MEMBER CODE: SVS

CORPORATE ACCOUNTING
CHAPTER 4 : Business combinations and holding company
1. Consolidation of statements – fundamental principles
A. Elimination of investment account
Liabilities A ltd B ltd Assets A ltd B ltd
Share Sundry
capital assets :
Sundry Investments
liabilities
Value points :while preparing consolidated balance sheet,
investment of holding company in the equity shares of the
subsidiary company is replaced by the assets and
liabilities of the subsidiary company.

B. Goodwill / cost of control or capital reserve

Calculation of goodwill or cost of control
Cost of shares xxxx
Less face value of shares held xxx
Less profit and loss a/c xxx
General reserve xxx xxxx
Goodwill /cost control xxxx

Value points : Goodwill or cost of control will arise only

when there will be excess payment made for investment over
and above the shares in equity or the net assets acquired by
the company. Capital reserve is the share in equity or net
 asset of the subsidiary company over and above the price
paid for the investment.

C. Minority interest

Minority interest is the nominal amount of the shares

held by the outside shareholders plus proportionate
capital or revenue profits and / or reserves or minus
proportional capital or revenue losses.

Consolidated Balance sheet as on

Liabilities Rs Rs Assets Rs. Rs.

Share capital Sundry
Capital reserve Xxx assets: Xxx
Minority
interest Xxx
Sundry
liabilities Xxx
 Xxx

Value point: the share of outside shareholders in the net

assets is shown as minority interest in the liability side of
consolidated balance sheet.

D. Capital profit/ pre acquisition profit and revenue profit/

post acquisition profit / current profit

The dates of consolidation and acquisition may be

different. In such cases company’s share in profits and
reserves must be divided into capital profit and revenue
profit.

 Capital profit : any profit or reserve of balance

sheet on the date of purchase of shares.
Calculation
Reserve balance xxxx
Current profit xxx
Reserve prior to the date of purchase xxx
Add profit prior to the date of purchase xx
Capital profit xxxx

 Revenue profit : profit and reserve earned

subsequent to the date of acquisition of shares.

Calculation
Profit and loss a/c as on….. xxx
Add reserve xxx
 Total profits earned xxx
Less Pre acquisition profit xxx
Revenue profit xxx

Computation of cost of control or capital reserve

Value of shares invested in x ltd xxx
Less equity acquired in subsidiary company
Nominal value of shares xxx
Capital profit xx xxxx
Cost of control or goodwill xxxx

Value point – all profits are to be divided into capital profit ( pre
acquisition ) and post acquisition profit are shown in consolidated
balance sheet ( liability side).

E. Pre acquisition of losses

Calculation
Profit and loss a/c balance xxx
Less loss written off xxx xxxx

Value point : if there is any loss in the subsidiary on the date

acquisition, these losses must be taken into consideration while
determining the equity held by the holding company in the
subsidiary. Such loses should be deducted from the face value
of the shares held while calculating goodwill or capital reserve.
 F. Unrealized profit
Sometimes one company sells goods to another company at a price
which includes profit. The same goods remained unsold and there is
unrealized profit and shown in the assets side of balance sheet. It
should be eliminated from consolidated balance sheet.
G. Issue of bonus share
 Bonus share out of capital profit / pre acquisition
profit
No effect in accounting treatment because holding
company’ s pre acquisition profit is reduced while
calculating cost of control.
 Bonus share out of current profit /post acquisition
profit
Calculation
Value of shares xxxx
Less equity acquired subsidiary company
Nominal value of shares xxx
Capital profit xxx
Less face value of bonus issue xxx
Capital reserve xxxx

H. Revaluation of assets and liabilities

 Calculation of capital profit on revaluation
Profit on particular asset( plant, machinery etc) xxx
Loss on particular asset xxx
Total profit xxx

 Calculation of revenue profit

Profit and loss for the year…… xxx
Less additional depreciation on… asset xx
Add excess depreciation xxx
 Correct profit after revaluation xxx

 Valuation of assets
Particular asset( plant, machinery etc)
xxx
Less depreciation already charged xxx
Add increased value in revaluation xxx
less depreciation on increased value xxx

I. Debentures of subsidiary Company

Holding company makes investment in debentures of
subsidiary company. It is shown under the head ‘
investment ‘ in the balance sheet of holding company.

J. Preference shares in subsidiaries

 Held by holding company
The difference between paid up value and cost price
is to be adjusted against cost of control or goodwill.
 Held by outsiders
Included in minority interest.

K. Treatment of Dividend
 Unclaimed dividend
The unclaimed dividend of holding company will be
cancelled by the corresponding unclaimed dividend
of balance sheet’ s asset side.
 Proposed dividend
The subsidiary company proposes the dividend. The
share of holding company may added to holding
 company ‘ s share and other part of other
shareholders will be added to minority interest.
 Payment of Dividend
i. Out of pre acquisition profit
Holding company ‘s share is to be deducted while
computing goodwill or capital reserve.
Deducted from consolidated profit and loss a/c
and from balance sheet.

ii. Out of post acquisition profit

If the dividend is paid by the subsidiary company
from the current profit and receiving holding
company, then it should be credited to profit and
loss account of holding company.

PROFORMA OF CONSOLIDATED BALANCE SHEET

PROFORMA OF CONSOLIDATED PROFIT AND
LOSS ACCOUNT