The document discusses key concepts related to holding companies and consolidated financial statements. It defines a holding company as one that controls another company by owning a majority of its shares. A subsidiary is a company whose shares are owned by the holding company. If all shares are owned, it is a wholly owned subsidiary, otherwise it is partially owned. To prepare consolidated financial statements, the holding company combines its financials with the subsidiary's by adding all assets and liabilities, except for its investment in the subsidiary. It also calculates the minority interest owned by outsiders in the subsidiary and the cost of control, if it paid more than the net assets for the subsidiary's shares. The consolidated statements provide an overall picture of the financial position and

1. Accounts of Holding
companies
Parmil Kumar
Associate Professor
Deptt. Of Commerce
Govt. P. G. College Ambala Cantt

2. Holding Company
• Is a company which exercise control over another company by acquiring all
or majority of its share of controlling the composition of its Board of
Directors.
• Company whose shares are acquired by holding company is called
Subsidiary company
• If holding company has acquired all the shares of Subsidiary company it will
be called wholly owned subsidiary/ fully owned subsidiary, hence there will
be no minority in the company and minority interest will be zero
• If holding company has acquired only majority( more than 50%) of the
shares of Subsidiary company it will be called partially owned subsidiary,
remaining shares will be held by minority and there claim is called minority
interest

3. Wholly owned and Partly owned subsidiary
Wholly owned Subsidiary
• 100% shares are acquired by the
holding company
• No shares with the outsiders
(other than holding company)
• There is no minority interest
• Minority interest will be zero
Partly owned Subsidiary
• Only majority shares(more than
50% shares) are acquired by the
holding company.
• Remaining (less than 50% share)
are with the out siders( means with
other companies or people called
minority)
• Claim of Minority is called minority
interest hence needs the
calculation of minority interest

4. Advantage and dis-advantage of holding
company
Advantages
• Eliminate competition
• Easy way to get new market for the products
• Increase goodwill of both companies
• Efficiency in management
• Separate profits and financial results
• Separate responsibility centre
• Easy to control
• Benefits of economies
• Large scale production
• Smooth supply of material
• Getting access to market
• Separate goodwill of both companies
• Getting income tax benefits
• Easy to sell
• Easy to wind up
Dis-advantages
• Frauds in inter-company transfers
• Failure of one company can affect the goodwill of another
• Speculation in shares
• Oppression of minorities can be there
• Difficulty in ascertain true financial position
• Secret reserves created
• Forced appointment of directors
• Directors fees may be fixed high
• Holding company may transfer its product at higher price to
subsidiary
• Difficulty in valuation of inventory
• Fear of Mis-management, Mis-management can be there

5. Advantage and dis-advantage of Consolidated
Financial Statements of the company
Advantages
• Group position is easily available
• Claims of minority interest is easily available, easy
bargain to acquire full control over the subsidiary
• Financial position of the group is easily available
• Total picture of group is available in unified one
document
• Ascertainment of intrinsic value of shares of
holding company
• Evaluation of efficiency
• Easy calculation of ROI (Return on Investment)
• Measurement of liquidity
Dis-advantages
• Difficulty in compiling of Accounts
• Accounting policies may differ in
both the companies
• Accounting period may differ differ
in both the companies
• Concealment of important
information
• Misleading information may be
there

6. Preparation of consolidated financial
statements (Balance Sheet)
• In order to prepare consolidated B/S following steps are taken:
• Calculation of pre-acquisition and Post acquisition profits( if shares in
subsidiary are purchased during the mid of year)
• Calculation of Cost of control
• ( cost of control is the excess price paid for share (investments in share of
subsidiary) more than the proportion of capital and reserve and surplus,
acquired)
• Calculation of Minority interest( if Subsidiary is not a wholly owned)
• Add all the assets of holding and subsidiary ( excluding investments of
holding in subsidiary), as well as add all the liabilities (except capital and
reserve and surplus) in consolidated B/S

7. Pre-acquisition and Post acquisition profits (if shares in
subsidiary are purchased during the mid of year)
Pre-acquisition profits
• Profits earned by the subsidiary company
before the date of majority shares acquired
by the holding company are called pre-
acquisition profits
• These profits are capital profits for the
holding company
• As capital profits, these are taken in
calculation of cost of control/ capital reserve
• Holding company proportion of such capital
profits will be added to proportion of capital,
, (calculated on the basis of % share acquired)
to calculate cost of control of holding
company
Post-acquisition profits
• Profits earned by the subsidiary company
after the date of majority shares acquired
by the holding company are called post-
acquisition profits
• These profits are revenue profits for the
holding company
• As revenue profits, these are taken in
calculation of current year profits of
holding company
• Holding company proportion of such
revenue profits, (calculated on the basis
of % share acquired) will be added to
current year profits of holding company

8. Cost of control & Minority interest
Cost of control
• Holding company may pay more or less
than the value of net assets
acquired(Proportion of capital &
reserves) for the majority shares in
subsidiary company
• It is the excess payment made by the
holding company, more than the
proportion of net assets to acquire
control in the subsidiary company.
• This excess payment is called goodwill or
cost of control
• If less amount is paid is is called capital
reserve
Minority interest
• Proportion of net assets of the
subsidiary which belongs to
minority share holders is called
minority interest.
• It is the amount payable to
outsiders in respect of share capital
and accumulated reserve and
surplus to the extent of their share
holding in the subsidiary.
• Minority interest is the proportion
of minority shareholders in the net
assets of the subsidiary company.

9. Calculation of Minority Interest
• Following items are added to calculate minority interest:
• Add Proportion of capital in subsidiary company held by outsiders on
the basis of their % shareholding
• Add proportion of Reserve and surplus( Capital Profit+ Revenue
Profits) on the basis of proportion of shares held
• Deduct loss( if any)

10. Calculation of Cost of Control/Goodwill
• It is the excess amount paid by holding company to acquire shares in
subsidiary, calculated as follows:
• Amount paid by holding company for the shares say (10,00,000)
(It is shown in Investment of holding company)
• Less:
• % amount of share capital held in subsidiary 800.000
• % amount of capital profits ( Pre-acquisition profits of subsidiary) 150.000
• Cost of control will be 10,00,000-9,50,000=50,000 ----------------
50,000