Holding Company Accounts-Holding and Minority.docx

A Holding Company is a company that controls another company by holding more than 50% of its equity share capital or controlling the composition of its Board of Directors.
The company whose shares are held or controlled is called a Subsidiary Company.
When one company has control over another, consolidated financial statements are prepared to present the financial position and performance of the group as a single economic entity.

1. UNIT – III: HOLDING COMPANY ACCOUNTS
1. MEANING AND INTRODUCTION
A Holding Company is a company that controls another company by
holding more than 50% of its equity share capital or controlling the
composition of its Board of Directors.
The company whose shares are held or controlled is called a Subsidiary
Company.
When one company has control over another, consolidated financial
statements are prepared to present the financial position and
performance of the group as a single economic entity.
2. DEFINITIONS
(a) As per Section 2(46) of the Companies Act, 2013:
“A holding company, in relation to one or more other companies, means a
company of which such companies are subsidiary companies.”
(b) As per Section 2(87) of the Companies Act, 2013:
“A company is a subsidiary of another if that other company controls the
composition of its Board of Directors or holds more than half in nominal
value of its equity share capital.”
3. EXAMPLES
If A Ltd. holds 80% of the equity shares of B Ltd.,
 
then
A Ltd. → Holding Company
 
and
B Ltd. → Subsidiary Company.
The holding-subsidiary relationship is based on ownership or
control.

2. 4. IMPORTANT TERMS
(A) Holding Company
A company which has control over another company by:
1.Holding more than 50% of equity share capital, or
2.Controlling the composition of the Board of Directors.
(B) Subsidiary Company
A company which is controlled by another company (holding company) as
per above conditions.
(C) Capital Profit
Meaning:
Profits earned by the subsidiary company before the date of acquisition of
shares by the holding company.
Sources:
Profit before acquisition.
Reserves existing before acquisition.
Profit on sale of fixed assets before acquisition.
Treatment:
Capital profit is added to Capital Reserve (or adjusted against cost of
control).
(D) Revenue Profit

3. Meaning:
Profits earned by the subsidiary after the date of acquisition by the
holding company.
Treatment:
Revenue profit is included in Group’s retained earnings (P&L).
(E) Minority Interest
Meaning:
That part of the subsidiary company’s net assets (share capital + reserves)
which belongs to shareholders other than the holding company .
Formula:
\text{Minority Interest} = \frac{\text{Shares held by outsiders}}{100} \times
(\text{Share Capital + Reserves + P&L of Subsidiary})
Treatment:
Shown on the liabilities side of the Consolidated Balance Sheet.
(F) Cost of Control or Goodwill / Capital Reserve
Meaning:
When a holding company acquires shares of a subsidiary, the amount paid
may be more or less than its share in the subsidiary’s net assets.
Formula:
Cost of Control (Goodwill)=Cost of Investment−Holding Company’s share in 
Capital Profit / Net Assets of Subsidiary\text{Cost of Control (Goodwill)} = \
text{Cost of Investment} - \text{Holding Company’s share in Capital Profit /
Net Assets of
Subsidiary}Cost of Control (Goodwill)=Cost of Investment−Holding Company’
s share in Capital Profit / Net Assets of Subsidiary

4. If positive, it is Goodwill on consolidation.
If negative, it is Capital Reserve.
Treatment:
Goodwill → Shown on Assets side.
Capital Reserve → Shown under Reserves & Surplus (Liabilities side).
(G) Inter-Company Holdings
Meaning:
When a subsidiary company holds shares in the holding company.
Such mutual holdings are eliminated during consolidation to avoid
duplication.
Only external shareholdings are shown in the consolidated financial
statements.
(H) Mutual Owings (Inter-Company Balances)
Meaning:
Balances due between holding and subsidiary companies — e.g., bills
receivable/payable, debtors/creditors, loans, etc.
Treatment:
Such inter-company balances are cancelled in consolidation.
Example:
If H Ltd. shows ₹10,000 due from S Ltd. (debtor), and S Ltd. shows
₹10,000 due to H Ltd. (creditor), the two balances cancel each other in
consolidation.
5. PREPARATION OF CONSOLIDATED BALANCE SHEET

5. Objective:
To present the combined financial position of the holding company and its
subsidiary as if they are one single entity.
Governing Standard:
Accounting Standard – AS 21: Consolidated Financial Statements.
Steps in Preparation:
1.Determine the relationship
– Identify holding and subsidiary companies, and percentage of
shareholding.
2.Calculate cost of control (goodwill / capital reserve)
Cost of Control=Cost of Investment–Share of HLtd.in Net Assets of S Ltd. On
date of acquisition Cost of Control = Cost of Investment – Share of H Ltd. in
Net Assets of S Ltd. on date of acquisition Cost of Control=Cost of
Investment–Share of H Ltd. In Net Assets of SLtd. On date of acquisition
3.Compute capital and revenue profits of subsidiary
oCapital profit → before acquisition.
oRevenue profit → after acquisition.
4.Calculate Minority Interest
oBased on outsider’s share in subsidiary’s share capital,
reserves, and profits.
5.Eliminate inter-company transactions
oDebtors/creditors, bills receivable/payable, loans, etc.
6.Prepare consolidated reserves and profits
oHolding company’s own + Holding company’s share of
subsidiary’s revenue profit.
7.Combine assets and liabilities of holding and subsidiary.

6. oEliminate investment in subsidiary company (since it’s internal).
Proforma of Consolidated Balance Sheet (Simplified)
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
As on 31st March, 20XX
Liabilities ₹Assets ₹
Share Capital (H Ltd.) xxxFixed Assets (H + S) xxx
Reserves & Surplus: Current Assets (H + S) xxx
– H Ltd.’s own reserves xxxGoodwill (if any) xxx
– Add: H Ltd.’s share in S Ltd.’s revenue
profit
xxx
Less: Inter-company
balances
(xxx)
Minority Interest xxx
Total xxxTotal xxx
6. WORKINGS INVOLVED
(i) Share of Holding Company in Subsidiary’s Net Assets
Share=(Holding %)×(Share Capital + Reserves + Profits)Share = (\
text{Holding \%}) × (\text{Share Capital + Reserves +
Profits})Share=(Holding %)×(Share Capital + Reserves + Profits)
(ii) Minority Interest
MinorityInterest=(Minority %)×(Share Capital + Reserves + Profits)Minority
Interest = (\text{Minority \%}) × (\text{Share Capital + Reserves +
Profits})MinorityInterest=(Minority %)×(Share Capital + Reserves + Profits)
(iii) Goodwill or Capital Reserve
Goodwill/CapitalReserve=Cost of Investment–H Ltd.’s Share of Net AssetsGo
odwill/Capital Reserve = \text{Cost of Investment} – \text{H Ltd.’s Share of

7. Net Assets}Goodwill/CapitalReserve=Cost of Investment–
H Ltd.’s Share of Net Assets
(iv) Consolidated Reserves and Surplus
ConsolidatedReserve=HLtd.’sOwn+HLtd.’sShareofSubsidiary’sPost−Acquisiti
on(Revenue)ProfitsConsolidated Reserve = H Ltd.’s Own + H Ltd.’s Share of
Subsidiary’s Post-Acquisition (Revenue)
ProfitsConsolidatedReserve=HLtd.’sOwn+HLtd.’sShareofSubsidiary’sPost−Ac
quisition(Revenue)Profits
7. FORMAT OF WORKING PAPER
Particulars Working Note
1. Holding company’s share in
subsidiary
% of shares held
2. Minority interest % of shares not held by holding
3. Net assets of subsidiary Share capital + Reserves + P&L
4. Cost of control
Cost of investment – Share of H in net
assets
5. Consolidated reserves
H’s own + H’s share of post-acquisition
profits
8. ADJUSTMENTS IN CONSOLIDATION
Adjustment Treatment
Unrealised profit in stockDeduct from closing stock and group profits
Inter-company
debtors/creditors
Cancel both balances
Bills receivable/payable Cancel both balances

8. Adjustment Treatment
Inter-company dividends Eliminate (treated as internal income)
Preference shares in
subsidiary
Show separately under Minority Interest (if not
held by holding company)
9. EXAMPLE (Illustration)
Balance Sheets (Simplified):
LiabilitiesH Ltd. (₹)S Ltd. (₹)Assets H Ltd. (₹)S Ltd. (₹)
Share Capital10,00,0005,00,000Fixed Assets8,00,0003,00,000
Reserves 2,00,0001,00,000Investments 4,00,000-
P&L Account1,00,00050,000Current Assets1,00,0003,50,000
Creditors 1,00,0001,00,000
Total 14,00,0007,50,000Total 13,00,0006,50,000
Additional Information:
H Ltd. holds 4,000 shares in S Ltd. (out of 5,000) for ₹4,00,000.
All profits of S Ltd. are earned after acquisition.
Solution:
1.Holding % = 4,000 / 5,000 = 80%
Minority % = 20%
2.Net assets of S Ltd. = 5,00,000 + 1,00,000 + 50,000 = ₹6,50,000
3.H Ltd.’s share (80%) = 6,50,000 × 80% = ₹5,20,000
4.Cost of Control = 4,00,000 – 5,20,000 = (₹1,20,000) → Capital
Reserve.

9. 5.Minority Interest = 6,50,000 × 20% = ₹1,30,000
6.Consolidated Reserves & Surplus
= H Ltd.’s own (2,00,000 + 1,00,000) + H’s share of S Ltd.’s P&L
(50,000 × 80%)
= ₹3,00,000 + ₹40,000 = ₹3,40,000
Consolidated Balance Sheet (Extract):
Liabilities ₹ Assets ₹
Share Capital (H Ltd.)10,00,000Fixed Assets (H + S)11,00,000
Reserves & Surplus3,40,000Investments –
Minority Interest 1,30,000Current Assets 4,50,000
Capital Reserve 1,20,000
Total 15,90,000Total 15,90,000
10. ADVANTAGES OF CONSOLIDATED BALANCE SHEET
1.Presents true and fair view of the financial position of the group.
2.Facilitates better control and management analysis.
3.Helps investors and creditors assess group performance.
4.Avoids misrepresentation of profits or reserves.
5.Useful for strategic planning and decision-making.
11. LIMITATIONS
1.Complex and time-consuming.
2.Minority interest and goodwill valuation may be subjective.

10. 3.Elimination of inter-company items may not always be precise.
4.Does not show individual company performance.
12. SUMMARY
Concept Meaning Treatment
Holding Company
Controls subsidiary through
shareholding or management
Prepares
consolidated
accounts
Subsidiary
Company
Controlled by holding company
Financials
consolidated
Capital Profit Profit before acquisition
Added to capital
reserve
Revenue Profit Profit after acquisition
Added to group
reserves
Minority InterestOutsiders’ share in subsidiary Liability side
Goodwill / Capital
Reserve
Cost of control adjustment
Asset or liability
side
Inter-company
Balances
Debtors/creditors between
companies
Eliminated
Consolidated
Balance Sheet
Combined statement of holding
and subsidiary
Shows true financial
position