
Less: Share of pre-acquisition profit, if any xxx
Goodwill/Capital Reserve xxx

If the difference is positive, that is investment is greater than total of face value of shares and share
of pre-acquisition profit, then it will represent Goodwill (capital loss). If the difference is negative, that is the
value of investment is lesser than the total of face value of Holding Company’s shares and pre-acquisition
profit, then it will be Capital Reserve (capital gain).

2.6 Minority or Outside Shareholders

Where, the Holding Company does not won the whole of the share capital of the Subsidiary
company, there will be some minority or outside shareholders. Even in such a case all the assets and
liabilities of the Subsidiary Company are included in the consolidated Statement of Financial Position at
their full values. On the other hand, the collective interest of the outside shareholders in the company, called
Minority interest, is treated as a liability, and is shown as a separate item in the Consolidated Statement of
Financial Position. The Minority Interest consists of the nominal value of shares held by the minority
shareholders plus a proportionate share of in the company’s profits and reserves minus their proportionate
share of the company’s losses. Thus minority interest may be calculated as follows:

Nominal value of minority shareholders’ shares xxx

Add: proportionate share of capital profit xxx
Add: proportionate share of revenue profit xxx
Less: proportionate share of accumulated losses (xxx)
Minority/outsiders’ Interest xxx

2.7 Reserves and Surplus

All the reserves and surplus of Holding Company along with its share of post-acquisition profit of
the Subsidiary Company are to be shown in the Consolidated Statement of Financial Position. If there is any
unrealized profit, as shown in Para 2.3, such unrealized profit is to be adjusted with the reserves and surplus.
To make it clear, it is to be mentioned here that the share of pre-acquisition profit of Holding Company is to
be shown in the Cost of Control whereas, share of pre- and post-acquisition profit of outsiders is to be shown
in the Minority Interest.

2.8 Assets and Liabilities

Assets and liabilities of Holding Company will be added with the respective assets and liabilities of
Subsidiary Company. These added values are to be shown in the Consolidated Statement of Financial
Position. It is to be mentioned that if there is any inter-company transaction, as shown in Para 2.3, should be
adjusted with the particular asset or liability.
Problem # 1

The following are the Statement of Financial Positions of P Ltd. and its subsidiary Q Ltd.:
Statement of Financial Position
As at 30.06.2018
Assets P Ltd. Q Ltd.
Goodwill 60,000 20,000
Machinery 700,000 270,000
Investment (2,400 shares at cost) 192,000 -
Inventory 180,000 90,000
Accounts Receivable 260,000 120,000
Notes Receivable - 15,000
Cash 40,000 25,000
Total 1432,000 540,000
Capital & liabilities P Ltd. Q Ltd.
Paid-up Capital: shares of Tk. 100 each 1,000,000 400,000
General Reserve 150,000 -
Retained Earnings 142,000 60,000
Account Payable 120,000 80,000
Note Payable 20,000
Total 1,432,000 540,000
Other information:
(a) P Ltd. acquired the shares of Q Ltd. on 1st January, 2018.
(b) Income Statement of Q Ltd. showed a loss of Tk. 20,000 as on 01.07.2017.
(c) The Notes Payable in P Ltd. represented Notes issued in favor of Q Ltd. which the company got
notes of Tk. 5,000 discounted.
(d) Included in the inventory of P Ltd. are goods of the value of Tk. 20,000 which was supplied by
Q Ltd. at cost plus 25%.
(e) An invoice for Tk. 2,400 for inventory (Profit Tk. 480) had been included in the 2013 sales of P
Ltd. but not been received by Q Ltd.
Required: Consolidated Statement of Financial Statement as at 30.06.2018.

Problem # 2

The following are the Statement of Financial Positions of H Ltd. and its subsidiary S Ltd.
Statement of Financial Position
As at 30.06.2018
Assets H Ltd. S Ltd.
Non-current Assets 48,000 220,000
Investments (at cost) 280,000 --
Inventory 50,000 84,000
Accounts Receivable 46,000 40,000
Current A/c with S Ltd. 27,200 --
Bank 4,800 16,000
Total 456,000 360,000
Capital & liabilities H Ltd. S Ltd.
Paid-up Capital: shares of Tk. 10 each 320,000 240,000
General Reserve 40,000 30,000
Retained Earnings 56,000 48,000
Note Payable 20,000 --
Current A/c with H Ltd. -- 24,000
Account Payable 20,000 18,000
Total 456,000 360,000
Other information:
(a) H Ltd. acquired 20,000 shares of S Ltd. on 1st January, 2018.
(b) On 01.07.2017 S Ltd. had Tk. 24,000 in General Reserve and Tk. 12,000 as Retained Earnings.
(c) The Notes Payable in H Ltd. represented Notes issued in favor of S Ltd. which the company got
discounted.
 (d) Included in the inventory of H Ltd. are goods of the value of Tk. 11,200 which was supplied by
S Ltd. at a profit of Tk. 1,200.
(e) Cash in transit from S Ltd. to H Ltd. is Tk. 4,000 as at the close of the business on 30.06.2018.
(f) Included in the Current A/c with H Ltd. an amount of tk. 800 being interest credited to H Ltd.
this interest has not yet been considered in the books of H Ltd.
Required: Consolidated Statement of Financial Statement as at 30.06.2018.

Problem # 3

The following are the Statement of Financial Position of A Ltd. and its subsidiary B Ltd.
Statement of Financial Position
As at 30.06.2018
Assets A Ltd. B Ltd.
Non-current Assets 280,000 360,000
Investments (32,000 shares of B Ltd. acquired on 01.07.17) 400,000 ---
Loan to B Ltd. 100,000 ---
Other Assets 240000 276,000
Total 1,020,000 636,000
Capital & liabilities A Ltd. B Ltd.
Paid-up Capital: shares of Tk. 10 each 800,000 400,000
General Reserve (01.07.2017) 50,000 40,000
Retained Earnings (current year) 120,000 76,000
Loan from A Ltd. --- 100,000
Account Payable 50,000 20,000
Total 1,020,000 636,000
Notes:
(a) Loan to B Ltd. carries 6% interest, which has not been considered by any of the two companies.
(b) Loan from A Ltd. was taken on 01.01.2018.
(c) 10% dividend has been proposed by each company for 2013.
(d) A plant was purchased on 30.09.017 by A Ltd. from B Ltd. for Tk. 20,000. B Ltd.’s cost was
Tk. 12,000 only. Depreciation has been charged in the accounts of the purchasing company at
10% p.a.
Required: Consolidated Statement of Financial Position.

Problem # 4

The following are the Statement of Financial Positions of H Ltd. and its subsidiary S Ltd.
Statement of Financial Position
As at 30.06.2018
Assets H Ltd. S Ltd.
Non-current Assets 48,000 220,000
Investments (at cost) 280,000 --
Inventory 50,000 84,000
Accounts Receivable 46,000 40,000
Current A/c with S Ltd. 27,200 --
Bank 4,800 16,000
Total 456,000 360,000
Capital & liabilities H Ltd. S Ltd.
Paid-up Capital: shares of Tk. 10 each 320,000 240,000
General Reserve 40,000 30,000
Retained Earnings 56,000 48,000
Note Payable 20,000 --
Current A/c with H Ltd. -- 24,000
Account Payable 20,000 18,000
Total 456,000 360,000

Other information:
(a) H Ltd. acquired 20,000 shares of S Ltd. on 1st January, 2018.
 (b) On 01.07.2017 S Ltd. had Tk. 24,000 in General Reserve and Tk. 12,000 as Retained Earnings.
(c) The Notes Payable in H Ltd. represented Notes issued in favor of S Ltd. which the company got
discounted.
(d) Included in the inventory of H Ltd. are goods of the value of Tk. 11,200 which was supplied by
S Ltd. at a profit of Tk. 1,200.
(e) Cash in transit from S Ltd. to H Ltd. is Tk. 4,000 as at the close of the business on 30.06.2018.
(f) Included in the Current A/c with H Ltd. an amount of Tk. 800 being interest credited to H Ltd.
this interest has not yet been considered in the books of H Ltd.
(g) Included in the non-current assets of S Ltd., machinery (book value Tk. 100,000) and furniture
(book value Tk. 20,000) were valued at Tk. 150,000 and Tk. 15,000 respectively for the purpose
of fixing the price of its shares, there was no purchase or sale of these assets since the date of
acquisition.
Required: Consolidated Statement of Financial Statement as at 30.06.2018.

Problem # 5

The following are the Statement of Financial Position of A Ltd. and its subsidiary B Ltd.
Statement of Financial Position
As at 30.06.2018
Assets A Ltd. B Ltd.
Non-current Assets 256,000 384,000
Investments (32,000 shares of B Ltd. acquired on 01.07.17) 208,000 ---
Total 464,000 384,000
Capital & liabilities A Ltd. B Ltd.
Paid-up Capital: shares of Tk. 10 each 240,000 200,000
General Reserve (01.01.2013) 48,000 40,000
Retained Earnings 136,000 112,000
Account Payable 40,000 32,000
Total 464,000 384,000
Other information:
(a) A Ltd. acquired 16,000 shares of Tk. 10 each on 01.01.2018.
(b) On 01.07.2017 the Retained earnings of B Ltd. was Tk. 64,000.
(c) A Ltd. received 10% dividend for 2016-17 and this dividend has been shown in the
Comprehensive Income Statement of A Ltd.
Required: Consolidated Statement of Financial Statement as at 30.06.2018.

Problem # 6

The following are the Statement of Financial Positions of a group of companies:

Statement of Financial Position
As at 30.06.2018
Assets P Ltd. Q Ltd. R Ltd.
Non-current Assets 1,265,000 490,000 424,000
Investment (actual cost):
Shares in Q Ltd. 830,000 … …
Shares in R Ltd. 200,000 500,000 …
Inventory 220,000 … …
Accounts Receivable 200,000 200,000 165,000
Balance at P Ltd. … … 55,000
Balance at Q Ltd. 90,000 … …
Total 2,805,000 1,190,000 644,000
Capital & liabilities P Ltd. Q Ltd.
Paid-up Capital: shares of Tk. 10 each 2,250,000 800,000 500,000
General Reserve 180,000 120,000 84,000
Retained Earnings 140,000 30,000 60,000
Account Payable 180,000 160,000 …
Balance at P Ltd. … 80,000 …
Balance at R Ltd. 55,000 … …
 Total 2,805,000 1,190,000 644,000
Other information:
(a) P Ltd. acquired 60,000 shares of Q Ltd. and 10,000 shares of R Ltd.
(b) Q Ltd. acquired 30,000 shares of R Ltd.
(c) All investments were made on 01.10.2017
(d) Share capitals of the companies are divided into shares of Tk. 10 each.
(e) The following balances were seen on 01.07.2017:
Q Ltd. R Ltd.
Reserves 80,000 72,000
Income Statement (retained earnings) 10,000 10,000
(f) No dividend was declared during the year..
(g) Q Ltd. Sold goods to P Ltd. for Tk. 10,000; cost price of the inventory was Tk. 6,000 but the
goods remained unsold on 31.12.2013
Required: Consolidated Statement of Financial Statement as at 30.06.2018.

Problem # 7

The following are the Statement of Financial Positions of a group of companies:

Statement of Financial Position
As at 30.06.2018
Assets A Ltd. B Ltd. C Ltd.
Non-current Assets 200,000 340,000 160,000
Investment (acquired on 01.07.2017):
16,000 Shares in B Ltd. 180,000 … …
7,500 Shares in C Ltd. 30,000 … …
Loan to B Ltd. 50,000 … …
Inventory 50,000 8,000 10,000
Total 510,000 348,000 170,000
Capital & liabilities A Ltd. B Ltd. C Ltd.
Paid-up Capital: shares of Tk. 10 each 400,000 200,000 100,000
Accumulated profit up-to 01.07.2017 15,000 20,000 8,000
Retained Earnings for 2017-18 70,000 38,000 18,000
Loan from A Ltd. … 50,000 …
Account Payable 75,000 40,000 44,000
Total 510,000 348,000 170,000
Other information:
(i) Proposed dividend by each company @ 10%.
(ii) Inventory was purchased by B Ltd. from C Ltd. for Tk. 8,000. C Ltd.’s cost was Tk. 5,000.
(iii) Loan by B Ltd. carries 8% interest which has not been considered by any of the two companies.
Required: Consolidated Statement of Financial Statement as at 30.06.2018.