Consolidation of Accounts Key Concepts and there Advantages
Here are the key concepts of account consolidation, including holding and subsidiary companies, and Find the benefits such as enhanced transparency and improved assessment of investment returns.
Rahul Jaiswal17 Jun, 2024
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What is Consolidation?
To consolidate means to merge assets, liabilities, and other financial elements from two or more entities into a single entity. In financial accounting, this often involves the consolidation of financial statements, where all subsidiaries are reported under the parent company. Additionally, consolidation can refer to the merging of smaller companies into larger ones through mergers and acquisitions (M&A).- Holding Company: A holding company is one that controls the composition of the board of directors or has the power to influence the management policies of another company, known as a subsidiary.
- Subsidiary Company: A subsidiary company is one that is controlled by another company, known as the holding company. This control is typically evidenced by ownership of more than 50% of the subsidiary's voting rights.
- Company Includes Body Corporate: The term "company" includes any body corporate, including a company formed and registered under company law or an existing company.
- Associate Company: An associate company, in relation to another company, is one where the other company holds significant influence but isn't a subsidiary. This influence can be through owning at least twenty percent of the total share capital or controlling business decisions through an agreement. In joint ventures, significant influence is established through an agreement, not necessarily through share capital control.
- Wholly Owned Subsidiary Company: A wholly owned subsidiary company is one where the holding company owns 100% of the subsidiary's shares, giving it complete control.
- Partly Owned Subsidiary Company: A company in which only the majority of shares (more than 50%) are owned by the holding company, it is said to be a party owned subsidiary.
- Minority Shareholder: A minority shareholder is one who holds less than 50% of the voting rights in a company and does not have control over its operations.
Advantages of Consolidation of Financial Statements
Facilitates easy comprehension: Shareholders are in a position to get a clear insight about the financial position of the group (parent and all its subsidiaries). Helps determine the intrinsic value of shares: The intrinsic value of shares is a crucial tool for various accounting processes. This value can be derived from the consolidated financial statements of companies. Proper assessment of return on investment: Only consolidated financial statements can provide proper information on the total share of holding company in the revenue profit of its subsidiaries.Also Check: Introduction to Corporate Accounting, Financial Statements
Consolidation Procedures
Consolidation involves combining the financial statements of the holding company and its subsidiaries to present a unified view of the group's financial performance and position. Contents and Format of Consolidated Balance Sheet:Consolidated balance Sheet Of Holding Company and its Subsidiaries as on ……
| Format Of Consolidated Balance Sheet | ||
| 1. EQUITY AND LIABILITIES | Amount | Amount |
| SHAREHOLDER'S FUND | ||
| a) Share Capital (Holding Company) | ||
| b) Reserves & Surplus | ||
| (i) General Reserve (Holding company) | ||
| (ii) Capital Reserve (Holding company) Add: Capital Reserve from Acquisition (iii) Surplus Surplus Of Holding company Add: Share in revenue profits of Subsidiary Company Less: Unrealized Profits | ||
| 2. Non-current liabilities | ||
| a) Minority Interest | ||
| b) Holding company Subsidiary company | ||
| 3. Current liabilities | ||
| Holding company Subsidiary company Less: Inter Company or mutual Owings | ||
| Total | ||
| ASSETS | ||
| 1. Non-current assets | ||
| a) Property, Plant and Equipment: | ||
| (i) Tangible assets: Holding Company Subsidiary Company | ||
| ii) Intangible assets: Goodwill or Cost of Control: Holding Company Subsidiary Company Goodwill resulting from acquisition | ||
| b) Non-Current Investment | ||
| Holding Company (except investment in shares of subsidiary Co.) | ||
| 2. Current assets | ||
| Holding Company Subsidiary Company Less: Inter Company or Mutual Owings | ||
| Total | ||
Calculation of Goodwill/Capital Reserve (Cost of Control)
Goodwill = Cost of Investment - Parent’s share in the equity of the subsidiary on date of investment Capital Reserve = Parent’s share in the equity of the subsidiary on date of investment – Cost of investment| Calculation | Particulars | (Rs.) |
| A. Net cost of investment (i)Amount actually paid for equity shares and preference shares of subsidiary (ii) Less: dividend received out of pre-acquisition profit of the subsidiary (whether equity or preference dividend) (iii) Less: Share of holding company in preference dividend on cumulative pref. Shares, whether declared or not, and non-cumulative preferred shares when declared, come from the subsidiary's pre-acquisition profits. (iv) Less: Share of holding company in declared equity dividend of the subsidiary out of pre-acquisition profit of the subsidiary Total net cost of investment (I+ ii+ iii+ iv) B. The holding company's share in the subsidiary company's net assets. (i) Paid up value of equity shares (including bonus shares) presently held by the holding company (ii) Paid up value of preference shares presently held by the holding company (iii) The holding company's share in the subsidiary company's capital profit. Total share of holding company in the net assets of the subsidiary company (i+ ii+ iii) C. Goodwill on consolidation (if A exceeds B) or Capital reserve on consolidation (if B exceeds A) |
- Calculation of Minority Interest:
| Calculation | Minority interest will be calculated as under: | |
| Particulars | (Rs.) | |
| A. The paid-up value of the equity shares (including bonus shares) owned by the minority shareholders. | ||
| B. Paid up value of preference shares presently held by the minority | ||
| C. Share of minority in the capital profits/(loss) of the subsidiary | ||
| D. Share of minority in the revenue profits/(loss) of the subsidiary | ||
| E. Share of minority in the revenue reserve of the subsidiary | ||
| F. Share of minority in the preference dividend of the subsidiary (on cumulative preference shares whether declared or not and on non-cumulative preference shares when declared) | ||
| G. Share of minority in the equity dividend declared by the subsidiary | ||
| Minority Interest (A+b+C+D+E+F+G) | ||
| Presentation of minority interest in the consolidated balance sheet | 'Minority Interest’ should be presented as a separate item after the head 'Shareholders' fund' but before the head ‘Share application money pending allotment' on the 'Equity and Liabilities' side of the Balance sheet. | |
Format of Consolidated Profit and Loss Account:
PROFIT AND LOSS ACCOUNT| Particulars | Note No. | Figures for the Current Reporting period | Figures for the Previous Reporting period |
I Revenue from operations
II Other Income
III Total Revenue (I + II)
IV Expenses:
|
Pre-acquisition and Post-acquisition Profits/Reserves:
| Item | Holding company’s share | Minority |
| Pre-acquisition profits (or losses) and Reserves (capital profits) | Holding company’s share will be added to (or in the case of losses deducted from) the paid-up value of shares presently held by the holding company in the subsidiary company so as to calculate the holding company’s share in the net assets of the subsidiary company. | The Share of minority will be added to (or in the cases of losses deducted from) the paid-up value of shares presently held by the minority in the subsidiary company so as to calculate the Minority Interest. |
| Post-acquisition profits (or losses) and reserves (Revenue profits) | Holding company’s share in the profit of the subsidiary will be added to (or in the case of losses deducted from) the profit and Loss A/c of the holding company. Holding company’s share in the reserves shall be added to the reserves of the holding company. | The Minority share in the post- acquisition profits and reserves shall be added to (or in the case of losses deducted from) the paid-up value of shares held by the minority in the subsidiary company so as to calculate the Minority Interest. |
Treatment of goodwill appearing in the balance Sheet of Subsidiary Company
Accounting Treatment: Approach I: Add: Goodwill already appearing in the balance sheet of subsidiary company to the goodwill and/ or cost of control in the consolidated balance sheet. Approach II: Add: Only holding company’s share to the cost of control/goodwill, from the goodwill of the subsidiary company.Consolidation of Accounts FAQs
What is consolidation in financial accounting?
Consolidation refers to the process of combining the financial statements of a parent company and its subsidiaries into a single set of financial statements. This provides a comprehensive view of the financial performance and position of the entire group.
Why is consolidation important?
Consolidation is important as it helps stakeholders, such as investors and creditors, to assess the overall financial health and performance of a group of companies rather than just individual entities. It ensures transparency and accountability in reporting.
How is a subsidiary company defined in consolidation?
A subsidiary company is one that is controlled by another company, known as the holding company. Control is typically evidenced by ownership of more than 50% of the subsidiary's voting rights or through significant influence over its operations.
What are the advantages of consolidating financial statements?
Consolidated financial statements facilitate easy comprehension of the group's financial position, aid in determining the intrinsic value of shares, and provide a proper assessment of return on investment. They offer a comprehensive view that includes all subsidiaries under one umbrella.
What is minority interest in consolidation?
Minority interest, also known as non-controlling interest, refers to the portion of a subsidiary's equity and net income that is not owned by the parent company. It represents the interests of shareholders other than the parent company in the subsidiary's earnings and assets.
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