Holding company
Introduction
The creation of the relationship of holding and subsidiary companies is a formed of combination. The procedure involves acquisition of share in the absorbed company, and not its assets with or without liabilities. The separate legal entity of the absorbed company is, therefore, not disturbed. In other interest by another company does not mean its liquidation.
Introduction
The creation of the relationship of holding and subsidiary companies is a formed of combination. The procedure involves acquisition of share in the absorbed company, and not its assets with or without liabilities. The separate legal entity of the absorbed company is, therefore, not disturbed. In other interest by another company does not mean its liquidation.
The purpose of getting the control over another company may be to gain advantage such as the elimination of competition, enjoying economies of large-scale production, ensuring a smooth supply of raw material, getting an assured market for the products of the company, etc.
Meaning of Holding Company
A company may acquire either the whole or the majority of the share of another company so as to have a controlling interest in such a company or companies. The controlling company is known as the Holding companies and the so controlled company or the company whose shares have been acquired is known as a subsidiary company and both together are known as the Group of Companies. The company gets companies are able to nominate the majority of the directors of subsidiary company. The company gets such right which it purchases more than fifty percent shares of another company. So, the holding company is one which control one or more other companies either by mean of holding more than fifty percentage share in that company or companies or but having power to appoint the whole or majority of the director of those companies. A company controlled by holding company is known as a subsidiary company.
Chapter 1, section 2 (d) and (e) of the Nepalese Company Act 2063 (2006), defines (d) "Holding Company" means a company-having control over a subsidiary company (e) "subsidiary Company" means a company controlled by a holding company.
Similarly, chapter 13, section 142 of this act stat that
1. A holding company may control its subsidiary company as follows:
a. By holding direct or indirect control over the formation of the board of director.
b. By holding majority shares of the company.
2. If any company becomes a subsidiary company of any other subsidiary company, the formed company shall also be a subsidiary company of the holding company controlling the later company.
3. Despite that the shares of a company are subscribed any agent on behalf of the holding company or its subsidiary company or that the right to appoint directors of such company is exercised by any person nominated on behalf of the holding company or its subsidiary company, the conditions mentioned in sub-section (1) shall be deemed to have been fulfilled.
Provided, however, the while determining a holding company and a subsidiary company, the shares possessed in the following circumstances shall not be recognized for this purposes.
a. In case when any company is entitled to exercise any power on the basis of holding debentures or a trust deed on the issue of debentures or having subscribed shares:
b. In case where a company of debentures or having subscribed shares;
1. A holding company may control its subsidiary company as follows:
a. By holding direct or indirect control over the formation of the board of director.
b. By holding majority shares of the company.
2. If any company becomes a subsidiary company of any other subsidiary company, the formed company shall also be a subsidiary company of the holding company controlling the later company.
3. Despite that the shares of a company are subscribed any agent on behalf of the holding company or its subsidiary company or that the right to appoint directors of such company is exercised by any person nominated on behalf of the holding company or its subsidiary company, the conditions mentioned in sub-section (1) shall be deemed to have been fulfilled.
Provided, however, the while determining a holding company and a subsidiary company, the shares possessed in the following circumstances shall not be recognized for this purposes.
a. In case when any company is entitled to exercise any power on the basis of holding debentures or a trust deed on the issue of debentures or having subscribed shares:
b. In case where a company of debentures or having subscribed shares;
Nepal accounting standard (NAS) 21 issued by ICAN states the following definitions:
a. A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).
b. A parent is an enterprise that has one or more subsidiaries.
c. A group is parent and all its subsidiaries.
In the definition the term 'parent' is used for holding company.
According to above definitions one company can become a holding company of another in any one of the following three ways;
a. The composition of a subsidy company's board of directors is controlled by holding company.
b. Whether the holding company is any other company which holds more than half or majority in nominal value of its equity share capital.
c. The company is a subsidiary of any company is which that other company's subsidiary is.
In this way, a holding company is one which controls one or more other companies either by means of holding more than fifty percent 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 holding company the whole or majority of the directors of those companies. A company controlled by holding company is known as a subsidiary company. This is also a form of business combination. In this type of combination, the separate legal entity of the absorbed company (subsidiary company) is not disturbed.
Types of subsidiary company
There are two types of subsidiary company. They are:
Wholly owned subsidiary company: is one which 100% shares with voting right are owned by the holding company.
Partly owned subsidiary company: is one in which more than 50% but less than 100% equity shares with voting rights are owned by the holding company.
In partly owned subsidiary company some of the shareholders do not sell their shares to the holding company. Such shareholders are known as minority shareholders or outsiders and their share or interest in the assets of the subsidiary company is termed as minority interest.
Reasons/ advantage of Holding Company
The following are the principle advantages of the formations of a holding company:
Elimination of competition: as both the companies are managed by the same group therefore, competition between then is automatically eliminated.
Separate account and results: both companies are maintained their account separately, the profitability and financial positions of each company is known separately.
Advantages of self goodwill: both the companies maintain their separate identity and as such they maintain their goodwill separately.
Less investment: the people controlling the holding company need investment as comparatively small amount in order to control the subsidiaries.
Carry forward the losses: both companies are maintained their identity separately, in such a case, it would be possible to avail income tax benefit by carrying forward the losses and set off from future profits.
Smooth supply of raw materials: if a holding company holds difference holder difference subsidiary companies, each of which performs functions at the difference stage of production, the companies, as a whole, will not have to depend upon other companies in their activities from procurement of raw materials.
Disadvantages of Holding company
The following are the principle disadvantages of holding companies:
Forced appointment of difference: the subsidiary companies may be forced to appoint person of the choosing of holding companies as the directors or other officers as unduly high remuneration.
Speculation in shares: by manipulation of accounts, directors may speculators in the shares of the subsidiary companies if such shares are listed in the stock exchanges.
Creation of secret reserves: secret reserves may be created by the dishonest directors to the detriment of the minority interest.
Oppression of the minority shareholders: subsidiary company is managed in such a manner as suit the interest of holding company. All the financial and manual resources are used for the benefit of holding company. In such a scale there is a danger of the oppression of minority shareholders.
Difficult in valuation of stock: difficult may be faced for valuing stock when it consists of hugs quantities of inter-company goods.
Fear of mismanagement: when a group number of subsidiary companies and managerial ability is limited, there may be mismanagement resulting into damage of the group as whole.
Fraud in inter-company transaction: Inter-company transactions are often entered at fanciful and unduly high or low prices in order to suit the holding companies.
Consolidation financial statement
Consolidation financial statements are the income statement and balance sheet of the holding company and its subsidiary company or companies taken together. Such financial statement ignore the separate entities of the companies within the group and shown the position of the group as a whole. The object of preparing the consolidation financial statements is to shareholders of a holding company with a composite picture which affects the state of affairs of the holding company in details.
The Consolidated statements are reports of a notional accounting entity which subsist on the view that the holding and subsidiary companies are to be treated as one economic unit.
In England , the holding company is required to present, in additional to its normal balance sheet, a consolidated balance sheet converting the holding company and its subsidiaries and a consolidated profit and loss account. In Nepal and also in India, the law does not compete a holding company to prepare a consolidated balance sheet and profit and loss account. It is only for convenience that these statements are prepared as supplement to the normal balance sheet. Since the shareholder of holding company are interested in the subsidiary company only to the extent of the shares held in it, a full balance sheet of subsidiary may not be of much interest to them. They are interest only to the extent they are entitled to the assets of the subsidiary company. But many shareholders being laymen may not be able to make out anything from separate balance sheet of the holding company and to Subsidiaries Company. Therefore, in order to enable them to understand their interest better, it is advisable to give the consolidated balance sheet of the group.
As per Nepal Accounting standard (NAS) 21 " Consolidate financial statement" is voluntarily applicable in Nepal. Accounting to this standard a parent who prepares consolidates financial applicable should present these statements in additional it its separate financial statement. Although the companies Act, 2063 (2006) as such does no prescribed format but it should be prepare as for as possible in accordance with accounting norms.
Preparation of consolidated balance sheet
The producers of preparing considered balance sheet are as given below:
Step i: find out to date of acquisition (share purchase date)
To decide whether profit/ losses and reserves of the subsidiary company are capital profits reserved profits, the date of purchase of shares by holding company is the deciding factor.
If the shares are acquired on the date of balance sheet of subsidiary company, all amounts of reserve and surplus shown by subsidiary company will be treated as capital profit (or pre-acquisition profit). This capital profit is adjusted while calculating cost of control (goodwill or capital reserve). But in actual practice the date of purchasing of share and the date of preparing the consolidated balance sheet may be different. So, it is essential to find out the date of purchasing of shares and the date of preparing the consolidated balance sheet.
Step ii: identification of proportion / ratio of investment/ ratio of interest
Shares of holding company in capital profit is deducted from the cost of investment for calculating goodwill or capital reserve and share of holding company in reserve profit is adduced to profit and loss account of holding company. Alternatively, proportionate share of capital profit and revenue profit May also be used for calculating minority interest. So, it is essential to find out ratio of investment or interest of holding company and minority shareholders to the subsidiary company.
The ratio of interest of holding company and minorities is identified on the number of total shares of subsidiary company, number of shares purchases by holding company and remaining shares held by the minority group.
Ratio of holding company= no. of shares purchased by holding company/ total shares of subsidiary company
Ratio of minorities= no. of remaining shares/ total shares of subsidiary company
Step iii: calculation of capital/per-acquisition profit
Generally there are reserve and surplus shown in the balance sheet of subsidiary company on the date of acquisition of the shares by shares by the holding company. Payment made by the holding company for purchasing the shares subsidiary company include not only payment for paid up value of shares acquired but also for the reserves and surplus shown in the balance sheet of subsidiary company on the date of purchase of shares.
The above reserve and surplus may e of revenue profit for the subsidiary company but they may be capital profit for the holding company depending upon the date of purchase of shares. Proportionate share of holding company in surplus of subsidiary company should be taken into account while calculating the goodwill or capital reserve. So, the reserve and surplus and surplus of the subsidiary may be divided into per-acquisition profit (capital profit) and post-acquisition profit (revenue profit). Profits existing in or earned by, the subsidiary company up to the data of acquisition of share by holding company are capital profit or ore-acquisition profit.
Any increase in the value of fixed assets of the subsidiary company whether before or after the date of acquisition will also be treated as capital profit and if there is reduction in the value of fixed assets as on the of acquisition, it must be treated as capital loss and deducted from the capital profits. But if to fall in the value of the assets occurs after threat of acquisition, the loss is treated as makes effect on amount of capital profit. Treatment of such revaluation of assets and dividends are discussed later.
Step IV: calculation of revenue/post-acquisition profit
Profit earned or the fund established by to Subsidiary Company after to date of acquisition is known as revenue profit (post-acquisition profit). It is also to be apportioned between holding company and minority on the same ratio that has been calculated in step ii above. Proportionate share of revenue profit to holding company is added to profit and loss account of holding company and its proportionate share to minority's shareholder may also be used for calculating minority interest.
Step v: calculation of cost of control or goodwill (capital reserve)
Shares acquired in subsidiary company appear in the holding company’s balance sheet as investment. In the consolidated balance sheet 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. Net worth or equity is the excess of assets over liabilities or the sum total of shareholder's fund, i.e. share capital, reserves and balance of profit and loss account. Thus, in case of a wholly owned subsidiary, if cost of investment is equity of subsidiary company, the excess represents payment for goodwill (which is also termed as 'cost of control') and will appear in the asset side of the consolidated balance sheet. If cost of investment is less than the equity, the difference is a capital reserve to be shown as such, in the liability side of the considered balance sheet. It must be noted here that he equity as on date of acquisition of control should be considered share capital plus reserves and profit and loss account existing on that date still not disturbed. For this restroom, allocation of profit between per-acquisition and post-acquisition period is very important.
If the holding company purchases the shares of the subsidiary at a price above the face value, the excess paid represent payment for cost of control or goodwill. This amount of goodwill must further be increase by the holding company's shares in the capital loss or be reduced by the capital profit. It the price paid for the purchase of share is less than the paid up value, the remaining difference is the capital reserve. This capital reserve will be increase by the per-acquisition profit and reduced by the per-acquisition loss.
Step VI: calculation of Minority interest
When some of the shares in the subsidiary are held by outside shareholders, they will be entitled to a proportionate share in the assets and liabilities of that company. For example, if 20% of the shares in the subsidiary are held by outside, they are entailed to 20% of the assets and liabilities of the subsidiary and the balance 80% belongs to the holding company. The share of the outsides in the subsidiary is called minority interest. In the consolidated balance sheet, all the assets and liabilities of the subsidiary are consolidated with the assets and liabilities of the holding company and the minority interest reprinting the interest of the outsides in the subsidiary is shown as a liability. The minority interest consist of the nominal, value of share held by the minority plus a proportionate share in the company's profit and reserve minus their proportionate share of the company's losses. If preference share are held by the outsides, the face value of such share with the dividend due thereon (if there are profit) will be included in the minority interest.
Step VII: preparation of consolidated Balance sheet
A consolidated balance sheet can be prepared by simple combining all the assets and liabilities of the holding company and subsidiary company. In other words, preparing consolidated balance sheet means to combine on line basis by ad dining tougher like items of assets and liabilities of holding and subsidiary company. But, if a correct consolidated balance sheet is to be prepared, the following steps should be taken:
a. Following items should be not included in consolidated balance sheet:
i. Investment in shares of subsidiary company of holding (which is shown in the assets side of the holding company's balance sheet).
ii. Share capital of subsidiary company
iii. Reserve and surplus of subsidiary company
iv. Any mutual owing by inter-company transactions
v. Any unrealized profit by inter-company transaction
b. Following items, which are calculated for specific purpose, must included in the consolidated balance sheet.
i. God will or capital reserve
ii. Minority interest
Mutual Owing or Inter-company Transaction
Mutual indebtedness between the holding company and its subsidiary may be merged in a sundry debtors and credits account or in separate current accounts. These accounts bet set off and eliminated from the onsolidated balance sheet (both from the total debtors and total creditors) since it are meant to show the position of the group as against the outside world. But the two balances may not be the same due to some amount in transit which should be shown separately. The acceptances held within the group as on the date of the balance sheet are to be set off. But the bills discounted or endorsed are not being eliminated as they now represented claims of the outsiders as against the group. Similarly, loans to and from subsidiary company should be eliminated from consolidated balance sheet. It should be ensured that the effect of elimination is equal and on opposite sides.
Unrealized inter-company profits
An unrealized inter-company profit exists where one company still holder, at the date of company still holders, at the date of consolidation, stock sold to it be the other company at a profit. Sometimes goods sold by one company in the receipts company at the date of balance sheet but are include in its stock at price, at which they were invoiced by the selling company in the group. The general rule is that profit on the transaction which from the point of view of group in unrealized must not remain in consolidated balance sheet. This must be deducted from the stock and from the consolidated profit (profit and loss account holding company) in consolidated account.
Nepal accounting standard (NAS) 21 states that full amount of the unrealized profit on should be deducted from the consolidated accounts. It means that in case there are minority shareholders in the subsidiary, there is no need of adjustment of their share of unrealized profits.
In this text, full unrealized profit included in stock of assets transferred from one group member to another has been eliminated; the practice of elevated propitiated part of attributable to interest of holding company in subsidiary company is also valid.
Good-in-transit and cash-in-transit
Sometimes goods sent by the holding company to subsidiary company and vice versa, and similarly cash sent by the holding company to subsidiary company and vice versa but might not have reached to the holding company or subsidiary company to before the date of closing of the accounts. It is known as goods-in-transit and cash-in-transit. In case of good-in-transit, the debtor will be reduced and goods-in-transit will be shown on the assets side in the consolidated balance sheet while in case of cash-in-transit, debtors will be reduced and cash-in-transit will be shown on the assets side of the consolidated balance sheet.
Revaluation of fixed assets
At the time of acquisition of shares, fixed assets may be reevaluated by holding company as well as by subsidiary company.
1. Revaluation of fixed assets of Holding company
If at the time of acquisition, the fixed assets of the holding company are reevaluated; in such a case the following adjustment will be made:
a. If the value of fixed assets is increased, the value (or profit) is treated as a capital profit and must appear on the liability side of the balance sheet of the holding company under the heading of capital reserve or may be used for writing off goodwill.
b. If the value of fixed asset is decrease, the reduced value (or loss) is treated as capital loss and will be deducted from capital reserve or general or profit & loss A/C respectively.
c. Fixed assets are shown at amended values in consolidated balance sheet.
d. Minority interest will not be affected.
2. Revaluation of fixed assets of subsidiary company
At the time of acquisition of shares in the subsidiary company, fixed assets of the subsidiary company may be revalued. In such a case:
a. Minority interest will be affected.
b. If the value of fixed assets increases, it is treated as a capital profit and is added to per-acquisition profit of the subsidiary company.
c. If the of fixed assets decreases, it is treated as capital loss and is deducted from per-acquisition profit of the subsidiary company.
d. Fixed asset are shown at amended value in consolidated balance sheet.
3. Adjustment for depreciation on revalued assets of subsidiary company
Since fixed assets are shown at received values in consolidated balance sheet, hence depreciation will be provided on the difference between revised value and existing value. For that:
a. If the value of fixed assets increases, depreciation will be provide on increased value from the date of balance sheet to revaluation date. On one hand, the additional depreciation will be deducted from the revised value of assets and on other hand; it will be deducted from revenue profit.
b. If the values of fixed assets decrease, depreciation on decreased value from the date of balance sheet to revaluation date will be treated as appreciation. On one hand, it will be added to the revised value of fixed assets and one other hand; it will be added to revenue profit.
Investment in debentures of subsidiary company
If the subsidiary company has issued debentures, these should be shown on the liabilities side of the consolidated balance sheet. However if portion of debentures of subsidiary company is held by holding company as investment, the same should be cancelled and remainder will be shown on the liability side of consolidated balance sheet. Debentures issued by one company and held by the other should be eliminating form both sides-from debentures on the liability side and from investment on the assets side.
If there is a differences in the purchase price of debentures and their paid up value, the same is adjusted as equity share capital while calculating goodwill or cost of control.
Dividend from subsidiary company
1. Dividend paid
When dividend has been declared by the subsidiary company and the holding company has received it, the treatment of the dividend will be follows:
a. If the whole of the dividend is from the pre-acquisition profit, it must be treated as capital gain and must be credited to the investment account (representing cost of shares acquisition in the subsidiary) since thrash received is against the price of the share paid at the time of acquisition. This will reduce the cost of shares to the holding company and thereby reduce the cost of control or increase capital reserve.
b. If the whole dividend is from the post-acquisition profit, it is a gain available to the shareholders of the holding company and can be credited to the profit and loss account of the holding company.
c. If the dividend paid, is both out of pre-acquisition and post-acquisition profits, the dividend received out of the pre-acquisition profit will be credited to the investment account and that received out of post-acquisition profit to profit and loss account.
d. If, however, the dividend received out of pre-acquisition profit of the subsidiary company has been wrongly credited to the profit and loss account of the holding company instead of its investment account (representing controlling shares) that should be adjusted by the debiting profit and loss account and reediting investment account or should be deducted from both items of the holding company.
e. No adjustment is required while preparing consolidated balance sheet if a dividend has been declare and actually paid by the subsidiary, profited the divided so received by the holding company has been correctly recorded in its books.
i. Dividend from subsidiary company out of pre-acquisition profit
Dividend received by the holding company from its subsidiary out of pre-acquisition profits is treated as capital receipts. In this situation, the correct accounting treatment is to deduct such dividend from the cost of investment or control in the subsidiary for calculating goodwill or capital reserve.
If such dividend ha s wrongly been credited or included in profit and loss account of the holding company hen it should be rectified. For rectification, the amount of dividend received by the holding company is to be deducted from the profit and loss account of the holding company and again it also deducted from the cost of investment or cost control. No adjustment is required if such dividend has already been correctly in the books of the holding company.
2. Interim dividend
If subsidiary company pay interim dividend during the year, full amount of such dividend should be added back to the balance of current year's profit of the subsidiary company. If the shares of subsidiary company have been purchased during the accounting period, such dividend should be apportioned between pre-acquisition period and post-acquisition period on the basis of time.
Interim dividend relating to pre-acquisition period should be subtracted from pre-acquisition profit and interim dividend relating to post-acquisition period should be subsctcted from post-acquisition profit. Thereafter holding company's share of pre-acquisition interim dividend should be deducted from the profit and loss account balance and also from the cost of investment. Payment of interim dividend its treated exactly in the same way as final dividend.
3. Proposed dividend
When a dividend is proposed by the subsidiary company it is debited to its profit and loss appropriation account and credited to the proposed dividend account which is shown as a current liability in its balance sheet. While preparing consolidated balance sheet only that part of the proposed dividend which belong to the minority shareholders will be shown as current liability and the rest capital reserve depending upon whether the dividend has the consolidated out of post or pre-acquisition profit. In the consolidated balance sheet, to show a clear picture, that of proposed dividend which belongs to the holding company may be added to the holding company’s share in their profits of the subsidiary company and the rest may be either sown as prosper dividend in the consolidated balance sheet or added to the minority interest.
It must be noted that, the above does not apply, in any way, to the proposed dividend of the holding company. The whole amount and the rest may be dividend of the holding company will be shown as a current liability in the consolidated balance sheet.
Bonus shares issue by the subsidiary company
Issue of bonus shares by the subsidiary company will increase the number of shares in the hands of the holding company. Treatment of issue of bonus shares by the subsidiary will depend upon these sources from which bonus shares are issued. Bonus shares may be issued out of pre-acquisition or pro-acquisition profit or reserves.
1. Issue of Bonus shares out of pre-acquisition profits
In this case, there will be no effect on the consolidated balance sheet because while calculating cost of control, the holding company's share in the pre-acquisition profit is reduced (because of capitalization of profit) while on the other hand, the paid-up value of share held by company increase. So the cost of control or goodwill will remain the same as it was before the issue of bonus shares.
2. Issue of Bonus shares out of post-acquisition profit
Where a subsidiary company capitalizes profits by the issue of bonus shares out of the post-acquisition profit, on one hand it will reduce the revenue profit of subsidiary company and on other hand it will increase the share capital of subsidiary company.
Treatment of preference shares
If the subsidiary company has issued preference shares, treatment of these shares in the consolidated balance sheet will be as follows:
a. When the preference shareware held by outside members, the minority interest will also included the paid up amount of share held and the amount in respect of dividend accursed to the date of consolidation.
b. If the holding company itself holds preference share in the subsidiary company, the paid up value will be deducted from the cost of thereof to the holding company in the same way as in case of equity shares.
The fixed dividend on preference shares accrued to the date of acquisition will be transferred to goodwill as being proportion of the pre-acquisition profit of the subsidiary applicable to the preference shares. Accrued dividend from the date of acquisition to the date of preparation of consolidated account, however, will be considered as revenue profit and shall be properly include among holding company's shares in the revenue of the subsidiary company.
Shares acquired in subsidiary company appear in the holding company’s balance sheet as investment. In the consolidated balance sheet 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. Net worth or equity is the excess of assets over liabilities or the sum total of shareholder's fund, i.e. share capital, reserves and balance of profit and loss account. Thus, in case of a wholly owned subsidiary, if cost of investment is equity of subsidiary company, the excess represents payment for goodwill (which is also termed as 'cost of control') and will appear in the asset side of the consolidated balance sheet. If cost of investment is less than the equity, the difference is a capital reserve to be shown as such, in the liability side of the considered balance sheet. It must be noted here that he equity as on date of acquisition of control should be considered share capital plus reserves and profit and loss account existing on that date still not disturbed. For this restroom, allocation of profit between per-acquisition and post-acquisition period is very important.
If the holding company purchases the shares of the subsidiary at a price above the face value, the excess paid represent payment for cost of control or goodwill. This amount of goodwill must further be increase by the holding company's shares in the capital loss or be reduced by the capital profit. It the price paid for the purchase of share is less than the paid up value, the remaining difference is the capital reserve. This capital reserve will be increase by the per-acquisition profit and reduced by the per-acquisition loss.
Step VI: calculation of Minority interest
When some of the shares in the subsidiary are held by outside shareholders, they will be entitled to a proportionate share in the assets and liabilities of that company. For example, if 20% of the shares in the subsidiary are held by outside, they are entailed to 20% of the assets and liabilities of the subsidiary and the balance 80% belongs to the holding company. The share of the outsides in the subsidiary is called minority interest. In the consolidated balance sheet, all the assets and liabilities of the subsidiary are consolidated with the assets and liabilities of the holding company and the minority interest reprinting the interest of the outsides in the subsidiary is shown as a liability. The minority interest consist of the nominal, value of share held by the minority plus a proportionate share in the company's profit and reserve minus their proportionate share of the company's losses. If preference share are held by the outsides, the face value of such share with the dividend due thereon (if there are profit) will be included in the minority interest.
Step VII: preparation of consolidated Balance sheet
A consolidated balance sheet can be prepared by simple combining all the assets and liabilities of the holding company and subsidiary company. In other words, preparing consolidated balance sheet means to combine on line basis by ad dining tougher like items of assets and liabilities of holding and subsidiary company. But, if a correct consolidated balance sheet is to be prepared, the following steps should be taken:
a. Following items should be not included in consolidated balance sheet:
i. Investment in shares of subsidiary company of holding (which is shown in the assets side of the holding company's balance sheet).
ii. Share capital of subsidiary company
iii. Reserve and surplus of subsidiary company
iv. Any mutual owing by inter-company transactions
v. Any unrealized profit by inter-company transaction
b. Following items, which are calculated for specific purpose, must included in the consolidated balance sheet.
i. God will or capital reserve
ii. Minority interest
Mutual Owing or Inter-company Transaction
Mutual indebtedness between the holding company and its subsidiary may be merged in a sundry debtors and credits account or in separate current accounts. These accounts bet set off and eliminated from the onsolidated balance sheet (both from the total debtors and total creditors) since it are meant to show the position of the group as against the outside world. But the two balances may not be the same due to some amount in transit which should be shown separately. The acceptances held within the group as on the date of the balance sheet are to be set off. But the bills discounted or endorsed are not being eliminated as they now represented claims of the outsiders as against the group. Similarly, loans to and from subsidiary company should be eliminated from consolidated balance sheet. It should be ensured that the effect of elimination is equal and on opposite sides.
Unrealized inter-company profits
An unrealized inter-company profit exists where one company still holder, at the date of company still holders, at the date of consolidation, stock sold to it be the other company at a profit. Sometimes goods sold by one company in the receipts company at the date of balance sheet but are include in its stock at price, at which they were invoiced by the selling company in the group. The general rule is that profit on the transaction which from the point of view of group in unrealized must not remain in consolidated balance sheet. This must be deducted from the stock and from the consolidated profit (profit and loss account holding company) in consolidated account.
Nepal accounting standard (NAS) 21 states that full amount of the unrealized profit on should be deducted from the consolidated accounts. It means that in case there are minority shareholders in the subsidiary, there is no need of adjustment of their share of unrealized profits.
In this text, full unrealized profit included in stock of assets transferred from one group member to another has been eliminated; the practice of elevated propitiated part of attributable to interest of holding company in subsidiary company is also valid.
Good-in-transit and cash-in-transit
Sometimes goods sent by the holding company to subsidiary company and vice versa, and similarly cash sent by the holding company to subsidiary company and vice versa but might not have reached to the holding company or subsidiary company to before the date of closing of the accounts. It is known as goods-in-transit and cash-in-transit. In case of good-in-transit, the debtor will be reduced and goods-in-transit will be shown on the assets side in the consolidated balance sheet while in case of cash-in-transit, debtors will be reduced and cash-in-transit will be shown on the assets side of the consolidated balance sheet.
Revaluation of fixed assets
At the time of acquisition of shares, fixed assets may be reevaluated by holding company as well as by subsidiary company.
1. Revaluation of fixed assets of Holding company
If at the time of acquisition, the fixed assets of the holding company are reevaluated; in such a case the following adjustment will be made:
a. If the value of fixed assets is increased, the value (or profit) is treated as a capital profit and must appear on the liability side of the balance sheet of the holding company under the heading of capital reserve or may be used for writing off goodwill.
b. If the value of fixed asset is decrease, the reduced value (or loss) is treated as capital loss and will be deducted from capital reserve or general or profit & loss A/C respectively.
c. Fixed assets are shown at amended values in consolidated balance sheet.
d. Minority interest will not be affected.
2. Revaluation of fixed assets of subsidiary company
At the time of acquisition of shares in the subsidiary company, fixed assets of the subsidiary company may be revalued. In such a case:
a. Minority interest will be affected.
b. If the value of fixed assets increases, it is treated as a capital profit and is added to per-acquisition profit of the subsidiary company.
c. If the of fixed assets decreases, it is treated as capital loss and is deducted from per-acquisition profit of the subsidiary company.
d. Fixed asset are shown at amended value in consolidated balance sheet.
3. Adjustment for depreciation on revalued assets of subsidiary company
Since fixed assets are shown at received values in consolidated balance sheet, hence depreciation will be provided on the difference between revised value and existing value. For that:
a. If the value of fixed assets increases, depreciation will be provide on increased value from the date of balance sheet to revaluation date. On one hand, the additional depreciation will be deducted from the revised value of assets and on other hand; it will be deducted from revenue profit.
b. If the values of fixed assets decrease, depreciation on decreased value from the date of balance sheet to revaluation date will be treated as appreciation. On one hand, it will be added to the revised value of fixed assets and one other hand; it will be added to revenue profit.
Investment in debentures of subsidiary company
If the subsidiary company has issued debentures, these should be shown on the liabilities side of the consolidated balance sheet. However if portion of debentures of subsidiary company is held by holding company as investment, the same should be cancelled and remainder will be shown on the liability side of consolidated balance sheet. Debentures issued by one company and held by the other should be eliminating form both sides-from debentures on the liability side and from investment on the assets side.
If there is a differences in the purchase price of debentures and their paid up value, the same is adjusted as equity share capital while calculating goodwill or cost of control.
Dividend from subsidiary company
1. Dividend paid
When dividend has been declared by the subsidiary company and the holding company has received it, the treatment of the dividend will be follows:
a. If the whole of the dividend is from the pre-acquisition profit, it must be treated as capital gain and must be credited to the investment account (representing cost of shares acquisition in the subsidiary) since thrash received is against the price of the share paid at the time of acquisition. This will reduce the cost of shares to the holding company and thereby reduce the cost of control or increase capital reserve.
b. If the whole dividend is from the post-acquisition profit, it is a gain available to the shareholders of the holding company and can be credited to the profit and loss account of the holding company.
c. If the dividend paid, is both out of pre-acquisition and post-acquisition profits, the dividend received out of the pre-acquisition profit will be credited to the investment account and that received out of post-acquisition profit to profit and loss account.
d. If, however, the dividend received out of pre-acquisition profit of the subsidiary company has been wrongly credited to the profit and loss account of the holding company instead of its investment account (representing controlling shares) that should be adjusted by the debiting profit and loss account and reediting investment account or should be deducted from both items of the holding company.
e. No adjustment is required while preparing consolidated balance sheet if a dividend has been declare and actually paid by the subsidiary, profited the divided so received by the holding company has been correctly recorded in its books.
i. Dividend from subsidiary company out of pre-acquisition profit
Dividend received by the holding company from its subsidiary out of pre-acquisition profits is treated as capital receipts. In this situation, the correct accounting treatment is to deduct such dividend from the cost of investment or control in the subsidiary for calculating goodwill or capital reserve.
If such dividend ha s wrongly been credited or included in profit and loss account of the holding company hen it should be rectified. For rectification, the amount of dividend received by the holding company is to be deducted from the profit and loss account of the holding company and again it also deducted from the cost of investment or cost control. No adjustment is required if such dividend has already been correctly in the books of the holding company.
2. Interim dividend
If subsidiary company pay interim dividend during the year, full amount of such dividend should be added back to the balance of current year's profit of the subsidiary company. If the shares of subsidiary company have been purchased during the accounting period, such dividend should be apportioned between pre-acquisition period and post-acquisition period on the basis of time.
Interim dividend relating to pre-acquisition period should be subtracted from pre-acquisition profit and interim dividend relating to post-acquisition period should be subsctcted from post-acquisition profit. Thereafter holding company's share of pre-acquisition interim dividend should be deducted from the profit and loss account balance and also from the cost of investment. Payment of interim dividend its treated exactly in the same way as final dividend.
3. Proposed dividend
When a dividend is proposed by the subsidiary company it is debited to its profit and loss appropriation account and credited to the proposed dividend account which is shown as a current liability in its balance sheet. While preparing consolidated balance sheet only that part of the proposed dividend which belong to the minority shareholders will be shown as current liability and the rest capital reserve depending upon whether the dividend has the consolidated out of post or pre-acquisition profit. In the consolidated balance sheet, to show a clear picture, that of proposed dividend which belongs to the holding company may be added to the holding company’s share in their profits of the subsidiary company and the rest may be either sown as prosper dividend in the consolidated balance sheet or added to the minority interest.
It must be noted that, the above does not apply, in any way, to the proposed dividend of the holding company. The whole amount and the rest may be dividend of the holding company will be shown as a current liability in the consolidated balance sheet.
Bonus shares issue by the subsidiary company
Issue of bonus shares by the subsidiary company will increase the number of shares in the hands of the holding company. Treatment of issue of bonus shares by the subsidiary will depend upon these sources from which bonus shares are issued. Bonus shares may be issued out of pre-acquisition or pro-acquisition profit or reserves.
1. Issue of Bonus shares out of pre-acquisition profits
In this case, there will be no effect on the consolidated balance sheet because while calculating cost of control, the holding company's share in the pre-acquisition profit is reduced (because of capitalization of profit) while on the other hand, the paid-up value of share held by company increase. So the cost of control or goodwill will remain the same as it was before the issue of bonus shares.
2. Issue of Bonus shares out of post-acquisition profit
Where a subsidiary company capitalizes profits by the issue of bonus shares out of the post-acquisition profit, on one hand it will reduce the revenue profit of subsidiary company and on other hand it will increase the share capital of subsidiary company.
Treatment of preference shares
If the subsidiary company has issued preference shares, treatment of these shares in the consolidated balance sheet will be as follows:
a. When the preference shareware held by outside members, the minority interest will also included the paid up amount of share held and the amount in respect of dividend accursed to the date of consolidation.
b. If the holding company itself holds preference share in the subsidiary company, the paid up value will be deducted from the cost of thereof to the holding company in the same way as in case of equity shares.
The fixed dividend on preference shares accrued to the date of acquisition will be transferred to goodwill as being proportion of the pre-acquisition profit of the subsidiary applicable to the preference shares. Accrued dividend from the date of acquisition to the date of preparation of consolidated account, however, will be considered as revenue profit and shall be properly include among holding company's shares in the revenue of the subsidiary company.
This post is good and i am hopeful that you will post such informative thing, it help me a lot in understanding this topic holding company
ReplyDelete