Holding and

Subsidiary
Companies

Purnima Satija
Assistant Professor
PCTE Group of Institutes
 Plan of Study

Meaning
Advantages and Disadvantages of a holding company
Cost of Control
Minority Interest
Capital Profits and Revenue Profits
Treatment of unrealized profits
Treatment of mutual owings
Preparation of Consolidated Balance Sheet

2
 Introduction
A company may acquire controlling interest in another company by
purchasing all or majority (More than 50%) of equity shares of that
company.

The company acquiring controlling interest in another company is called

Holding Company

The company which is controlled is called Subsidiary Company.

According to Bon Bright and Meons, The holding company is often

described as a super corporation which, by virtue of its share oqnership
and hence voting right in other corporations, is in a position to exercise
control or materially influence the management of those other
3
corporations known as subsidiaries
 How can a company become subsidiary of another company?

1. If a company acquires all or majority of equity shares in other

company

2. If the other company controls the management or the composition of its

Board of directors

3. If the company becomes a subsidiary of another company which itself

is a subsidiary of a third company. For example: If B Ltd. is a
subsidiary of C Ltd. and C Ltd. is a subsidiary of A Ltd. Then B Ltd. is
a deemed subsidiary of A Ltd.

4
Wholly Owned and Partly Owned Subsidiaries
Wholly Owned and Partly Owned Subsidiaries

All the shares with voting rights

Wholly Owned Subsidiaries of 100% are owned by the
holding company

Only majority of the shares

Partly Owned Subsidiaries with voting rights (51% are
owned) by holding company

5
 Rationale for Holding Companies

By grouping
It leads to of
The holding
better enterprises
company is
utilization of The into holding
able to
financial management companies, a
concentrate
It allows and other of holding large
on corporate
better reserves by company number
planning,
quality pooling the could could be
acquisition
decisions to reserves of promote reduced to
and update
be taken at the group of commercial manageable
technology
all levels. enterprises and levels from
and building
like finance, managerial the point of
on corporate
R&D, culture co-
culture on
Marketing, ordination
sound basis.
HR, etc. and span of
control.

6
 Advantages of Holding Companies
Subsidiary company maintain their goodwill due to separate identity.

The public may not be aware the existence of combinationamong the various
company.

Holding company need not to be invest entire amount in theshare capital in

subsidiary company still enjoy controllingpower in such company.

It would be possible to carry forward losses for income tax purposes.

Each subsidiary company prepares its own accounts and therefore financial
position and profitability of each undertaking is known.

It is easy to give up the control of the holding company by simply disposing of the
shares in the subsidiary companies
Holding Company may be able to secure economies in production and
management. 7
 Disadvantages of Holding Companies
There is a possibility of fraudulent manipulation of accounts.

Inter company transaction may not be at a fair prices.

Minority share holders interest may not be properly protected.

The accounts of various companies may be made upon different dates to, manipulate
profit or financial position of Group companies.
The shareholders in the holding company may not be aware of true financial
position of subsidiary company.
Creditors and outsiders shareholder in the subsidiary company may not be aware of
true financial position of subsidiary company.
The Subsidiary Companies may be forced to appoint person of the choice of holding
company such as Auditors, Directors other officers etc. at ahigh remuneration.
The Subsidiary Company may be forced for purchases or sale of goods, certain
assets etc. as per direction of holding company
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 Consolidated Balance Sheet

A balance sheet in which assets and liabilities of a parent company and its
controlled subsidiaries are combined,
thereby presenting balance sheet items for the parent and its subsidiaries a
s if they were a single firm.

Shareholders of a holding company are interested in knowing the affairs

of the subsidiary company as a part of their money given to the holding
company is invested in the subsidiary company.

So it becomes safe for directors of the holding company to disclose to the

shareholders of the holding company, the extent to which they are entitled
to the net assets of the subsidiary company.
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Steps in preparation of Consolidated Balance Sheet

Calculation of ratio between H Ltd. and Outsiders

Calculation of Pre-acquisition period and Post-Acquisition Period

Calculation of Capital Profits/Pre-acquisition profits

Calculation of Revenue Profits/Post-Acquisition Profits

Calculation of Minority Interest

Calculation of Goodwill or Capital Reserve or Cost of Control

Calculation of Balance of P&L of H Ltd.

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 1. Calculation of ratio between H Ltd. and Outsiders

For Example: Share Capital of S Ltd. consists of 5000 shares of Rs. 100
each .

Out of which 3000 shares held by H Ltd.

H Ltd : Outsiders = 3000 Shares:2000Shares i.e. 3:2

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 2. Calculation of Pre-Acquisition Period and Post Acquisition Period

The period before H Ltd. acquired shares of S Ltd. is called as pre-

acquisition period.

The period after H Ltd. acquired shares of S Ltd. is called as post-

acquisition period.

For Example: Accounting year starts from 1st Apr 2007 and ends on 31st
March 2008.

On 1st Jan, 2008, H Ltd. acquired above 3000 shares.

In the above Example:

Pre-acquisition period- 1/04/2007-1/01/2008 9 months

Post-acquisition period-1/01/2008-31/03/2008-3 months 12

 3. Pre-Acquisition Profits or Capital Profits

While preparing a Consolidated Balance Sheet, there is a need to

divide all the profits into pre-acquisition and post-acquisition profits.

The profits earned by the subsidiary co. before the holding co.
acquires its control, is known as pre-acquisition profits or Capital
Profit

Pre-Acquisition profits are eliminated by taking into account in the

computation of Cost of Control/Goodwill

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Calculation of Pre-Acquisition Profits/Capital Profits

Opening Balance f P&L a/c Xxx

(+) Opening Balance of Reserves Xxx
(+) Current Years profit for pre-acquisition period Xxx
Total Capital Profits Xxx
(-) Transfer to Minority Interest (xxx)
(-) Transfer to H Ltd. xxx

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 4. Post-Acquisition Profits or Revenue Profits

While preparing a Consolidated Balance Sheet, there is a need to

divide all the profits into pre-acquisition and post-acquisition profits.

The profits earned by the subsidiary co. after the holding co. acquires
its control, is known as post-acquisition profits or Revenue Profit

Post-Acquisition profits are shown in the consolidated balance sheet.

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 Calculation of Post-Acquisition Profits/Revenue Profits

Current Years profit for post-acquisition period Xxx

(-) Transfer to Minority Interest (xxx)
(-) Transfer to H Ltd. xxx

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 5. Minority Interest

When the holding company acquires 100% shares of the subsidiary

company, the latter company becomes a wholly owned subsidiary.

But when the holding company acquires more than 50% but less than
100% shares of the subsidiary company, those shareholders who have
a minority share are referred to as minority shareholders.

The collective interest of the minority shareholders is known as

Minority Interest.

Minority Interest is shown on the liability side of the Balance Sheet.

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 5. Minority Interest

Thus, minority interest is the share of outsider in the following.

Share in share capital in subsidiary.

Share in reserves (Both pre and post acquisition of subsidiary).

Share in accumulated losses should be deducted.

Proportionate share of profit or loss on revaluation of assets.

Preference share capital of subsidiary company held by outsiders and

dividend due on such share capital, if there are profits.

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 Calculation of Minority Interest

Face Value of shares held by outsiders Xxx

(+) Proportionate share in Capital Profit Xxx
(+) Proportionate share in Capital Profit Xxx
(+) Proportionate share in increase in value of asset Xxx
(-) Proportionate share in decrease in value of asset (xxx)
(-) Proportionate share in Capital Loss (xxx)
Value of Minority Interest xxxx

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 6. Cost of Control/Goodwill or Capital Reserve

The holding company acquires more than 50% of the shares of the
subsidiary company. Such shares may be acquired at a market price
which may be at a price higher than the actual book value of shares of
subsidiary company on the date of purchase.
If H Ltd purchases the shares of S Ltd at a higher price than their actual
value, the excess payment is known as cost of control or goodwill (Loss
on purchase of shares of S Ltd).
On the other hand, if the shares are purchased at a lower price than their
actual value, the extent of lower payment is known as capital reserve
(profit on purchase of shares of S Ltd).
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 Cost of Control/Goodwill or Capital Reserve

It goodwill already exists in the balance sheet of holding company or

both the goodwill thus calculated, will be added up to the existing
goodwill.

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 Calculation of Cost of Control/Goodwill or Capital Reserve

Cost of Investment (i.e. amount paid for acquiring shares in subsidiary Xxxx
company)
Less: Book Value of Shares in Subsidiary Company xxxx
Paid up Value of Shares acquired by holding Co. in Subsidiary
Company xxxx
(+) Proportionate share of holding company in the capital
profits/reserves of the subsidiary company xxxx
OR
(-) Proportionate share of holding company in the capital losses of the
subsidiary company xxxx

If +ve (Goodwill/Cost of Control-Shown on Asset side) xxxx

If ve (Capital Reserve-Shown on Liability side) 22
 7. Calculation of balance of P&L of H Ltd.

Balance of P&L a/c of H Ltd. as per its balance sheet Xxx

Add: Proportionate share of H Ltd. in revenue profit Xxx

Balance of P&L a/c of H Ltd. (Shown on Liability side of Balance xxx

Sheet)

If current year profits or opening balance of P&L a/c of S Ltd. are not
given then we have to prepare a P&L Appropriation a/c before
calculation of capital profit or revenue profit (After Step 2 but before
Step 3)

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 IMPORTANT NOTE

If current year profits or opening balance of P&L a/c of S Ltd. are not given
then we have to prepare a P&L Appropriation a/c before calculation of capital
profit or revenue profit (After Step 2 but before Step 3)
Particulars Rs. Particulars Rs.
To transfer to reserves xxx By Profit b/d Xxx
To dividend to S/H Xxx By Profit for the year Xxx
To Profit c/d Xxx
Xxx xxx
Share Capital and Reserves & Surplus of S Ltd is not to be taken in
Consolidated Balance Sheet.

Investments of H Ltd. in S Ltd. is not to be taken in Consolidated Balance

Sheet. 24
 Question-1
Particulars H Ltd. S Ltd. Particulars H Ltd. S Ltd.
Share Capital (Rs. 10) 5,00,000 2,00,000 Sundry Assets 5,17,600 3,04,000

Reserves 1,00,000 50,000 Investments: 1,62,400 -

12,000 shares in S
Ltd.
Creditors 80,000 60,000 Preliminary - 6,000
Expenses
6,80,000 3,10,000 6,80,000 3,10,000

On 31st March, 2014, the Balance Sheet of S Ltd. and H Ltd. are given.

Calculate Cost of Control and prepare consolidated balance sheet

Question-2
 Question-3
Particulars H Ltd. S Ltd. Particulars H Ltd. S Ltd.
Share Capital (Rs. 10) 8,00,000 3,00,000 Land & Building 4,00,000 2,70,000

Creditors 3,50,000 1,60,000 Plant & 2,00,000 1,00,000

Machinery
Bills Payable 40,000 20,000 Furniture 50,000 20,000
Reserve on 1-4-2007 2,10,000 40,000 Investment in 5,00,000
shares of S Ltd.
Profit & Loss A/c 50,000 30,000 Stock 1,50,000 80,000
Sundry Debtors 1,00,000 60,000
Bank Balance 50,000 20,000
14,50,000 5,50,000 14,50,00 5,50,000
0
The P&L a/c of S Ltd. had a credit balance of Rs. 6000
Acquisition date :-31st Dec, 2007
 Question-4
Particulars H Ltd. S Ltd. Particulars H Ltd. S Ltd.
Share Capital (Re 1) 12,00,000 8,00,000 Sundry Assets 22,20,000 13,80,000
General Reserve 6,00,000 - Investments in S 4,00,000 -
Ltd. (4,00,000
shares)
Profit & Loss A/c 6,00,000 3,80,000
Creditors 2,20,000 2,00,000
26,20,000 13,80,000 26,20,000 13,80,000

The shares were purchased by H Ltd. in S Ltd. on 30.09.2001.

On 1st Apr, 2001, the P&L a/c of S Ltd. showed a loss of Rs. 3,00,000
which was written off from out of profits earned during the year
Profits were earned uniformly for the year 2001-02
Prepare Consolidated Balance Sheet of H Ltd. and S Ltd.
 Question-5
Particulars H Ltd. S Ltd. Particulars H Ltd. S Ltd.
Share Capital (Rs. 5,00,000 1,00,000 Fixed Assets 4,00,000 60,000
10)
P&L 2,00,000 60,000 Stock 3,00,000 1,20,000
Reserves 60,000 30,000 Debtors 75,000 85,000
Bills Payable - 15,000 Bills Receivable 20,000 -
Creditors 1,10,000 60,000 7,500 shares in S 75,000 -
Ltd. at cost
8,70,000 2,65,000 8,70,000 2,65,000

The bills accepted by S Ltd. are all in favour of H Ltd.

The stock of H Ltd. includes Rs. 25,000 bought from S Ltd. at a profit to
latter of 20% of sales.
All the profits of S Ltd. has been earned since th shares were acquired
by H Ltd. but there was already the reserve of Rs. 30,000 at that time
 Question-6
Particulars H Ltd. S Ltd. Particulars H Ltd. S Ltd.
Share Capital (Rs. 1,00,000 50,000 Fixed Assets 80,000 45,000
10)
P&L 20,000 10,000 Stock 20,000 10,000
Reserves (1.1.03) 40,000 10,000 Debtors 25,000 10,000
Creditors 10,000 5,000 Investments: 4,000 40,000 -
shares in S Ltd.
Cash 5,000 10,000

1,70,000 75,000 1,70,000 75,000

On 1.1.03 the Profit and Loss Account of S Ltd. showed a credit balance
of Rs. 4,000.
Stock of H Ltd. includes Rs. 2,500 for goods at invoice price from S Ltd.
on which the latter company makes a profit of 25% on cost.
Prepare Consolidated Balance Sheet as on 31.12.2003
 Question-7
Particulars H Ltd. S Ltd. Particulars H Ltd. S Ltd.
Share Capital 8,00,000 2,00,000 Fixed Assets 5,50,000 1,00,000

P&L 90,000 55,000 Stock 1,05,000 1,77,000

Reserves 1,50,000 70,000 Other Current 2,25,000 1,28,000
Assets
Creditors 1,20,000 80,000 75% Investments 2,80,000 -
in S Ltd. (at Cost)
11,60,000 4,05,000

H Ltd. acquired the shares on 31st July, 2007.

S Ltd. earned a profit of Rs. 45,000 for the year ended 31.03.2008
Prepare Consolidated Balance Sheet as on 31.03.2008