SUBJECT : Corporate Accounting

TOPIC :
ACCOUNTS OF HOLDING COMPANIES
SUBMITTED TO: SUBMITTED BY:
Ms. Kajal Popli Charu Lata
Roll no. 204 {SEC D}
 INTRODUCTION

• When a company acquires majority shares in the

ownership capital or is in a position to influence or
control the management of the other company, the
company is called a Holding Company and other
company a Subsidiary.
• Subsidiaries have their separate existence and are
managed by independent governing boards (in case of
public enterprises) and Holding company (in case of
commercial enterprises).
• Holding company is the one that holds either the whole
of the share capital or a majority of shares in one or
more companies. Its object is to promote combination
movement. Example : the organization of steel authority
of India ltd. etc.
 LEGAL DEFINATION
A holding company is better defined in the context of
definition of a subsidiary company, section 4 of the
companies act,1956 defines a subsidiary company.
A company is said to be subsidiary when :
(a) That other company controls the composition of its
(i.e. subsidiary) Boards of directors or
(b) Other
➢ when 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 respects as the
holders of equity shares, exercises or controls more
than half of the total voting power of such company.
(c) The company is subsidiary of any company which is
that other company’s subsidiary.
 ADVANTAGE of HOLDING COMPANY

• Both companies can retain their identities as there is

no need to liquidate themselves and lose their identity.
• Various income tax benefits can be enjoyed by
forwarding their existing losses.
• Subsidiary company can enjoy the advantage of existing
goodwill.
• Profitability and financial position of each company
can be easily known as each company has to prepare its
own books of accounts.
• Less investment is required to acquire the controlling
interest.
• Economies in production and management may be
secured.
 DISADVANTAGE of HOLDING COMPANY

• These companies can manipulate the accounts for

their fraudulent purposes.
• Danger of oppression of minority shareholders.
• Figures of inter company transactions may also be
manipulated.
• Holding companies enjoys all the benefits of
monopoly but this is clearly a disadvantage from
social point.
• Subsidiary company may be forced to appoint
persons of the choice of holding company.
• Holding company can unreasonably exploit the
subsidiary company.
 CONSOLIDATED BALANCE SHEET

• In India, although a holding company is not required by

law to prepare a consolidated Balance sheet or a
consolidated P & L A/c is of much help to the holding
company to show clear pictures.
• So, in addition to the ‘legal’ Balance sheet as prescribed
in Schedule VI, the holding company may also publish in
a consolidated Balance sheet in which the assets and
liabilities of all the subsidiaries are given along with its
own assets and liabilities as the Balance sheet.
 COST OF CONTROL
• If the holding company purchases the shares of the
subsidiary company at a price which is more than paid-
up value of the shares, the excess amount paid represents
payment for goodwill or cost of acquiring control of the
subsidiary control if there exists no reserves or P & L
balance in the subsidiary company on the date of
acquisition of shares of the subsidiary company.
PRE-ACQUISITION RESERVES
• If there exists some reserves and profits of the
subsidiary company on the date of acquisition of shares
of the subsidiary company, the outsider share of such
reserves and profits is added to the minority interest
and the balance of such reserves and profits are capital
profits of the Holding company and are shown as capital
reserve in the consolidated balance sheet.
 REVENUE PROFITS

• Profit of the subsidiary company made after the date of the

purchase of shares by the holding company are treated as
reserve profits.
• Holding companies share of such profits is added to the
profits of the holding company and share of such profits
belonging to the minority shareholders is added to the
amount of the minority interest.

ELIMINATION OF COMMON TRANSACTIONS

• Common transaction appearing in both the balance sheet of

the holding company and the subsidiary company should
be eliminated. Such transactions may be: Debtors and
Creditors Bills Receivable and Bills Payable Loans
Debentures
 TREATMENT OF FICTITIOUS ASSETS

• Given on the assets side of the balance sheet,

• If there, then those items must be deducted from the
capital profits or added to the capital loss before
distributing the same among the holding company and
minority shareholders.

TREATMENT OF GOODWILL

• Goodwill appearing in the balance sheet of subsidiary

company will be shown along with goodwill (if any) of
the holding company.
• In case there is capital reserve it will be adjusted in
Capital reserve on consolidation.
 TREATMENT OF UNREALISED PROFIT

• If the goods sold at a profit by the subsidiary company to

the holding company or vice-versa remain unsold at the
close of the financial year, the profit charged by the
company on unsold goods remains unrealized.
• So, a stock reserve is created and profit is reduced by the
unrealised profit.

TREATMENT OF UNCLAIMED DIVIDEND

• If unclaimed dividend is given in the Balance Sheet of the

subsidiary account, it must the added in full to the total of
minority interest in the consolidated balance sheet.
 TREATMENT OF
CONTINGENT LIABILITIES

• They are shown as follows :

1. Liability in respect of bills discounted not yet matured.
It is possible that bills may be discounted on the due
date and liability may arise.
2. Amount uncalled on partly paid shares held.
3. Arrears of dividend on Cumulative preference shares.
 TREATMENT OF BONUS SHARE BY SUBSIDIARY
COMPANY
Treatment of issue of bonus shares by the subsidiary company
will depend upon the source from which the bonus shares are
issued. Bonus shares may be issued out of ,
I : Issue of bonus shares out of Pre acquisition profits will
have no effect on the consolidated balance sheet because holding
companies share in pre acquisition profits is reduced on account
of issue of bonus shares and on the other hand paid up value of
shares held be holding company increases. So , cost of Goodwill
and Minorities interest will remain the same as these were before
the issue of bonus share.
II : Issue of bonus shares out of Post acquisition profits : Such
issue will have effect on the consolidated balance sheet. The
shares of holding company shall reduce in revenue profits( post
acquisition) and the paid up value of shares held by the holding
company will increase. Increased paid up value of shares held will
reduce the cost of control or Goodwill or increase the value of
capital reserve.
 STEPS FOR PREPARING
CONSOLIDATED BALANCE SHEETS

Step 1- Calculate ratio of equity shares held by H Ltd

and outsiders (minority) in S Ltd as their investment.

Step 2- Calculation of period prior to the date of

acquisition of shares by H Ltd in S Ltd and period post to
the date of such acquisition.
 Step-3
Calculation of pre-acquisition
or capital profit

Balance of P&L a/c as in the beginning of the year xxx

G/R or other reserve as in the beginning of the year xxx
Current years profits for the pre acquisition period xxx
xxx
Add: Increase in the value of fixed assets xxx
Less: Decrease in the value of fixed assets (xxx)
Less: Amount of bonus shares issued
(if out of pre acquisition period profits) (xxx)
Less: Fictitious assets (now to be written off) (xxx)
Pre acquisition or capital profit or loss xxx
 Step-4
Calculation of post-acquisition
or revenue profit

Current years profits for post acquisition period xxx

Less: Amount of bonus issue
(if out of post acquisition profits) xxx
Add :Depreciation on decrease in value of
fixed assets for post acquisition period xxx
Less: Depreciation on increase in value of
fixed assets for post acquisition period (xxx)

Revenue Profits or Loss xxx

 Step-5
Calculation of cost of control (or goodwill) or capital
reserve
Amount invested by other company (as per balance sheet of other company)
In Equity shares xxx
In Preference shares xxx
xxx
Less- (i) Face value of equity shares held by co.1 In co. 2 xxx
(ii) Face Value of preference shares held by co. 1 in co.2 xxx
(iii) Proportionate share of co. 2 in Capital profits of co. 1 xxx
(iv) Proportionate shares of co. 2 in bonus issue
(whether out of capital or revenue profit) xxx
xxx
Goodwill (if +ve) Capital Reserve (if –ve) xxx
Add: Goodwill already shown in the b/s of both co.
Net goodwill or capital reserve xxx
 Step -6
MINORITY INTEREST
• When some of the shares of the subsidiary company are held by
outsiders, their interest, known as the minority interest in the
subsidiary company, is calculated and shown on the liabilities
side of the Balance Sheet of the holding company.
Add : paid up value of the shares Rs.
held by outsiders ****
Add : proportionate share of the
Sub. company’s profits & res. ****
Prop. increase in the value of
Assets of the sub. co. ****
****
Less : company’s losses ****
decrease in value of assets ****
(****)
Value of Minority interest ****
 Step-7
Calculation of balance of profit and loss
account of co.2

Balance of P&L a/c of co. 2

(as per its balance sheet) xxx
Add: Proportionate share of co. 2
in revenue profits xxx
Less: Unrealised profits on unsold stock xxx

Balance of profit and loss a/c of co. 2 xxx