A PROJECT REPORT ON

FINANCIAL ACCOUNTING OF HOLDING COMPANIES

A Project Submitted to
University of Mumbai for completion of the degree of
Master in Commerce

Under the Faculty of Commerce

By

GARIMA MAHAVIR SHARMA

M.Com (Accountancy) – Part II

Semester IV – Roll No.66

Under the Guidance of

Prof, Kunal Chandika

Keraleeya Samajam (Regd.) Dombivli’s

MODEL COLLEGE

April 2019 1
INDEX
Chapter No. 1 INTRODUCTION Page No.

 HOLDING COMPANY – MEANING, 9

DEFINITION 11

 TYPES OF HOLDING COMPANY 12

 RIGHTS OF HOLDING COMPANY 13

 RESPONSIBILITIES OF HOLDING COMPANY 16

 ADVANTAGES OF HOLDING COMPANY 19
 DISADVANTAGES OF HOLDING COMPANY 20
 SUBSIDIARY COMPANY – MEANING, 22
DEFINITION
24
 ADVANTAGES OF SUBSIDIARY COMPANY
26
 DISADVANTAGES OF SUBSIDIARY COMPANY

 DIFFERENCE BETWEEN HOLDING COMPANY

AND SUBSIDIARY COMPANY 26
 SUBSIDIARY RELATIONSHIP WITH HOLDING 29
COMPANY
30
 REASONS COMPANIES HAVE SUBSIDIARY
COMPANIES 31

 ACCOUNTING STANDARD 21 31
 CONSOLIDATION OF FINANCIAL STATEMENT 34
 SCOPE OF CONSOLIDATED FINANCIAL 36
STATEMENT
40
 CONSOLIDATION PROCEDURE

2
  CONSOLIDATION OF BALANCESHEET

 PREPARATION OF CONSOLIDATED
BALANCESHEET

Chapter No. 2 RESEARCH METHODOLOGY

57
 OBJECTIVE OF THE STUDY
57
 LIMITATION OF STUDY 58
 RESEARCH METHODOLOGY

Chapter No. 3 DATA ANALYSIS & PRESENTATION 59-71

Chapter No. 4 CONCLISIONS & SUGGESTIONS

 CONCLUSION 73
 SUMMARY 73

Chapter No. 5 BIBLIOGRAPHY 76

3
 Model College Of Commerce

Certificate
This is to certify that Ms. Garima Mahavir Sharma has worked and duly completed her
Project Work for the degree of Master in Commerce under the Faculty of Commerce in the
subject of M.com Accountancy and her project is entitled “Financial Accounting of
Holding Companies.” under my supervision .

I further certify that the entire work has been done by the leaner under my guidance and that
no part of it has been submitted previously for any degree or diploma of any university.

It is her own work and fact reported by her is her personal findings and investigations.

Name and Signature of

Seal of the
Guiding Teacher
College

Date of submission: 7 April 2019.

4
 Declaration by learner

I the undersigned Miss. Garima Mahavir Sharma here by, declare that the
work embodied in this project work titled ” Financial Accounting of
Holding Companies”, forms my own contribution to the research work carried
out under the guidance of Prof. Kunal Chandika is a result of my own
research work and has not been previously submitted to any other University
for any other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been
clearly indicated as such and included in the bibliography.

I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical conduct.

Garima Mahavir Sharma

Name and Signature of the learner

Certified by
Prof. Kunal Chandika
Name and signature of the Guiding Teacher

5
 Acknowlegement
Acknowledgement

To list who all have helped me is difficult because they are so numerous and the
depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to
do this project.

I would like to thank my Principal, Dr.Vinay Bhole for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator Thrivikraman M.V., for his
moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

Prof. Kunal Chandika whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.

6
CHAPTER
1
INTRODUCTION

7
HOLDING COMPANY
A holding company is a parent corporation, limited liability company, or limited partnership that owns
enough voting stock in another company, that it can control that company's policies and oversee its
management decisions. Although a holding company owns the assets of other companies, it merely
maintains oversight capacities, and therefore does not actively participate in running a business' day-
to-day operations.
A holding company exists for the sole purpose of controlling other companies, be they other
corporations, limited partnerships or limited liability companies. Holding companies also may own
property, such as real estate, patents, trademarks, stocks and other assets. Business that are 100%
owned by a holding company are referred to as "wholly owned subsidiaries". Although a holding
company can hire and fire managers of companies it owns, those managers are ultimately responsible
for their own operations. Therefore it is crucial for owners to keep a sharp eye on its businesses, to
make sure they are running optimally.

Holding companies enjoy the benefit of protection from losses. If a subsidiary company goes
bankrupt, the holding company may experience a capital loss and a decline in net worth, however the
bankrupt company’s creditors cannot legally pursue the holding company for remuneration.
Consequently, as an asset protection strategy, a parent corporation might structure itself as a holding
company, while creating subsidiaries for each of its business lines. For example, one subsidiary may
own the parent corporation's brand name and trademarks, another may own its real estate, another may
own the equipment, and still others may own and operate each individual franchise. This tactic serves
to limit the financial and legal liability exposure of the holding company and of the various
subsidiaries. It may also depress a corporation's overall tax liability by strategically basing certain
parts of its business in jurisdictions that have lower tax rates.

Holding companies also let individuals protect their personal assets, because those assets are
technically held by the corporation, and not by the person, who is consequently shielded from debt
liabilities, lawsuits and other risks.

Holding companies support their subsidiaries by using their resources to lower the cost of much-
needed operating capital. Using a downstream guarantee, the parent company makes a pledge on a
loan on behalf of the subsidiary, helping companies obtain lower interest rate debt financing than they
otherwise would be able to source on their own. Once backed by the financial strength of the holding
company, the subsidiary company's risk of defaulting on its debt drops considerably.

A prime example of a well-known holding company is Berkshire Hathaway, which owns assets in
more than one hundred public and private companies, including Dairy Queen, Clayton Homes,
Duracell, GEICO, Fruit of the Loom, RC Wiley Home Furnishings and Marmon Group. Berkshire
likewise boasts minor holdings in The Coca-Cola Company, Goldman Sachs, IBM, American
Express, Apple, Delta Airlines, and Kinder Morgan.

8
MEANING
Under the companies Act, 1956, a holding company is any company which holds more than half of
the equity share capital of other companies or controls the composition of the board of directors of
other companies.

A holding company is a company that owns other companies' outstanding stock. A holding company
usually does not produce goods or services itself; rather, its purpose is to own shares of other
companies to form a corporate group. Holding companies allow the reduction of risk for the owners
and can allow the ownership and control of a number of different companies.
In the United States, 80% of stock, in voting and value, must be owned before tax consolidation
benefits such as tax-free dividends can be claimed.[1] That is, if Company A owns 80% or more of the
stock of Company B, Company A will not pay taxes on dividends paid by Company B to its
stockholders, as the payment of dividends from B to A is essentially transferring cash from one
company to the other. Any other shareholders of Company B will pay the usual taxes on dividends, as
they are legitimate and ordinary dividends to these shareholders.
Sometimes a company intended to be a pure holding company identifies itself as such by adding
"Holding" or "Holdings" to its name.

The holding company has more than 50 percent of the total voting power and has the control on the
other company.
The existing management team, assisted by financial investors, created and financed a holding
company that then borrowed debt to acquire the target company.
A holding company is a company with controlling shareholdings in one or more other companies.

Holding company first came into existence in the US. It was created to overcome the restrictions
imposed by the Anti-trust legislation. They were formed because businessmen wanted to have
concerns under common control and within the framework of law.

A Holding company is a company, which has the purpose of owning stock (or shares) of other
companies. In most cases, such companies do not sell products or services, they manage the
companies they (partly) own. Probably one of the best known holding companies was the "Standard
Oil of New Jersey", founded in 1889, which is called Exxon Mobil today. In general, there are three
forms:

1. the holding company owns stock/shares of other companies; activities are limited to managing
the companies.
2. in addition to the above, the companies have a common management, which take the strategic
decisions.
3. in addition to item 1, the management influences the distribution of capital to its daughter
companies. The holding is mainly used for managing financial resources.

9
MEANING UNDER COMPANIES ACT,1956

Section 4 of the companies Act, 1956 defines a subsidiary

company. A company is a subsidiary of another if and only if –

a) That other company controls the composition of its Board of

Directors; or

b) That other –
i) Where the first mentioned company is an existing company in respect
of which the holders of Preference shares issued before the
commencement of this Act have the same voting rights in all respect
as the holders of Equity shares exercises or controls more than half of
the total voting power of such company.
ii) Where the first mentioned company is any other company, holds
more than half in nominal value of its Equity share capitals. OR
iii) The company is a subsidiary of any company which is that other
company’s subsidiary.

10
DEFINITION
a corporation organized to hold bonds or stocks of other corporations, which it usually controls

A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

A parent is an enterprise that has one or more subsidiaries.

A group is a parent and all its subsidiaries.

Thus, the Accounting Standard calls the holding company, a parent.

DIFFERENT TYPES OF HOLDING COMPANY

The following are the different types of holding companies:

1. Parent holding company:

It comes into existence when an organization in existence acquires controlling stake in
existing companies or starts new companies under its control. For e.g. Tata Tea has acquired
controlling stake in Tetley, a UK tea company. In this case, Tata Tea is the parent holding
company.

2. Offspring company:
A new company started by some existing company with the objective of exercising control.
For example, ECC (Engineering Construction Corporation Ltd.,) was set up by L&T (Larsen
& Toubro Ltd.,) as its subsidiary. L&T is the parent holding company and ECC is the
offspring company.

3. Pure holding company:

A company which is established primarily for uniting and controlling the subsidiaries. For e.g.
in the Tata group, Tata Sons Ltd., was established for uniting and controlling the various
subsidiaries. TV Sundaram Iyengar and Sons is the holding company of the TVS group.

4. Proprietary holding company:

A company which holds the entire stock issued by its subsidiaries.

5. Intermediate holding company:

A holding company of a subsidiary, but is itself controlled by another holding Company.

11
 6. Finance holding company:
It does not control the affairs of other companies. It earns profits by financing the operations
of other firms.

7. Investment holding company:

It does not control the affairs of other companies. It invests in the securities of a number of
companies. Its members derive the benefit of diversified investment.

8. Primary holding company:

A holding company which is not a subsidiary of any other company. For example, Unilever
Ltd., set.up HLL (Hindustan Lever Limited) as its subsidiary. Unilever Ltd., which is the
holding company is not a subsidiary of any other company and is therefore a primary holding
company

9. Mixed holding company:

A holding company which runs its own business and also controls the business of its
subsidiaries. For e.g. ICI Ltd., set up Indian Explosive as its subsidiary. ICI Ltd., runs its own
business and also controls the business of Indian Explosives.

RIGHTS OF THE HOLDING COMPANY

 Holds more than 50% of rights in the subsidiary company.

 Controlling power over the subsidiary company.

 Maintains voting rights regarding the subsidiary company.

RESPONSIBILITIES OF THE PARENT COMPANY

 Needs to report its financials by including those of the subsidiary company as well, since it

holds 50% or more of the rights in the subsidiary company.

 Responsible for tax obligations of the subsidiary as well.

 Liable for the sister concern’s operation of business and management of resources in its

location.

 Sometimes serves as a guarantor for the subsidiary in their financial requirements.

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ADVANTAGES OF HOLDING COMPANIES:

Holding companies have been used extensively to further the combination movement. Particularly in
the United States of America, the holding company device was found to be useful in bringing a
number of companies under one control, and it is only when the combination movement gathered
momentum that holding companies became popular.

The advantages of holding companies are as under:

1.Ease of formation
It is quite easy to form a holding company. The promoters can buy the shares in the open market. The
consent of the shareholders of the subsidiary company is not required.

2. Large capital
The financial resources of the holding and subsidiary companies can be pooled together. The company
can undertake large scale projects to increase its profitability.

3. Avoidance of competition
Competition between holding and subsidiary companies can be avoided if they are in the same line of
business.

4. Economies of large scale operations

The buying and selling of the holding company and the subsidiaries can be centralized. It can enjoy
the advantage of quantity discount and better credit terms because of bulk purchases. It can also get
better terms from buyers in case of sales.

5. Secrecy maintained
Secrecy can be maintained as the authority and decision making are centralized. It can protect itself
from adverse publicity.

6. Risks avoided
In case the subsidiaries undertake risky business and fail, the loss does not affect the holding
company. It can sell its stakes in the subsidiary company.

7. It offers potential tax consolidation benefits.

In the United States, holding companies are required to own 80% of outstanding stock, either in
voting or total value, before any tax consolidation benefits are permitted. Once that threshold is
reached, then tax-free dividends can be claimed, since that process is treated as one company
transferring cash assets to the other company. To be eligible for other benefits, more than 50% of the
value of its outstanding stock must be owned directly or indirectly by five or fewer individuals during
the last portion of the tax year.

13
8. It reduces the legal risks of those involved.
Holding companies are basically just a major shareholder for the companies where they own
outstanding stock. That means there is a reduced risk of legal action taken against them for the goods
and services being produced by the company they own. The primary risk that most holding companies
face is a loss of stock value because of performance issues that are directly related to the companies
they own.

9. It permits companies to perform traditional functions if they choose.

If 60% of the adjusted gross income of an organization comes from dividends, interest, royalties, or
rent, then it qualifies as a holding company in the United States. Even with this qualification, it is still
permissible for the company to create its own products or services. The only stipulation is that the
adjusted gross income from these other activities must stay below the 40% threshold.

10. It offers diversity within the business world.

Holding companies make it possible for a diverse array of businesses to exist, providing products and
services for their customers. They invest into companies that provide a strong possibility of
profitability, which then creates profits for the holding company. Many of today’s top performing
companies are owned by holding companies. Berkshire Hathaway, for example, owns $49.6 billion in
Apple, holding over 239 million shares. They own 679 million shares of Bank of America, worth
$21.2 billion. They even own 400 million shares of Coca-Cola, valued at $18.4 billion.

11. It creates more opportunities for low-cost loans.

Shares are usually classified as a tangible asset. That means they can be used as collateral when
lending products are required for some reason. These secured loans are often made available at a very
low interest rate because there is virtually no risk for the lender in the transaction. If a default occurs,
then the shares are used to pay off the debt. That makes it easier and cheaper to finance new
expansion opportunities, support businesses, and even keep prices lower for consumers.

12. It is very easy to form a holding company.

To form a holding company, you must first incorporate your business. Then you purchase shares of
the companies you wish to hold from the open market. You don’t require the consent of the
shareholders within the targeted companies under this structure because you’re not completing a full
takeover.

13. It becomes possible to gain a competitive edge.

Holding companies present an opportunity that is similar to a strategic partnership. The resources of
the holding company can be combined with the resources of the acquired organization to create
unique market opportunities. When both companies are involved within the same industry, this benefit
is magnified even further. It becomes possible to work on large-scale operations instead of trying to
funnel strong market shares from small demographics.

14. It can be implemented on a personal scale.

Holding companies aren’t just for Warren Buffet. They are for individuals too. If you set up a personal
holding company, then you gain an opportunity to avoid potential estate taxes. It gives your heirs the
ability to avoid probate while still investing and growing your wealth. Investors who hold the
possession of a person’s assets at death are able to transfer those assets to heirs. Although these

14
companies can be very complex, and sometimes cost more than the benefits they provide, it is a way
to protect personal wealth that you may wish to pass along one day.

Some of the other advantages are as below:

 Subsidiary companies maintain their separate identities and as such they maintain their
goodwill.

 The public may not be aware of the existence of combination among the various companies
and, therefore, the fruits of monopoly or near monopoly may be enjoyed without resentment in
the minds of the people.

 The persons controlling the holding company need invest a comparatively small amount in
order to control the subsidiary companies. If, for example. A, a holding company, has two
subsidiaries, B and C and if B and C in turn have three subsidiaries each, the persons who have
the majority of shares in A will be able to control eight other companies.

 Had these companies been amalgamated, a much larger amount would have been required in
order to control the concerns.

 This, again, is a disadvantage from the social point of view, because it may lead to ir-
responsibility.

 By maintaining the separate identities of various companies, it would be possible to carry

forward losses for income tax purposes.

 Each subsidiary company has to prepare its own accounts and, therefore, the financial position
and profitability of each undertaking is known.

 Should it be found desirable that the control of the holding company be given up, it can be
easily arranged; all that is required is that the shares in the subsidiary companies should be
disposed of in the market.

15
DISADVANTAGES OF HOLDING COMPANIES:

The disadvantages of holding companies are the following:

1. Over capitalization
Since capital of holding company and its subsidiaries may be pooled together it may result in over
capitalization. Shareholders would get not get a fair return on their invested capital.

2. Misuse of power
The financial liability of the members of a holding company is insignificant in comparison to their
financial power. It may lead to irresponsibility and misuse of power.

3. Exploitation of subsidiaries
The holding company may exploit the subsidiary companies. The subsidiaries may be compelled to
buy goods from the holding at high prices. They might be forced to sell their produce to the holding
company as very low prices.

4. Manipulation
Information about subsidiaries may be used for personal gains. For example information of the
financial performance of subsidiary companies may be misused to indulge in speculative activities.

5. Concentration of economic power

There is concentration of economic power in the hands of those who manage the holding company.
Such concentration of economic power is harmful to the general economic welfare.

6. Secret monopoly
It may lead to the creation of secret monopolies. These secret monopolies may try to eliminate
competitors and prevent entry of new firms. They may exploit consumers by charging unreasonable
prices.

7. It creates disadvantages for individual investors.

Holding companies hold an influential number of shares in most of the companies they own. If the
holding company decides to liquidate their holdings, then the effects on the individual investor can be
very traumatic. Imagine what would happen if Berkshire Hathaway sold their 4.9% stake in Apple
tomorrow? People with only 100 shares might see a strong, unanticipated dip in their holdings
because of those actions. Holding companies can dramatically change the landscape of a trading day
by initiating a handful of transactions.

8. It reduces the level of transparency available to the consumer.

Most holding companies are not required to report on how their company is being internally managed.
Their responsibility is to their own shareholders, which means reporting on the status of the dividends
they receive. Consumers are often doing business with companies that are owned, in part or in whole,
by holding companies without realizing it. Without transparency, it makes things more difficult for the
average consumer to make informed investment or purchasing decisions.
16
9. It is not always easy for holding companies to sell their shares.
Holding companies can sometimes find themselves unable to sell their shares in a company, even if
they wanted to do so. Dumping a large number of shares on the open market does not guarantee that
they will all be sold. Forcing a holding company to hold onto some of their shares is the one option
individual investors have to limit their own potential losses. Although strong holding companies
should have a diversified portfolio of companies that provide them with stable income, one big loss
could destabilize the company and make life difficult.

10. It forces a heavy reliance on a single income resource.

Because 60% of income must come from dividends, interest, or other revenues that are not related to
products or services, it forces a holding company to be reliant on the performance of the market. They
are only as strong as the strategies they use to procure shares in consistent companies. If there is a bad
run on dividends for the company, it could be enough to put it out of business. Even with products or
services available to supplement income, there just isn’t enough time to develop new revenue streams
during a strategy collapse.

11. It may create competing interests.

One of the biggest criticisms of Warren Buffet is that he invests into dividend shares with his holding
company, then fails to provide a dividend to his own investors. Although Berkshire Hathaway does
use an aggressive buy-back policy, Buffet feels like funneling resources into expanding the reach of
his holding company or improving existing products or services is a better investment for his
shareholders. There are times when a holding company may find itself competing with itself for
market share within its holdings.

12. It creates management challenges for the parent company.

Many holding companies prefer to hold shares of a subsidiary rather than a true parent company if a
controlling interest is preferred. That is because there are management challenges in play when
diversity in holdings is present. Imagine requiring a manager to be knowledgeable about the banking
industry, real estate, sugary beverages, and smartphone manufacturing simultaneously. When there is
decisional control, the structure makes the process ineffective because there may not be enough
experience present to make the correct decision.

13. It can create issues of control.

Holding companies are sometimes forced to implement a change of control when they turn a newly
acquired business into one of their own subsidiaries. The former managers in the new subsidiary still
represent a large percentage of shareholders. These competing interests in management are similar to
the competing interests of shareholders. The end result in this type of situation is an increase in
turnover, poor decision-making processes, and quite possibly a reduction in share valuation.

14. It may require a large amount of capital to get started.

You must have financing resources in place to have a holding company be able to remain operational.
Without sufficient personal capital, equity partners are required to provide enough funding to make
the initial investments. This capital must be in place before making acquisitions. At the same time, the
owners of any companies you intend to acquire, even if it is only a minority stake, will want
assurances that you are able to complete the financial transactions as promised.

17
15. It can centralize an industry.
Although a holding company does not technically form a monopoly, the process of acquiring
company shares does begin to consolidate certain industries if enough capital is used. When that
occurs, consumers are presented with fewer choices instead of more. There is less competition in the
market instead of more. That means the prices for items tends to be higher, not lower, unless specific
safeguards are implemented to prevent this from happening. That is why the first holding companies
were ordered to be disbanded in the early 20th century.

16. It can result in decisions for personal, not professional, gains.

The information that is received from subsidiaries or minority stakes in businesses allows the
management of a holding company to create the potential for personal financial gains. It might be
used to create speculative activities in the market, which could negatively impact individual investors.
It may even lead to the exploitation of certain companies, forcing them to purchase goods at high
prices from companies under the control of holding company management.

Some other disadvantages of Holding company are as follows :

 There is a possibility of fraudulent manipulation of accounts, especially if the accounts of

various companies are made up to different dates.

 Inter-company transactions are often entered at fanciful or unduly low prices in order to suit
those who control the holding companies.

 There is the danger of the oppression of minority shareholders

 There may be accounting difficulties in appraising the financial position of companies due to
inter-company transactions carried on at too high or too low prices.

 The shareholders in the holding company may not be aware of the true financial position of the
subsidiary companies.

 Similarly, the creditors and outside shareholders in the subsidiary companies may not also be
aware of the true financial position.

 The subsidiary companies may be forced to appoint persons of the choosing of holding
companies as directors or other officers at unduly high remuneration.

Whatever the advantages and disadvantages, the holding company has come to stay and the law now
wisely tries to regulate its working. The law has defined a holding company and a subsidiary
18
company. Private companies, subsidiary to a public company, do not enjoy the privileges given to
private companies. Also, the law compels the holding company to give information about the sub-
sidiary companies.

FEATURES OF HOLDING COMPANY

A holding or parent company may choose to expand their business operations or more evenly
distribute risk by setting up subsidiary companies. Importantly, a parent company and its subsidiaries
are separate entities. Below, we set out four features of parent companies including operations and
management structure, to better understand how these two structures differ from one another.

1. Operations
The parent company creates and either wholly or owns by majority its subsidiaries. As mentioned, a
parent typically forms or purchases a subsidiary to expand its business operations or diversify its
liabilities. Although the subsidiary may operate to broaden existing services, it may also engage in
new lines of business. As such, the subsidiary’s products or services may be entirely different and
unrelated to its parent company.

2. Management Structure
As a sole or majority shareholder, the parent elects the subsidiary’s board of directors and organises
its management structure. It is also responsible for deciding the subsidiary’s bylaws and establishing
the rules for its corporate governance. The parent company may choose to withdraw from managing
day-to-day operations, and by selecting a strong management team. This would allow the subsidiary
to operate with some level of independence.

3. Independence
The parent company typically maintains financial control, although the subsidiary benefits in turn
with increased access to funding sources and a reduction in expense costs. The degree of control the
parent company chooses to exert will determine a subsidiary’s level of independence.
The parent corporation can delegate more power to the subsidiary’s management team to provide for
increased autonomy, allowing the subsidiary to hire employees, report its financials separately, and
conduct its business operations as an independent entity. Providing independence to a subsidiary is a
protective measure the parent company implements and is not intended to remove its ability to
exercise control.
Independent operations aim to prevent stakeholders from treating the entities as one company,
diffusing potential liability issues for the parent. For transparency purposes, a parent company will
clearly define the financial and operational delegations of authority at the outset.

4. Liability
Though there is an ownership-based relationship, both the parent and subsidiary company are separate
entities and legally independent of one another. As a result, parent companies and their shareholders
are not usually liable for the debts or actions of their subsidiaries. Conglomerates may use this liability
shield to create a corporate structure which spreads assets amongst affiliates, reducing the risk of a
creditor reaching all of the parent corporation’s assets.
Under common law, however, a court may ‘pierce the corporate veil’, casting aside the separate legal
personality of the entities to hold the parent accountable in instances where it has attempted to
19
frustrate or evade its legal obligations. Exceptions to the separate legal entity doctrine occur where
there is an appearance of impropriety on the part of the parent company or if it has engaged in unfair
or fraudulent conduct. The parent company’s actions determine its liability (e.g. whether it has
engaged the subsidiary to escape corporate liability).

5.Centralized Control
Entrepreneurs who want to open multiple small businesses can use a holding company to centralize
control. The entrepreneur can set up the holding company and designate himself as the sole owner.
Each business can be set up separately with the holding company as the owner. In this way, the
holding company is the central repository of the equity interests in those companies, and the
entrepreneur can select executive management for each company while retaining the ability to direct
each entity.
6.Limiting Investment
Using a holding company also enables you to raise money and create partnerships for each individual
entity without losing overarching control of the business conglomerate. An equity investor can invest
in one of the companies under the holding company without interfering with any of the others. If you
had simply created a single company with multiple divisions or projects, an investor would take an
interest in your whole business empire instead of just a single project that is set up as its own business.
7.Considerations
Creating an interlocking ownership structure for multiple small businesses using a holding company is
a sophisticated endeavor with significant tax consequences that are tied to your legal structure choices
and tax elections. For example, special personal holding company tax rules apply to corporations but
not necessarily LLCs that are used as holding companies. Consult with qualified legal and tax
professionals before setting up your businesses.

SUBSIDIARY COMPANY
A subsidiary, subsidiary company or daughter company[1][2][3] is a company that is owned or
controlled by another company, which is called the parent company, parent, or holding
company.[4][5] The subsidiary can be a company, corporation, or limited liability company. In some
cases it is a government or state-owned enterprise. In some cases, particularly in the music and book
publishing industries, subsidiaries are referred to as imprints.
In the United States railroad industry, an operating subsidiary is a company that is a subsidiary but
operates with its own identity, locomotives and rolling stock. In contrast, a non-operating
subsidiary would exist on paper only (i.e., stocks, bonds, articles of incorporation) and would use the
identity of the parent company.
Subsidiaries are a common feature of business life, and most multinational corporations organize their
operations in this way.[6] Examples include holding companies such as Berkshire
[7]
Hathaway, Jefferies Financial Group, WarnerMedia, or Citigroup; as well as more focused
companies such as IBM or Xerox. These, and others, organize their businesses into national and
functional subsidiaries, often wi th multiple levels of subsidiaries.
Subsidiaries are separate, distinct legal entities for the purposes of taxation, regulation and liability.
For this reason, they differ from divisions, which are businesses fully integrated within the main

20
company, and not legally or otherwise distinct from it.[8] In other words, a subsidiary can sue and be
sued separately from its parent and its obligations will not normally be the obligations of its parent.
However, creditors of an insolvent subsidiary may be able to obtain a judgment against the parent if
they can pierce the corporate veil and prove that the parent and subsidiary are mere alter egos of one
another, therefore any copyrights, trademarks, and patents remain with the subsidiary until the parent
shuts down the subsidiary.
One of the ways of controlling a subsidiary is achieved through the ownership of shares in the
subsidiary by the parent. These shares give the parent the necessary votes to determine the
composition of the board of the subsidiary, and so exercise control. This gives rise to the common
presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways
that control can come about, and the exact rules both as to what control is needed, and how it is
achieved, can be complex (see below). A subsidiary may itself have subsidiaries, and these, in turn,
may have subsidiaries of their own. A parent and all its subsidiaries together are called a corporate ,
although this term can also apply to cooperating companies and their subsidiaries with varying
degrees of shared ownership.
A parent company does not have to be the larger or "more powerful" entity; it is possible for the
parent company to be smaller than a subsidiary, such as DanJaq, a closely held family company,
which controls Eon Productions, the large corporation which manages the James Bond franchise.
Conversely, the parent may be larger than some or all of its subsidiaries (if it has more than one), as
the relationship is defined by control of ownership shares, not the number of employees.
The parent and the subsidiary do not necessarily have to operate in the same locations or operate the
same businesses. Not only is it possible that they could conceivably be competitors in the
marketplace, but such arrangements happen frequently at the end of a hostile takeover or voluntary
merger. Also, because a parent company and a subsidiary are separate entities, it is entirely possible
for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment or under
investigation while the other is not.

CONSOLIDATED AND UNCONSOLIDATED SUBSIDIARIES

While the term subsidiary refers to companies that are at least 50% controlled by another entity,
an associate or affiliate company denotes a firm held as a minority stake by another entity. Aside from
being held as a majority ownership stake, subsidiaries also differ from associate companies because a
subsidiary's financial statements are typically consolidated for inclusion on the parent company's
consolidated financial statements.

As is common practice and per the Securities and Exchange Commission (SEC), public companies
should generally consolidate all majority-owned firms, or subsidiaries. Consolidation is typically seen
as a more meaningful method of accounting than providing separate financials for a parent company
and each of its subsidiaries. For example, eBay reported total revenue on its consolidated income
statement, for the year ended Dec. 31, 2017, of $9.6 billion. The e-commerce firm notes in the annual
report that its sole domestic and consolidated subsidiary, StubHub, generated revenue of $307 million.

The SEC states that only in rare cases, such as when a subsidiary is undergoing bankruptcy, should a
majority-owned subsidiary not be consolidated. An unconsolidated subsidiary is a subsidiary with
financials that are not included in its parent company's financials. Ownership of such firms is typically
treated as an equity investment and denoted as an asset on the parent company's balance sheet. For
21
regulatory reasons, unconsolidated subsidiary firms are typically those in which parent firms do not
have a significant stake.

EXAMPLE OF SUBSIDIARIES AND THEIR BENEFITS

Public companies are required by the SEC to disclose significant subsidiaries under Item 601 of
Regulation S-K. Warren Buffett's Berkshire Hathaway Inc., for example, has a long and diverse list of
subsidiaries, including Dairy Queen, Clayton Homes, Business Wire, GEICO, and Helzberg
Diamonds. Berkshire Hathaway's acquisition of many diverse firms fall in accordance with Buffett's
oft-discussed strategy of buying undervalued assets and holding onto them. In return, acquired
subsidiaries can often continue to operate independently while gaining access to broader financial
resources. An exhibit to Berkshire's annual filing for the year ended Dec. 31, 2017, reveals that the
firm owns upwards of 250 subsidiaries.

Like Berkshire Hathaway, Alphabet Inc. also has many subsidiaries. These separate business entities
all perform unique operations that add value to Alphabet through diversification, revenue, earnings,
and research and development (R&D). For example, Sidewalk Labs, a small startup that is a
subsidiary of Alphabet, seeks to modernize public transit in the United States. The company has
developed a public transportation management system that aggregates millions of data points from
smartphones, cars and Wi-Fi hotspots to analyze and predict where traffic and commuters are most
congregated. The system can redirect public transportation resources, such as buses, to these
congested areas to keep the public transit system moving efficiently.

A subsidiary benefits from the acquiring company's name recognition and financial resources. For
workers, there may even be promotional and cross-training opportunities that weren't available prior
to the new affiliation. For the parent corporation, the costs inherent in acquiring subsidiaries is not
only less than those associated with a merger but also do not require stockholders' approval to move
forward. On the global stage, the formation or acquisition of subsidiaries abroad can yield tax
advantages in addition to generating goodwill with countries that might not otherwise be amenable to
doing business. This, in turn, leads to increased market share, gained economies and the expansion of
offerings if the subsidiaries provide services and goods that differ from those of the parent
corporation.

DEFINITION
A Subsidiary is a company that has been set up or acquired by another company that is usually either
larger or better-known to the public as a result of its longevity or reputation. The acquiring company
is called the parent corporation. If a parent corporation exists strictly to hold stock in other entities, it
is referred to as a holding company.

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OWNERSHIP
In a subsidiary situation, the parent corporation owns more than 50 percent of the voting stock of each
of the companies it acquires. If it holds all of the voting stock, the smaller entity is said to be a wholly
owned subsidiary. Parents and their subsidiaries are separate legal entities insofar as liability issues
but sometimes file their financial statements as a single unit. Ownership of 80 percent or more of a
subsidiary's stock is required for the parent corporation to submit consolidated tax returns.

SUBSIDIARIES VS. MERGERS

A subsidiary retains its own unique identity and, often, its existing organizational structure as well.
Usually the only difference is the reporting hierarchy, which now includes the board of directors of
the parent corporation. Ongoing and future activities of the subsidiary may also be directed by the
parent corporation to ensure compliance with its vision and strategies for growth. In a merger, the
smaller company is absorbed into the larger one that purchased it and is subsequently dissolved. This
can impact downsizing, closure of offices and a reshuffling -- including termination -- of the
subsidiary's upper management.

LIABILITY FOR INSOLVENT SUBSIDIARY

The question whether the parent company should be held liable for the debts of its insolvent
subsidiary involves a difficult problem. The difficulty has been indicated in a case which exposes the
legal inadequacy and which has been thus presented:1
English company law possesses some curious features, which may generate various results. A parent
company may spawn a number of subsidiary companies, all controlled directly or indirectly by the
shareholders of the parent company. If one of the subsidiary companies turns out to be the runt of the
litter and declines into insolvency to the dismay of its creditors, the parent company and the other
subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of
the insolvent subsidiary. It is not surprising that when a subsidiary collapses, the unsecured creditors
wish the finances of the company and its relationship with other members of the group to be narrowly
examined, to ensure that no assets of the subsidiary company have leaked away; that no liabilities of
the subsidiary company ought to be laid at the door of the other members of the group and that no
indemnity from or right of action against any other company, or against any individual is by some

23
mischief overlooked. unless it can be shown that the branch office was used for the purpose of
committing the wrong.

SUBSIDIARY ESTABLISHMENTS
There is also the power in the Central Government as conferred by Section 8 to declare that any
establishment of a company carrying on thesame or substantially the same activity as that carried on
by the head office of the company, shall not be treated as a branch office of the company for any of
the purposes of the Act.Where proceedings were initiated against a company at the place of its branch
office, it was held that notwithstanding the Explanation to Section 20 of the Civil Procedure Code
which confers jurisdiction on the courts at the place of the company’s branch office, it is also
necessary that the cause of action should have arisen there. 2 A charge of interference in management
of the complainant’s business could be alleged only against the head office of the company and not
against the branch office unless it can be shown that the branch office was used for the purpose of
committing the wrong.3

ADVANTAGES OF SUBSIDIARY COMPANY

There are a lot of reasons companies acquire other companies and retain their legal status as a
subsidiary, and a lot of benefits for a smaller company becoming part of a larger corporate family.
The monetary influence of a parent company cannot be overemphasized. The parent has the means
of providing buying power, research and development funds, marketing money and know-how,
employees, technical expertise and other features the smaller company could not afford or
accomplish alone. The parent can provide the monetary means and capability to jump start new
companies and products. The marketing power of the parent, such as the ability to place products
in stores, can be a boon to a smaller company seeking to expand. Sometimes a company will set up
a subsidiary for a portion of a company it plans to sell in the future. It is easier for a smaller
subsidiary to form joint ventures and partnerships with other companies if it is not hindered by a
larger corporate bureaucracy. Subsidiaries can borrow money and issue their own debt.

1.Limiting Liability

Perhaps the most common reason cited for forming a subsidiary is limited liability. Provided that the
parent and its subsidiaries respect corporate formalities, it is possible to limit a parent company's
potential losses by using subsidiaries as a liability shield. For example, in the movie industry, it is

24
common for each film to be made through its own corporate entity, which can protect the parent
company from losses due to lawsuits resulting from a particular production.

2.Separate Management

A subsidiary provides a legal structure for dividing a business into discrete entities with separate
management. For example, in a multinational conglomerate, subsidiaries provide a structural way to
adapt to local institutional culture and legal requirements. It can also be a means of accommodating
different incentive structures, such as linking executive pay to the economic performance of a
particular company or using both for-profit and nonprofit subsidiaries within a tax-exempt university
or hospital.

3.Identity and Branding

A subsidiary provides a structural framework for diversifying corporate identity. Within a

conglomerate it is possible to maintain the integrity of discrete brand identities through separate
subsidiary enterprises, such as the way The Gap, Inc. uses Gap, Old Navy, Banana Republic and
Piperlime to target different segments of the fashion market.

4.Tax Treatment

As Randy Myers notes in his Journal of Accountancy article, "Is a Subsidiary in Your Future?",
tax considerations can play a major role in the decision to form a subsidiary. For example, Myers
explains, a company can benefit from using subsidiaries in a state such as Pennsylvania or
Michigan, where a subsidiary is taxed only on in-state profits rather than on all of the profits
generated by the company nationwide. Likewise, an international business can form a foreign
subsidiary to take advantage of lower tax rates in another country. Creating a subsidiary is also
useful for nonprofit organizations, which use subsidiaries to preserve their tax exemption by
separating unrelated business activity from for-profit commercial ventures.

5.Saleability

Structured properly, a subsidiary can be used to attract additional investors, reduce regulatory
requirements for certain transactions, facilitate tax-free mergers or sell a line of business. As a
result, using a subsidiary to spin off a particular venture can be an effective and profitable way to
maximize shareholder value.

6.Investment Purposes
Provided that a subsidiary is structured properly, it can be used for a variety of investment purposes. It
can make certain transactions easier by reducing the regulatory requirements; it can attract additional
investors to a business venture; it can make a merger easier between two businesses, by reducing the
amount of tax payable – and it can even be used to sell a section of one business to another business.

25
DISADVANTAGES OF A SUBSIDIARY

A major disadvantage of being a subsidiary of a large organization is the limited freedom

management may have to make major decisions, whether involving products, finance or other major
topics. Issues often must go through various chains of command within the parent bureaucracy
before any action can be taken. The extra legal and tax work involved can be a disadvantage for
subsidiaries.

1.The parent company may not have full access to the cash flows of the subsidiary, depending on the
management structure and on the amount of control it exercises on the subsidiary.

2.Sometimes, the reputation of the parent company is linked to that of the subsidiary, and the parent
company may need to pay off the debts of the subsidiary to save face.

3.The parent company may need to guarantee the loans of its subsidiaries, thereby directly exposing
itself to the liabilities of its subsidiaries.

4.There are occasions in which a parent company can be liable for the actions of the subsidiary. If the
subsidiary is an operating company, then the parent company may be liable – in the event that the
operating company has broken the law – and is subject to damages or other legal enforcement.

DIFFERENCE BETWEEN HOLDING COMPANY AND SUBSIDIARY

COMPANY
1. All transactions qualify as related party transactions and need to comply with the
relevant restrictions on related party transactions. These restrictions are of multiple
kinds, depending on the type of transaction. They could range from disclosure of
interest, abstention from voting or taking approval of a specific majority of
shareholders before entering into the transaction. These principles seek to ensure that
the transaction does not get influenced merely by the relationship between the parties
and is executed on an arm’s length basis.
2. There are certain stamp duty relaxations available on transactions between holding and
subsidiary companies, especially if they are wholly owned. Since the holding and
subsidiary are different legal entities, their relationship and transactions between them
will require various kinds of contracts to be executed, and payment of stamp duty on
26
 each contract can be onerous. Hence, stamp duty relaxations are beneficial. These
exemptions have been done with a view to facilitate such structuring and organization
of a company’s business. These exemptions are made available through separate
notifications hence they are not ordinarily visible in the text of the state-level Stamp
Act or schedule.
3. From an income tax perspective, arm’s length pricing principles may have to apply
especially, if the holding-subsidiary relationship is international. In certain cases, arm’s
length pricing applies in domestic situations also under Indian law.
4. Transferring dividend from a level 2 or level 3 subsidiary (where permitted) to the
holding company can be cumbersome and have unintended tax implications if the
structuring is not done carefully.
5. For loan transactions, one or more holding companies may issue guarantees for the
obligations of the subsidiary.

PERMITTED TRANSACTIONS

1. Any loan made by a holding company to its wholly-owned subsidiary company is

permitted if the said loan is used for wholly-owned subsidiaries’ principal business.
The loan should not be used for any other investment by the subsidiary company.
2. Holding company can provide guarantee/security for any loan made to its wholly-
owned subsidiary company if the said loan is used for wholly-owned subsidiaries’
principal business. The loan should not be used for any other investment by the
subsidiary company.
3. Furthermore, holding company can provide guarantee/security for any loan made to its
subsidiary company by any bank and financial institution if the said loan is used for
wholly-owned subsidiaries’ principal business. The loan should not be used for any
other investment by the subsidiary company.

Other than above, transactions between holding companies and subsidiary companies are classified as
related-party transactions under section 2(76). For these transactions, consent of Board of directors
27
should be given by a resolution at a Board meeting. Moreover, if these transactions are not entered by
the holding or subsidiary company in its ordinary course of business, they have to make sure that they
have followed arm’s length principle. Thereafter, holding company and subsidiary company can enter
into a contract or an arrangement for the following things:

 Sale, purchase or supply of any goods or materials;

 Selling or otherwise disposing of, or buying, property of any kind;
 Leasing of property of any kind;
 Availing or rendering of any service;
 Appointment of any agent for purchase or sale of goods, materials, service or property;
 Appointment of related party to any office or place of profit in the company, or its
subsidiary or associate company;
 underwriting the subscription of any securities or derivatives thereof, of the company.

To further govern these related party transactions, central government came up with The Companies
(Meetings of Board and its Powers) Rules, 2014.

PROHIBITED TRANSACTIONS
As can be seen above, permitted transactions have been specified in the act. One thing we need to
remember is that if the proper procedure has not been followed to conduct permitted transactions, it
will be in contravention of the act and will result into penalty for the company.

However other than that, the act also specifies various prohibited transactions between subsidiary and
holding company. The rationale behind is that to ensure that the directors are not utilising the
companies’ funds for their own benefit. Prohibited transactions are:

1. A subsidiary cannot have an shares in its holding company. Thus, cross-holdings are not
permitted between holding subsidiary companies. Holding company can not allot or transfer
its shares to any of its subsidiary company. If you see the holding structure of the Tata
group there are numerous cross-holdings between companies (i.e. Company A will have
some shares in Company B and Company B will also have some shares in Company A).

28
 That is possible if the two companies are not holding and subsidiary companies (i.e. mutual
shareholding in each other should be less than 50%).
2. Any loan made by a holding company to the subsidiary company is not permitted under the
act.
3. Any loan/guarantee/security made by the subsidiary company to the director of the holding
company is not permitted.

SUBSIDIARY'S RELATIONSHIP TO HOLDING COMPANY

A subsidiary is owned or controlled by a parent company. The parent company doesn't need to be a
holding company; it can be any other type of business entity that decides to buy into another
company.

When a subsidiary is 100 percent owned by the parent company, it is called a wholly owned
subsidiary. If a parent company doesn't have controlling interest, meaning less than 51 percent of
voting interest, the subsidiary is called an affiliate or associate company.

For example, assume Joe's Corporation is a photography studio. Photography is what the company
does, but an opportunity arises where Joe can buy into a custom framing company. Joe initially takes a
minor role, buying only 25 percent of Custom Frames Corporation, making it an affiliate. Custom
Frames and Joe's Photography are still operating as individual businesses.

Joe's Photography gets to vote its 25 percent ownership on key business issues at board meetings. A
year later, one of the other investors in Custom Frames asks Joe to buy his 30 percent ownership
because he wants to retire. Joe's Photography does, which gives 55 percent ownership in the company.
Custom Frames is now a subsidiary of Joe's Photography.

Subsidiary's Relationship to Parent Company

A subsidiary is owned or controlled by a parent company. The parent company doesn't need to be a holding company; it
can be any other type of business entity that decides to buy into another company.

When a subsidiary is 100 percent owned by the parent company, it is called a wholly owned subsidiary. If a parent company
doesn't have controlling interest, meaning less than 51 percent of voting interest, the subsidiary is called an affiliate or
associate company.

29
For example, assume Joe's Corporation is a photography studio. Photography is what the company does, but an
opportunity arises where Joe can buy into a custom framing company. Joe initially takes a minor role, buying only 25
percent of Custom Frames Corporation, making it an affiliate. Custom Frames and Joe's Photography are still operating as
individual businesses.

Joe's Photography gets to vote its 25 percent ownership on key business issues at board meetings. A year later, one of the
other investors in Custom Frames asks Joe to buy his 30 percent ownership because he wants to retire. Joe's Photography
does, which gives 55 percent ownership in the company. Custom Frames is now a subsidiary of Joe's Photography.

REASONS COMPANIES HAVE SUBSIDIARIES

Brand Recognition

A company may organize subsidiaries to keep its brand identities separate. This allows each brand to
maintain its established goodwill with customers and vendor relationships. Subsidiaries are often used
in acquisitions where the acquiring company intends to keep the target company's name and culture.
Becoming part of the parent company can make customers and investors wary that more changes are
on the horizon. Subsidiaries can also help you position part of your business as an alternative to the
parent company at a different price point. This strategy will not work if customers think both
companies are too closely related.

Financial Considerations

The entire organization may be able to save on its taxes if the parent company owns over 80 percent
of one or more subsidiaries. The parent can file a consolidated tax return and use a losses from a
failing subsidiary to offset income from other subsidiaries. Keeping each company separate allows the
parent company to sell unprofitable subsidiaries without disrupting its own business activities.
Because the assets of each subsidiary are also separate, the reach of creditors is limited to only the
subsidiary that signed the contract with that particular creditor.

30
Raising Capital

A subsidiary also allows you to offer stock in a portion of the company without affecting the parent
company's stock price. For example, startups often hold initial public offerings to raise funds for the
company and cash out some of the founders' personal investment. This is more difficult for an
established company that needs capital for a new venture. In this case, it may be better to spin the new
venture off into its own subsidiary and take that subsidiary public. Only the subsidiary that benefits
from the invested capital must offer equity to outside investors.

Reporting and Disclosure Issues

The parent company can choose which areas of its business should be public and which should be
private. Not all business operations are suitable for public investment and disclosure requirements. For
example, support functions are hard to quantify, so investors may not get excited enough to buy stock.
The company may also want to avoid Securities and Exchange Commission reporting for certain
segments of the business, especially when starting a new product line. Keeping these activities in a
privately held subsidiary makes it more difficult for competitors to uncover information you are not
ready to release yet.

ACCOUNTING STANDARD (AS) 21

AS. 21 come into effect in respect of accounting periods

commencing on or after 1st April i.e. for year ending 31st March
2002. The A.S. 21 is applicable to all the enterprises that prepare
consolidated financial statement. It is mandatory for Listed
companies and Banking companies.

As per AS 21, The Consolidated financial statements would

include:
i) Profit & Loss A/c
ii) Balance sheet
iii) Cash flow statement
iv) Notes of Accounts except typical notes.
v) Segment reporting

31
AS-21 CONSOLIDATION OF FINANCIAL STATEMENT
AS 21 also desire various import terms, as well as treatment and same while
preparing consolidated financial statement. Consolidated financial statements
should be prepared for both domestic as well as foreign subsidiaries.

OBJECTIVE:
The objective of this Standard is to lay down principles and procedures for
preparation and presentation of consolidated financial statements. Consolidated
financial statements are presented by a parent (also known as holding enterprise) to
provide financial information about the economic activities of its group. These
statements are intended to present financial information about a parent and its
subsidiary(ies) as a single economic entity to show the economic resources
controlled by the group, the obligations of the group and results the group achieves
with its resources.

SCOPE
1. This Standard should be applied in the preparation and presentation of
consolidated financial statements for a group of enterprises under the control of a
parent.
2. This Standard should also be applied in accounting for investments in
subsidiaries in the separate financial statements of a parent.
3. In the preparation of consolidated financial statements, other Accounting
Standards also apply in the same manner as they apply to the separate financial
statements.
4. This Standard does not deal with:

(a) methods of accounting for amalgamations and their effects on consolidation,

including goodwill arising on amalgamation (see AS 14, Accounting for
Amalgamations);

(b) accounting for investments in associates (at present governed by AS 13,

Accounting for Investments2 ); and

(c) accounting for investments in joint ventures (at present governed by AS 13,
Acc
ounting for Investments3 )

DEFINITIONS
For the purpose of this Standard, the following terms are used with the meanings
specified:

1.Control:

(a) the ownership, directly or indirectly through subsidiary(ies), of more than one-
32
half of the voting power of an enterprise; or

(b) control of the composition of the board of directors in the case of a company or
of the composition of the corresponding governing body in case of any other
enterprise so as to obtain economic benefits from its activities.

2.A subsidiary is an enterprise that is controlled by another enterprise (known as

the parent).

3.A parent is an enterprise that has one or more subsidiaries.

4.A group is a parent and all its subsidiaries

5.Consolidated financial statements are the financial statements of a group

presented as those of a single enterprise.

6.Equity is the residual interest in the assets of an enterprise after deducting all its
liabilities.

7.Minority interest is that part of the net results of operations and of the net assets
of a subsidiary attributable to interests which are not owned, directly or indirectly
through subsidiary(ies), by the parent.

Consolidated financial statements normally include consolidated balance sheet,

consolidated statement of profit and loss, and notes, other statements and
explanatory material that form an integral part thereof. Consolidated cash flow
statement is presented in case a parent presents its own cash flow statement. The
consolidated financial statements are presented, to the extent possible, in the same
format as that adopted by the parent for its separate financial statements.

Explanation:
All the notes appearing in the separate financial statements of the parent enterprise
and its subsidiaries need not be included in the notes to the consolidated financial
statements. For preparing consolidated financial statements, the following
principles may be observed in respect of notes and other explanatory material that
form an integral part thereof:
(a) Notes which are necessary for presenting a true and fair view of the
consolidated financial statements are included in the consolidated financial
statements as an integral part thereof.

(b) Only the notes involving items which are material need to be disclosed.
Materiality for this purpose is assessed in relation to the information contained in
consolidated financial statements. In view of this, it is possible that certain notes
which are disclosed in separate financial statements of a parent or a subsidiary
would not be required to be disclosed in the consolidated financial statements when
the test of materiality is applied in the context of consolidated financial statements.

(c) Additional statutory information disclosed in separate financial statements of

33
the subsidiary and/or a parent having no bearing on the true and fair view of the
consolidated financial statements 336 AS 21 need not be disclosed in the
consolidated financial statements. An illustration of such information in the case of
companies is attached to the Standard.

PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

A parent which presents consolidated financial statements should present these

statements in addition to its separate financial statements.

Users of the financial statements of a parent are usually concerned with, and need
to be informed about, the financial position and results of operations of not only the
enterprise itself but also of the group as a whole. This need is served by providing
the users –

(a) separate financial statements of the parent; and

(b) consolidated financial statements, which present financial information about the
group as that of a single enterprise without regard to the legal boundaries of the
separate legal entities.

SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS

A parent which presents consolidated financial statements should consolidate all
subsidiaries, domestic as well as foreign. The consolidated financial statements are
prepared on the basis of financial statements of parent and all enterprises that are
controlled by the parent, Control exists when the parent owns, directly or indirectly
through subsidiary(ies), more than one-half of the voting power of an enterprise.
Control also exists when an enterprise controls the composition of the board of
directors (in the case of a company) or of the corresponding governing body (in
case of an enterprise not being a company) so as to obtain economic benefits from
its activities. An enterprise may control the composition of the governing bodies of
entities such as gratuity trust, provident fund trust etc. Since the objective of
control over such entities is not to obtain economic benefits from their activities,
these are not considered for the purpose of preparation of consolidated financial
statements. For the purpose of this Standard, an enterprise is considered to control
the composition Consolidated Financial Statements 337 of:

i) the board of directors of a company, if it has the power, without the consent or
concurrence of any other person, to appoint or remove all or a majority of directors
of that company. An enterprise is deemed to have the power to appoint a director,
if any of the following conditions is satisfied:

(a) a person cannot be appointed as director without the exercise in his favour by
that enterprise of such a power as aforesaid; or

34
 (b) a person’s appointment as director follows necessarily from his appointment to
a position held by him in that enterprise; or

(c) the director is nominated by that enterprise or a subsidiary thereof.

(ii) the governing body of an enterprise that is not a company, if it has the power,
without the consent or the concurrence of any other person, to appoint or remove
all or a majority of members of the governing body of that other enterprise. An
enterprise is deemed to have the power to appoint a member, if any of the
following conditions is satisfied:

(a) a person cannot be appointed as member of the governing body without the
exercise in his favour by that other enterprise of such a power as aforesaid; or

(b) a person’s appointment as member of the governing body follows necessarily

from his appointment to a position held by him in that other enterprise; or

(c) the member of the governing body is nominated by that other enterprise.

EXPLANATION:
It is possible that an enterprise is controlled by two enterprises – one controls by
virtue of ownership of majority of the voting power of that enterprise and the other
controls, by virtue of an agreement or otherwise, the composition of the board of
directors so as to obtain economic benefits from its activities. In such a rare
situation, when an enterprise is controlled by two enterprises as per the definition
of ‘control’, the 338 AS 21 first mentioned enterprise will be considered as
subsidiary of both the controlling enterprises within the meaning of this Standard
and, therefore, both the enterprises need to consolidate the financial statements of
that enterprise as per the requirements of this Standard.

A subsidiary should be excluded from consolidation when:

(a) control is intended to be temporary because the subsidiary is acquired and held
exclusively with a view to its subsequent disposal in the near future; or

(b) it operates under severe long-term restrictions which significantly impair its
ability to transfer funds to the parent.

In consolidated financialstatements, investmentsin such subsidiaries should be

accounted for in accordance with Accounting Standard (AS) 13, Accounting for
Investments. The reasons for not consolidating a subsidiary should be disclosed in
the consolidated financial statements.
35
EXPLANATION:
(a) Where an enterprise owns majority of voting power by virtue of ownership of
the shares of another enterprise and all the shares are held as ‘stock-in-trade’ and
are acquired and held exclusively with a view to their subsequent disposal in the
near future, the control by the first mentioned enterprise is considered to be
temporary .

(b) The period of time, which is considered as near future for the purposes of this
Standard primarily depends on the facts and circumstances of each case. However,
ordinarily, the meaning of the words ‘near future’ is considered as not more than
twelve months from acquisition of relevant investments unless a longer period can
be justified on the basis of facts and circumstances of the case. The intention with
regard to disposal of the relevant investment is considered at the time of acquisition
of the investment. Accordingly, if the relevant investment is acquired without an
intention to its subsequent disposal in near future, and subsequently, it is decided to
dispose off the investment, such an investment is not excluded from consolidation,
until the investment is actually disposed off. Conversely, if the relevant
Consolidated Financial Statements 339 investment is acquired with an intention
toits subsequent disposal in near future, but, due to some valid reasons, it could not
be disposed off within that period, the same will continue to be excluded from
consolidation, provided there is no change in the intention.

Exclusion of a subsidiary from consolidation on the ground that its business

activities are dissimilar from those of the other enterprises within the group is not
justified because better information is provided by consolidating such subsidiaries
and disclosing additional information in the consolidated financial statements about
the different business activities of subsidiaries. For example, the disclosures
required by Accounting Standard (AS) 17, Segment Reporting, help to explain the
significance of different business activities within the group.

CONSOLIDATION PROCEDURES

In preparing consolidated financial statements, the financial statements of the

parent and its subsidiaries should be combined on a line by line basis by adding
together like items of assets, liabilities, income and expenses. In order that the
consolidated financial statements present financial information about the group as
that of a single enterprise, the following steps should be taken:

(a) the cost to the parent of its investment in each subsidiary and the parent’s
portion of equity of each subsidiary, at the date on which investment in each
subsidiary is made, should be eliminated;

(b) any excess of the cost to the parent of its investment in a subsidiary over the
parent’s portion of equity of the subsidiary, at the date on which investment in the
subsidiary is made, should be described as goodwill to be recognised as an asset in
36
the consolidated financial statements;

(c) when the cost to the parent of its investment in a subsidiary is less than the
parent’s portion of equity of the subsidiary, at the date on which investment in the
subsidiary is made, the difference should be treated as a capital reserve in the
consolidated financial statements;

(d) minority interests in the net income of consolidated subsidiaries for the
reporting period should be identified and adjusted 340 AS 21 against the income of
the group in order to arrive at the net income attributable to the owners of the
parent; and

(e) minority interests in the net assets of consolidated subsidiaries should be

identified and presented in the consolidated balance sheet separately from liabilities
and the equity of the parent’s shareholders. Minority interests in the net assets
consist of:

(i) the amount of equity attributable to minorities at the date on

which investment in a subsidiary is made; and
(ii) the minorities’ share of movements in equity since the date
the parent-subsidiary relationship came in existence. Where
the carrying amount of the investment in the subsidiary is
different from its cost, the carrying amount is considered for
the purpose of above computations.

EXPLANATION:
(a) The tax expense (comprising current tax and deferred tax) to be shown in the
consolidated financial statements should be the aggregate of the amounts of tax
expense appearing in the separate financial statements of the parent and its
subsidiaries.

(b) The parent’s share in the post-acquisition reserves of a subsidiary, forming part
of the corresponding reserves in the consolidated balance sheet, is not required to
be disclosed separately in the consolidated balance sheet keeping in view the
objective of consolidated financial statements to present financial information of
the group as a whole. In view of this, the consolidated reserves disclosed in the
consolidated balance sheet are inclusive of the parent’s share in the post-
acquisition reserves of a subsidiary.

The parent’s portion of equity in a subsidiary, at the date on which investment is

made, is determined on the basis of information contained in the financial
statements of the subsidiary as on the date of investment. However, if the financial
statements of a subsidiary, as on the date of investment, are not available and if it is
impracticable to draw the financial statements of the subsidiary as on that date,
financial statements of the subsidiary for the immediately preceding period are
used as a basis for consolidation. Adjustments are made to these financial
statements for the effects of significant transactions or other events that occur
between Consolidated Financial Statements 341 the date of such financial
37
statements and the date of investment in the subsidiary.

If an enterprise makes two or more investments in another enterprise at different

dates and eventually obtains control of the other enterprise, the consolidated
financial statements are presented only from the date on which holding-subsidiary
relationship comes in existence. If two or more investments are made over a period
of time, the equity of the subsidiary at the date of investment, for the purposes of
paragraph 13 above, is generally determined on a step-by-step basis; however, if
small investments are made over a period of time and then an investment is made
that results in control, the date of the latest investment, as a practicable measure,
may be considered as the date of investment.

 Intragroup balances and intragroup transactions and resulting unrealised

profits should be eliminated in full. Unrealised losses resulting from
intragroup transactions should also be eliminated unless cost cannot be
recovered.

 Intragroup balances and intragroup transactions, including sales, expenses

and dividends, are eliminated in full. Unrealised profits resulting from
intragroup transactions that are included in the carrying amount of assets,
such as inventory and fixed assets, are eliminated in full. Unrealised losses
resulting from intragroup transactions that are deducted in arriving at the
carrying amount of assets are also eliminated unless cost cannot be

 The financial statements used in the consolidation should be drawn up to

the same reporting date. If it is not practicable to draw up the financial
statements of one or more subsidiaries to such date and, accordingly, those
financial statements are drawn up to different reporting dates, adjustments
should be made for the effects of significant transactions or other events
that occur between those dates and the date of the parent’s financial
statements. In any case, the difference between reporting dates should not
be more than six months.

 The financial statements of the parent and its subsidiaries used in the
preparation of the consolidated financial statements are usually drawn up to
the same date. When the reporting dates are different, the subsidiary often
prepares, for consolidation purposes, statements as at the same date as that
of the parent. When it is impracticable to do this, financial statements
drawn up to different reporting dates may be used provided the difference
in 342 AS 21 reporting dates is not more than six months. The consistency
principle requires that the length of the reporting periods and any difference
in the reporting dates should be the same from period to period.

 Consolidated financial statements should be prepared using uniform

accounting policies for like transactions and other events in similar
circumstances. If it is not practicable to use uniform accounting policies in
preparing the consolidated financial statements, that fact should be
disclosed together with the proportions of the items in the consolidated
financial statements to which the different accounting policies have been
38
 applied.

 If a member of the group uses accounting policies other than those adopted
in the consolidated financial statements for like transactions and events in
similar circumstances, appropriate adjustments are made to its financial
statements when they are used in preparing the consolidated financial
statements.

 The results of operations of a subsidiary are included in the consolidated

financial statements as from the date on which parent-subsidiary
relationship came in existence. The results of operations of a subsidiary
with which parent-subsidiary relationship ceases to exist are included in the
consolidated statement of profit and loss until the date of cessation of the
relationship. The difference between the proceeds from the disposal of
investment in a subsidiary and the carrying amount of its assets less
liabilities as of the date of disposal is recognised in the consolidated
statement of profit and loss as the profit or loss on the disposal of the
investment in the subsidiary. In order to ensure the comparability of the
financial statements from one accounting period to the next, supplementary
information is often provided about the effect of the acquisition and
disposal of subsidiaries on the financial position at the reporting date and
the results for the reporting period and on the

 An investment in an enterprise should be accounted forin accordance with

Accounting Standard (AS) 13, Accounting for Investments, from the date
that the enterprise ceases to be a subsidiary and does not become an
associate4 .

 The carrying amount of the investment at the date that it ceases to be a

subsidiary is regarded as cost thereafter.

 Minority interests should be presented in the consolidated balance sheet

separately from liabilities and the equity of the parent’s shareholders.
Minority interests in the income of the group should also be separately
presented.

 The losses applicable to the minority in a consolidated subsidiary may

exceed the minority interest in the equity of the subsidiary. The excess, and
any further losses applicable to the minority, are adjusted against the
majority interest except to the extent that the minority has a binding
obligation to, and is able to, make good the losses. If the subsidiary
subsequently reports profits, all such profits are allocated to the majority
interest until the minority’s share of losses previously absorbed by the
majority has been recovered.

 If a subsidiary has outstanding cumulative preference shares which are held

outside the group, the parent computes its share of profits or losses after
adjusting for the subsidiary’s preference dividends, whether or not

39
 dividends have been declared.

CONSOLIDATION OF BALANCE SHEET

A holding company is required to present to its shareholders consolidated balance

sheet of holding company and its subsidiaries. Consolidated balance sheet is
nothing but addicting of up or combining the balance sheet of holding and its
subsidiary together. However assets and liabilities are straight forward, i.e. added
line to line and combination of share capital, reserves, and accumulated losses are
not directly added in consolidated balance sheet.

PREPARATION OF CONSOLIDATED BALANCE SHEET.

The following points need special attention while preparing consolidated balance
sheet.

1) Share of holding company and share of minority (outside

shareholders).
2) Date of Balance sheet of holding company and that of various
subsidiary companies must be same. If they are not so necessary
adjustment must be made before consolidation.
3) Date of Acquisition of control in subsidiary companies.
4) Inter company owing.
5) Revaluation of fixed assets as on date of acquisition, depreciation,
adjustment on revaluation amount etc. which are discussed here in
after.

COST OF CONTROL / GOODWILL / 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
premium or at discount. This amount is reflected in the balance sheet of holding
company of the assets side as investment in the shares of subsidiary company. This
is the price paid for shares in net assets of subsidiary company as on date of its
acquisition. Net assets of the subsidiary

company consist of share capital, accumulated profits and reserve after

adjustment, accumulated losses as on the date of acquisition. If the amount
paid by the holding company for the shares of subsidiary company is more
than its proportionate share in the net asset of the subsidiary company as
on the date of acquisition, the difference is considered as goodwill.
If there is excess of proportionate share in net assets of subsidiary
company intrinsic of shares acquired and cost of shares acquired by
holding company there will be capital reserve in favour of holding
40
 company.
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. Capital Reserve will be deducted from Goodwill.
In short, net amount resulting from goodwill and capital Reserve
will be shown in the consolidated Balance sheet.

MINORITY INTEREST :
The claim of outside shareholders in the subsidiary company has to
be assessed and shown as liability in the consolidated balance sheet.
Minority interest in the net assets of the company is nothing but the
proportionate share of aggregation of share capital, reserve surpluses funds
etc. proportionate share of all assets should be deducted from the minority
interest.

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

1) Share in share capital in subsidiary.

2) Share in reserves (Both pre and post acquisition of subsidiary).
3) Share in accumulated losses should be deducted.
4) Proportionate share of profit or loss on revaluation of assets.
5) Preference share capital of subsidiary company held by outsiders and
dividend due on such share capital, if there are profits.

Minority interest means outsiders interest. It is treated as liability

and shown in consolidated. Balance sheet as current liability. This amount
is basically intrinsic value of shares held by minority.

COST OF CONTROL

Determine Cost of Control

It is an important aspect of consolidation of accounts to find out either goodwill or capital reserve at

the acquisition of shares in subsidiary company. Following two steps should be taken to decide cost of

control:

41
 A. Determine cost of investment:

Cost of investment is calculated as follows:

Amount invested xx

(Cost as per Holding Companies balance sheet)

Less: Dividend received from subsidiary out xx

Of pre-acquisition profit

Cost of preference shares in subsidiary company xx

Adjusted cost of investment xx

B. Determine value of investment:

Holding Company’s share of capital xx

Add: Holding Company’s share of capital profit xx

Value of investment xx

When the value of investment is less than the cost of investment in shares of subsidiary

company, the difference is considered as goodwill. Capital Reserve is the excess of value of

investment over the cost of investment.

ANALYSE OF RESERVES & SURPLUS OF SUBSIDIARY COMPANY

Analysis of profit of subsidiary company as pre-acquisition profit and post acquisition

profit is done on the basis of date of acquisition of shares by the holding company. Profits earned by
the subsidiary company upto date of acquisition of shares by Holding company are called as pre-
acquisition profits or capital profits. The profit earned by the subsidiary company after the acquisition
of shares by the holding company is called as Post acquisition profits or Revenue profits. The loss of

42
the subsidiary company upto the date of acquisition is treated as a capital loss and subsequent to the
acquisition as a Revenue loss.

The reserves to be analysed shall be the reserves as appearing in the Balance sheet of
the subsidiary company as on the date of preparation of consolidated Balance sheet. Such reserves are
subject to adjustments relating to proposed dividends, Bonus / unaccounted items such as interest
payment due to or due from subsidiary company. If the subsidiary has cumulative preference shares
on which dividend has not been provided for or dividend is in arrears, the same should be provided.

If investments are made during the financial year, the profits should be apportioned on
a reasonable basis i.e. on the basis of time. The assumption being that profits have accrued evenly
during the year.

DEPRECIATION ADJUSTMENT

When any fixed asset of a subsidiary company has been revalue, but no entry has been passed should
be adjusted, but the not only addition or reduction in the consolidated profit and loss account has to be
adjusted.

If the value of asset is written up to a higher figure than that appears in the books of the subsidiary
company, the charge for depreciation to consolidated profit and loss account should be increased on
the increased value of the asset at the appropriate rate. When the value of asset has been written down,
the charge for depreciation should be reduced proportionately. The amount of extra depreciation is to
be written back and considered as a revenue profit. This should be added to the profit and loss account
of the subsidiary company.

 CAPITAL PROFITS AND REVENUE PROFITS :

43
 The holding company may acquire the shares in the subsidiary
company either on the balance sheet date or any date earlier than balance
sheet date. All the profit earned by the subsidiary company till the date of
acquisition of shares by holding company have to be taken as capital
profits for the holding company.

Such reserves loose their individual identity and considered as

capital profits. In case, the holding company acquired shares on a date
other than balance sheet date of subsidiary, the profits of subsidiary
company will have to be apportioned between capital

profits and Revenue profits from the point of view of the holding
company. Thus any profit earned by subsidiary company before the date
of acquisition is the capital profit, while any profit earned by subsidiary
company after the date of acquisition is Revenue profits. While preparing
the consolidated balance sheet share in capital profits should be adjusted
with the cost of control and Revenue profits / Reserves should be merged
with the balances in the Reserve and surpluses of the holding company.

 ELIMINATION OF INVESTMENTS IN SHARES OF

SUBSIDIARY COMPANY :

Investment in shares in subsidiary company represents the cost

paid by the holding company to acquire the shares of the subsidiary
company. The investment in shares of the subsidiary company entitles the
holding company to share the net assets of the subsidiary company. While
preparing consolidated balance sheet all the assets and liabilities of
subsidiary company have to be merged with those of the holding company
and therefore it is logical to eliminate investments of the holding company
in the shares of the subsidiary company. Share in net assets of the outside
shareholders should treat as the minority interest it is shown in the balance
sheet on the liability side of holding company.

 MUTUAL OWING / INTER COMPANY TRANSACTIONS :

The holding company and the subsidiary company may have

number of inter company transactions in any one or more of the following
matters.

1. Loan advanced by the holding company to the subsidiary company or

vice versa.
2. Bill of Exchange drawn by holding company on subsidiary company
or vice versa.
3. Sale or purchase of goods on credit by holding company form
subsidiary company or vice versa.
4. Debentures issued by one company may be held by the other.

44
 As a result of these inter company transactions, certain accounts
appear in the balance sheet of the holding company as well as the
subsidiary company. In the consolidated balance sheet all these common
accounts should be eliminated

 UNREALIZED PROFIT:

The problem of unrealized profit arises in those cases where the

companies of the same group have sold goods to each other at the profits
and goods still remain unsold at the end of the year company to whom the
goods are sold.

While preparing the consolidated balance sheet, unrealized profit

has to be eliminated from the consolidated balance sheet in the following
manner.

1. Unrealised profits should be deducted from the current revenue

profits of the holding company.
2. The same should be deducted from the stock of the company
consolidated balance sheet. Minority shareholders will not be
affected in any way due to unrealized profits.

 CONTINGENT LIABILITIES:
As 29 defines a contingent liabilities as:

A possible obligation that arises from past events and whose

existence will be confirmed only by occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of the entity
or a present obligation that arises from the past events but not recognized /
provided.
Such contingent liability may be of two types.
a) External contingent liability.
b) Internal contingent liability.

Internal contingent liability relates in respect of transactions

between holding and subsidiary company and it will not be shown as foot
note in the consolidated balance sheet, as they appear as actual liability in
the consolidated balance sheet.

 REVALUATION OF ASSETS AND LIABILITIES :

The holding company may decide to revalue the assets and
liabilities of the subsidiary company on the date of acquisition of share in
the subsidiary company. Any profit or loss on such revaluation is a capital
profit or loss.

45
 Profit on revaluation of assets of the subsidiary company whether
before or after date of acquisition of shares by the holding company, the
same must be shared by the holding company, and the minority share
holders in proportion to their respective holding. The minority share
holders share should be added to the minority interest. But the holding
company share should be treated as capital profits and considered in cost
of control.

Further readjustment for depreciation on increase in the value of

assets should be made in the profit and loss account in the subsidiary
company. And same should be deducted from the Revenue profits of the
subsidiary company.

 PREFERENCE SHARES IN SUBSIDIARY COMPANY :

In case the subsidiary company has also Preference share capital,

its treatment on consolidation will be as follows:

a) Nominal value of non participating Preference share capital of the

subsidiary company is held by the holding company should be
adjusted in cost of control against the cost of Preference shares.

b) Preference shares held by outsiders. Paid up value of such

Preference shares should be included in Minority interest.

BONUS SHARES:

The issue of bonus shares by the subsidiary company will increase the number of
shares held by the holding company as well as by the minority share holders
without any additional cost. However ratio of holding will not change. Issue of
bonus shares may or may not affect the cost of control depending upon whether
such shares are issued out of capital profits or revenue profits.

Issue of bonus shares out of pre acquisition profits (capital profits): In case the
subsidiary company issues bonus shares out of capital profits the cost of control
remains unaffected in the consolidated balance sheet on account of issue of bonus
shares. As share capital increases by the amount of bonus and capital profits
decreases by the same amount. Hence, there is not effect on cost of control when
bonus shares are issued from pre acquisition profits.

Issue of bonus share of post acquisition profits (Revenue profits): In this case, a
part of revenue profits will get capitalised resulting decrease in cost of control or
increase in capital reserve.
Issue of bonus shares whether out of capital profits or revenue profits will not
affect on minority interest. Minority interest will remain unaffected.

46
  TREATMENT OF DIVIDEND :

i) Dividend paid
When subsidiary company pays dividend, the holding company
will naturally receive its due share. On receipt the holding company will
debit bank account. However account to be credited depends upon
whether dividend received out of pre-acquisition profit or out of post
acquisition profit. Dividend received by the holding company out of Pre-
acquisition profit should be credited to investment account. Only the
dividend out of post acquisition profit should be treated as Revenue
income and credited to profit and loss account.

ii) Proposed dividend :

In case the subsidiary company has proposed dividend on its
shares which is not accounted by the holding company for such dividend
due on their investment in subsidiary company profits.

Profit may be then analysed between capital Revenue in the usual manner.

iii) Dividend payable :

In case subsidiary company has declared dividend and the holding
company taken credits for such dividend in its account, following
treatments should be given.

1. No adjustment in respect of such dividend should be done in the

subsidiary company book.
2. In the holding company books dividend out of pre-acquisition profit
should be credited investment account. Dividend out of post
acquisition profit should be credited to profit and loss account.
3. In the consolidated Balance-sheet the amount of dividend payable by
the subsidiary company will be cancelled against the amount of
dividend receivable by the holding company. dividend payable to
minorities may be either included in the minority interest or be shown
separately as liability in the consolidated balance sheet.

iv) Intension to propose dividend:

In case subsidiary company as intension to propose dividend, such

47
proposed dividend given in adjustment may be completely ignored while
preparing the consolidated balance sheet.

Alternatively proposed dividend on share capital held by minority

may be deducted from minorities interest and shown separately liability in
the consolidated balance sheet.

 PRELIMINARY EXPENSES :

The preliminary expenses of subsidiary company may be taken as

capital loss or the amount may be added with the amount of preliminary
expenses of the holding company.

 PROVISION FOR TAXATION :

Any provision for taxation provided by the subsidiary company

should be taken to the consolidated balance sheet and be shown on the
liability side.

 PURCHASE OF SHARES IN INSTALLMENT :

A holding company may purchase shares of the subsidiary

company in installments. In such circumstances division of profit between
pre and post acquisition will depend upon the lots in which

shares are purchased. However, if small purchases are made over the
period of time then date of purchase of shares which results in acquiring in
controlling interest may be taken as cut of line for division of profits
between capital and Revenue.

 SALE OF SHARES :

When a holding company disposed off a part of its holding in the

subsidiary company and the relationship of holding and subsidiary
company continues as it holds majority of shares of subsidiary. Sale of
shares by holding company may be treated as follows.

a) Profit or loss on sale of shares should be ascertained and it should be

adjusted while ascertaining goodwill or capital reserve. In brief, such
loss or gain on sale of share should be considered in cost of control.
b) The minority interest and cost of control should be ascertained on the
basis of number of shares held by the holding company and the
minority on the date of consolidated balance sheet.

48
 CONSOLIDATED PROFIT AND LOSS ACCOUNT

The consolidated profit and loss account of the holding company

and its subsidiaries are prepared to show the operating activities of the
companies comprising the groups. While preparing the consolidated profit
and loss account of the holding company and its subsidiary, the items
appearing in the profit and loss account of the holding company and the
subsidiary companies have to be aggregated.

But while doing so, the following adjustment have to be made.

1) Prepare profit and loss account in columnar form Amounts relating

to inter company transactions are entered in the adjustment column
against the respective items and are subtracted while entering
amounts in the total columns.
2) All inter company operating transactions are eliminated such as
purchase and sale of goods, interest on loans among the group
companies.
3) All inter company profits are adjusted.
4) Dividends received from the subsidiary company by the holding
company should be eliminated from both the sides of consolidated
profit and loss account.

5) Interest accrued and outstanding on Debenture of the subsidiary

company held by the holding company should be
accounted by holding and subsidiary company both and then its
should be eliminated.
6) Readjustment of Depreciation on Revaluation on fixed Assets at the
time of acquisition of shares by the holding company should be
adjusted in consolidated balance sheet and respective fixed assets
and in the consolidated profit and loss account.
7) The minority interest in the profit of subsidiary company should be
transferred minority interest account, in the proportion of total profit
after adjustment of revaluation of fixed Assets, but before adjusting
unrealized profit on stock.
8) The share of holding company in pre-acquisition profit should be
transferred to cost of control, in case shares are acquired during the
year.
9) Share of holding company in the past acquisition profits shall be
considered as revenue profits.
10) The balance in holding company columns will represents the total
profit or loss made or suffered by the group as a whole.
9) Group Consisting more than one subsidiaries: There are three
49
 situations
a) A holding company may have a number of subsidiaries without any
mutual holding between the subsidies. The following chart will clearly
show the position.

BALANCE SHEET

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a
specific point in time. These three balance sheet segments give investors an idea as to what the
company owns and owes, as well as the amount invested by the shareholders.

LIABILITY

Financial accounting, a liability is defined as an obligation of an entity arising from past transactions
or events, the settlement of which may result in the transfer or use of assets, provision of services or
other yielding of economic benefits in the future. A liability is defined by the following
characteristics:

SHAREHOLDERS

The term has several meanings. In its narrow, classical sense, still commonly used in accounting,
share capital comprises the nominal values of all shares issued (that is, the sum of their "par values").
In a wider sense, if the shares have no par value or the allocation price of shares is greater than their
par value, the shares are said to be at a premium (called share premium, additional paid-in
capital or paid-in capital in excess of par); in that case, the share capital can be said to be the sum of
the aforementioned "nominal" share capital and the premium. In the modern law of shares, the "par
value" concept has diminished in importance, and share capital can simply be defined as the sum of
capital (cash or other assets) the company has received from investors for its shares.

RESERVES AND SURPLUS

Reserves and surplus at the end of an accounting period the company may decide to transfer part of
the profits to a reserve and retain the balance in the profit and loss account. The reserve created out of

50
profits transferred from profit and loss account is called general reserve. The balance in the profit and
loss account is called a surplus and will be shown under this head in the balance sheet.

SECURED LOAN
If a loan is ‘secured’, it means it is secured against something you own (an ‘asset’) – and failing to
repay the loan could result in the lender taking possession of that asset, and selling it to cover their
losses.
The asset in a secured loan will normally be your home, but it can also be your car or another item of
a high value.

UNSECURED LOAN

An unsecured loan does not require you to secure anything against the loan – the lender relies on your
contractual obligation to pay it back.
Because there is no security and the risk they are taking is therefore greater, the amount you can
borrow tends to be less, and the repayment period is usually shorter.

CURRENT LIABILITIES

A company's debts or obligations that is due within one year. Current liabilities appear on the
company's balance sheet and include short term debt, accounts payable, accrued
Analysts and creditors will often use the current ratio, (which divides current assets by liabilities), or
the quick ratio, (which divides current assets minus inventories by current liabilities), to
determine whether a company has the ability to pay off its current liabilities.

PROVISION

In financial accounting, provision is a word that creates an ambiguous account title. In U.S. GAAP,
provision means an expense, while in IFRS, International Financial Reporting Standards, it means a
liability. So, in the U.S., Provision for Income Taxes means the same thing as Income Tax Expense,
while under IFRS, Provision for Income Taxes means Liability for Income Taxes Payable. Another

51
examples is provisions for warranty costs [expense in the US and liability in IFRS]. Sometimes in
IFRS, but not in US GAAP, the term reserve is used instead of term provision; such a use, however, is
inconsistent with the terminology suggested by International Accounting Standards Board.[citation
needed]
Reserve, which seems to be one of the most confusing terms in accounting, has the connotation
of a debit balance to non-professionals but in accounting always means an account with a credit
balance. Reserve for Warranties means estimated liability for future warranty repairs and
replacements, NOT a pool of cash set aside for the firm to use in making repairs.

CURRENT ASSETS

In financial accounting, assets are economic resources. Anything tangible or intangible that is capable
of being owned or controlled to produce value and that is held to have positive economic value is
considered an asset. Simply stated, assets represent value of ownership that can be converted into cash
(although cash itself is also considered an asset).

Current asset is an asset on the balance sheet which can either be converted to cash or used to pay
current liabilities within 12 months. Typical current assets include cash, cash, short-term
investments, accounts receivable, inventory and the portion of prepaid liabilities which will be paid
within a year.

On a balance sheet, assets will typically be classified into current assets and long-term assets.

FIXED ASSETS

Fixed assets, also known as a non-current asset or as property, plant, and equipment (PP&E), is a term
used in accounting for assets and property which cannot easily be converted into cash. This can be
compared with current assets such as cash or bank accounts, which are described as liquid assets. In
most cases, only tangible assets are referred to as fixed.

52
INVESTMENT

Investment has different meanings in finance and economics. Finance investment is putting money
into something with the expectation of gain, that upon thorough analysis, has a high degree of security
for the principal amount, as well as security of return, within an expected period of time. As such,
those shareholders who fail to thoroughly analyze their stock purchases, such as owners of mutual
funds, could well be called gamblers. Indeed, given the efficient market hypothesis, which implies
that a thorough analysis of stock data is irrational, most rational shareholders are, by definition, not
investors, but speculators.

Investment is related to saving or deferring consumption. Investment is involved in many areas of

the economy, such as business management and finance whether for Households, Firms, or
Governments.

LOANS AND ADVANCES

Loans and advances for financing of current assets is a short-term loan for companies needing a short-
term increase in current assets in case of seasonal necessity (Christmas, winter or summer goods, etc.)
or for a separate project requiring the finances for purchasing of stock.

A loan for financing of current assets can also be used for implementation of new projects, e.g.,
launch of a new line of goods where it is necessary to ensure a full spectrum of goods, while suppliers
do not offer deferred payment terms yet. The loan repayment takes place gradually each month from
the positive cash flow generated from the project.

53
CONTROL OF COMPOSITION OF BOARD OF DIRECTORS–

The composition of the Board of Directors of a company shall be deemed to be controlled by the
other if the latter has the power, without the consent or concurrence of the other persons to appoint or
remove all or majority of the directors.

The company shall be deemed to have the power to appoint a person as a director in the other
company in the following cases :—

(1) where a person cannot be appointed thereto without the exercise in his favour by the company
of such a power of appointment;
(2) where a person's appointment or directorship follows necessarily from his appointment as
director or manager of, or to any other office or employment in the company;
(3) where a directorship is held by an individual nominated by the company or a subsidiary
thereof.
Control over composition of a subsidiary company's Board of directors can arise from provisions in
subsidiary's memorandum or articles or from a contract with subsidiary empowering holding
company to appoint directors to subsidiary's Board.4

More than half in nominal value of equity share capital–

The expression 'nominal value' is used to denote the face value of the shares so as to distinguish it
from their 'market value'. The words 'holds more than half in nominal value of its equity share
capital' obviously mean 'holds more than half the face value of its equity “share capital” and not of
its authorised equity share capital. Thus, were both fully paid and partially paid equity shares have
been issued and allotted by a company, it is more than half of the total of equity shares held that
will make the company holding such shares, the holding company of the company issuing and
allotting the shares.
In determining whether one company is a subsidiary of another, following shall be disregarded5:

54
 (1) Any shares held or power exercisable by the other company in a fiduciary capacity shall
be treated as not held or exercisable by it.

(2) Any shares held or power exercisable in a company by any person under provisions of its
debentures of the first mentioned company or of a trust deed for securing any issue of such
debentures shall be disregarded.

(3) or power exercisable by, or by a nominee for a company, or its subsidiary, other than as in
clause (2) above, shall be treated as not held or exercisable by it if the ordinary business of
that other company is lending money and the shares are held or power is exercisable only
by way of security in the ordinary course of business.
The position regarding holding subsidiary relationship was impressively summarised in the case of
M. Velayudhan v. Registrar of Companies6as follows :—

Section 4 envisages the existence of subsidiary companies in different situations. It may be that by
acquiring sufficient share capital of a company, sufficient control maybe obtained over that company
to enable control in the composition of board of directors. But, it is also possible to obtain such
control in regard to thecomposition of the board of directors without making such an investment in
equity capital of the company. Such a control may be by reason of an agreement such as where one
company may agree to advance funds to another company and in return may, under the terms of an
agreement, gain control over the right to appoint all or a majority of the Board of directors. The first
of the cases envisaged in section 4 is the case where a control is obtained by a company in the matter
of composition of the Board of directors of another company. That would be sufficient to constitute
the former as holding company and the other as subsidiary. The second type of cases is where more
than half of the nominal value of the equity share capital is held by another company. By virtue of
such holding that other company becomes a holding company and the one whose shares are so held
becomes a subsidiary company. The third case envisaged is where a subsidiary company of a holding
company may be a holding company in relation to another company. That other company is also a
subsidiary of the holding company of the subsidiary. Questions as to whether a company was
subsidiary of other company cannot be decided merely on basis of fact that one of directors was
common to said companies but it has to be decided in context of section 4.

55
56
CHAPTER
2
RESEARCH
METHODOLOGY

57
PROBLEM OT THE STUDY

“A STUDY ON FINANCIAL ACCOUNTING OF HOLDING COMPANY”

OBJECTIVES

The objective of this project is to -

 To discuss the concept of holding and subsidiaries companies in India.

 To determine its true character.
 Understand the legal requirements relating to presentation of accounts by a holding company.
 Understand the requirements of Schedule VI
 Explain Consolidated Financial Statement
 Prepare Consolidated balancesheet of a holding company and its subsidiaries
 Understand the important factors and their accounting treatement such as:
i. Elimination of investment account
ii. Minority Interest
iii. Cost of Control or Goodwill
iv. Revenue profits or Post-acquisition profits
v. Revenue losses or Post-acquisition losses

LIMITATION OF STUDY

The study has following limitations:

 The study has lack of contact with company personnel acted as hindrance in the
study.
 The study is based on the limited knowledge & information provided by the
websites and software available on internet.

58
  The size of the sample is too small looking to the nature of the study and due to
tome and money constraints relatively smaller sample was chosen.

RESEARCH METHODOLOGY

The researcher has followed the non doctrinal method for research design. The research is based on
both primary and secondary sources. Books from the university’s library have been used. Computer
from the computer laboratory of the university has been used for the purpose of secondary research
and is the main source of project.

59
CHAPTER
3
DATA ANALYSIS AND
PRESENTATION

60
Steps for preparing consolidated balance Sheet of the holding company and its
subsidiary company.

1st Step
Add all the assets of subsidiary company with the assets of holding company. But Investment of
holding company in Subsidiary company will not shown in consolidated balance sheet because,
investment in subsidiary company will automatically adjust with the amount of share capital of
subsidiary company in holding company.

2nd step
Add all the liabilities of subsidiary company with the liabilities of holding company. But Share capital
of subsidiary company in holding company will not shown in the consolidated balance sheet in the
books of holding company. Because, this share capital automatically adjust with the amount of the
investment of holding company in to subsidiary company .

3rd Step

Calculate of Minority Interest

First of all we should know what minority interest is. Minority interest is the shareholder but there is
not holding company’s shareholder. So, when holding company shows consolidated balance sheet, it is
the duty of accountant to show minority interest in the liability side of consolidated balance sheet.

We can calculate minority interest with following formula

Total share capital of Subsidiary company = XXXXX

Less Investment of Holding company in to subsidiary company = - XXXX

Add proportionate share of the subsidiary company‘s profit and
Reserves or increase in the value of assets + XXXX
Less proportionate share of the subsidiary company’s loss and decrease
In the value of total assets of company – XXXXX
Value of Minority Interest XXXXX

61
 The following is the Balance sheet of S Ltd. as on 31st March,
2010.

The following is the Balance sheet of S Ltd. as on 31 st

March, 2010.

Liabilities Rs. Assets Rs.

Share capital Fixed Assets 2,90,000
Equity shares of Rs. 10 2,70,000 Investment 2,75,000
each
General Reserve Profit & 3,60,000 Current 1,30,000
Loss A/c Assets
Current liabilities 85,000 Preliminary 20,000
Expenses
7,15,000 7,15,000

H Ltd. acquired 25,000 shares in S Ltd. on 31st March, 2010 at a cost of

Rs. 2,75,000. fixed assets were revalued at Rs. 3,28,000. find minority
interest

Solution :
2, 000 2
Minority Interest
27, 000 27

Minority Interest Rs.

1) Share in share capital

2 20000
2, 70, 000 
27

2) Share in Reserves and Surpluses 20,000

2
3, 60, 000 
27
3) Share in capital profits 28,000
Profit on appreciation on fixed Assets
(3,60,000 – 20,000 + 38,000)
2
= 3, 78, 000 
27
Minority Interest 68,000

62
4th Step

Calculate cost of capital / Goodwill or Capital Reserve

If holding company purchases shares of subsidiary company at premium, then the value of premium
will be deemed as goodwill or cost of capital and shows as goodwill on the assets side of consolidated
balance sheet.

But if holding company purchases the shares of subsidiary company at discount, then this value of
discount will be capital reserve and show in the liability side of consolidated balance sheet.

Cost of Control / Goodwill

Balance sheet of S Ltd. as on 31st March 2010 (Liabilities
only)
Rs.
Share capital 40,000 Equity shares of Rs. 10/- each 4,00,000
Reserves and surpluses 2,50,000
Secured loan 2,50,000
Other Liabilities 1,00,000
10,00,000

On the above date H Ltd. acquired 30,000 Equity shares in S Ltd.

on the above date for Rs. 7,50,000 fixed assets of S Ltd. were appreciated
by Rs. 1,50,000 find out cost of control / Goodwill.
Rs. Rs.
Cost of investment in S Ltd. ⎛ 3⎞ 7,50,000
Less : 1) Share in share capital 4, 00, 000 3,00,000
⎜ 4⎟
 ⎠
2) Share in Reserves and surpluses
Capital profit 2,50, 000
3 1,87,500
4
Share in capital profit
3
(Appreciation in fixed assets) 1,50, 000
4 1,12,500 6,00,000

Goodwill 1,50,000

63
5th Step

Treatment of Pre – Acquisition of reserve and profit

Pre – acquisition profit and reserve of subsidiary company will be shown as capital reserve in
consolidated balance sheet but the value of minority interest’s profit or reserves deducts from it and add
in minority interest value.

Total profit before acquisition of subsidiary company = XXXX

Less share of minority interest - XXXX

Value of profit X minority interest’s value of shares in subsidiary company / total share capital of
subsidiary company.

Pre – acquisition profit and reserve shown as capital reserve XXX

6th Step

Calculate post acquisition profits

After the date of purchasing the shares of subsidiary company , profit of subsidiary company will also
deem of holding company and it include in the profit of holding company and we also separate the part
of profit of minority interest and add in minority interest’s value and shown in liability side .

7th Step

Elimination of common transactions

All common transaction between holding company and subsidiary company will not show in the
consolidated balance. There following common transaction
1. goods sold and goods purchase on credit and the value of debtor or creditor either subsidiary
company or holding company will not shown in consolidated balance sheet
2. Value of bill payable or bill receivable of holding company on subsidiary company will also not
shown but if some bills value is discounted from third party then either of both company’s payable
value shown as liability in the consolidated balance sheet .

64
8th Step

Treatment of Unrealized profit

If subsidiary company sells the goods to holding company or holding company sells the goods to
subsidiary company at profit and if such goods will not sold in third party , then the profit will not
realized , so such unrealized profit will not credited to profit and loss account . At this time a stock
reserve account is opened and all amounts of unrealized profit transfers to this account and this
accounts total amount is deducted from closing stock of consolidated balance sheet.

If subsidiary company has also other outsider’s shares then holding company makes reserve up to his
shares proportion.

The sock in trade of S Ltd. includes Rs. 60,000 in respect of goods

purchased from H Ltd. These goods have been sold by H Ltd. at a profit of
20% on invoice price.

Therefore, unrealized profit = 60,000 x 2/100 = 12000

Unrealized profit of Rs12000 should be deducted from closing stock in

consolidated Balancesheet and from Revenue profit i.e. Profit & Loss account

9th Step

Treatment of Dividends

If holding company gets the dividends from subsidiary company, then this will
divide into two parts. If subsidiary company declare dividend out of capital profits,
then this will add in capital reserves in consolidated balance sheet. But, if subsidiary
company has declared the profit out of revenue gains, then this dividend will add in
general profit and loss account and will shown in the liability side of consolidated
balance sheet.

65
PROBLEMS WITH SOLUTION
Q.1 The following are the balance sheet of Yukti Ltd. and Shakti Ltd. As on 31 st March
2010:
Yukti Shakti Yukti Shakti

LAIBILITIES Ltd. Rs Ltd. Rs ASSETS Ltd. Rs Ltd. Rs

Share Capital Fixed Assets:

Equity shares of Building 6,50,000 4,40,000

Rs.10/- 12,00,000 6,00,000 Machinery 3,90,000 1,40,000

each Furniture 60,000 35,000

Reserves/Surplus Investment 5,00,000

General Reserve 4,50,000 1,00,000 Current

Profit/Loss A/C 1,70,000 2,40,000 Assets

Stock 1,20,000 1,90,000

Current Liab. Debtors 3,80,000 2,60,000

Creditors 1,50,000 75,000 Bills

Bills Payable 1,65,000 Receivable 70,000 40,000

Outstanding Exp. 50,000 30,000 Bank Balance 15,000 10,000

Total 21,85,000 11,15,000 Total 21,85,000 11,15,000

The following further information is available-

1) Yukti Ltd. Acquired 45,000 shares of Shakti Ltd. As on 31st March ,2009

2) Sundry debtors of Yukti Ltd. include Rs.25000 due for Shakti Ltd.

3) Bills receivable of Shakti Ltd. Include Rs 15000 due from Yukti Ltd.

4) The Stock of Shakti Ltd. Includes good purchased from Yukti Ltd. Of Rs.

66
 20000 which includes profit charged by Yukti Ltd @ 25% on cost.

5) The position of reserves and surplus of Shakti Ltd. As on 31stMarch,2009 was as follows:

General Reserve Rs. 75000

Profit and Loss Account Rs. 150000

You are the required to prepare a Consolidated Balance Sheet of Yukti Ltd. and Shakti Ltd. as on 31st

March 2010 along with necessary working for Minority Interest etc.

SOLUTION:

Proportion of Holding Shares

Yukti’s shares in Shakti ltd. = 45000÷60000*100 = 75%

Shakti ltd. = 15000÷60000 *100 = 25%

ANALYSIS OF RESERVE & SURPLUS OF SUBSIDIAREY

Rs. Rs.

(1-4-2009 to 31-

PARTICULARS 3-2010)

CAPITAL REVENUE

PROFIT PROFIT

General Reserve 75000 25000

Add: P & L A/c 150000 90000

67
 225000 115000

Holding Share (75%) 168750 86250

Minority Interest (25%) 56250 28750

COST OF CONTROL

Cost of Investment 500000

Less: Share capital (600000*75%) 450000

Less: Capital Profit 168750

CAPITAL RESERVE 118750

MINORITY INTEREST

Share capital (600000*25%) 150000

Add: Capital Profit 56250

Add: Revenue Profit 28750

TOTAL 235000

PROFIT & LOSS A/C

P & L A/c 170000

Add: Revenue Profit 86250

Less: Stock Reserve (20000*20%) 4000

P & L A/c 252250

68
CONSOLIDATED BALANCE SHEET as on 31-3-2010

LIABILITIES Rs. ASSETS Rs.

SHARE CAPITAL FIXED ASSETS

120000 Eq. Shares of Rs. 10 each 1200000 Building 1090000

Machinery 530000

RESERVE & SURPLUS Furniture 95000

Capital Reserve 118750 INVESTMENTS

General Reserve 450000 CURRENT ASSETS, LOANS

P & L A/c 252250 & ADVANCE

Minority Interest 235000 Stock 310000

Less: Stock reserve 4000 306000

SECURED LOANS Debtors 640000

Less: Set off 25000 615000

UNSECURED LOANS Bills Receivable: 110000

Less: Set off 15000 95000

CURRENT LIABILITIES & Bank 25000

PROVISIONS MISCELLANEOUS

Creditors 225000 EXPENDITUES

Less: Set off 25000 200000 (to the extent not written off)

Bills Payable 235000

Less: set off 15000 220000

Outstanding Expenses 80000

Total 2756000 Total 2756000

69
 COMPANY PROFILE

TATA MOTORS
Tata Motors Limited (formerly TELCO, short for Tata Engineering and Locomotive Company)
is an Indian multinational automotive manufacturing company headquartered in Mumbai. It is a
subsidiary of Tata Group, an Indian conglomerate. Its products include passenger cars, trucks, vans,
coaches, buses, sports cars, construction equipment and military vehicles.

Tata Motors has auto manufacturing and assembly plants

in Jamshedpur, Pantnagar, Lucknow, Sanand, Dharwad, and Pune in India, as well as in Argentina,
South Africa, Great Britain and Thailand. It has research and development centres in Pune,
Jamshedpur, Lucknow, and Dharwad, India and in South Korea, Great Britain and Spain. Tata Motors'
principal subsidiaries purchased the English premium car maker Jaguar Land Rover (the maker of
Jaguar and Land Rover cars) and the South Korean commercial vehicle manufacturer Tata Daewoo.
Tata Motors has a bus-manufacturing joint venture with Marcopolo S.A. (Tata Marcopolo), a
construction-equipment manufacturing joint venture with Hitachi (Tata Hitachi Construction
Machinery), and a joint venture with Fiat Chrysler which manufactures automotive components and
Fiat Chrysler and Tata branded vehicles.

Founded in 1945 as a manufacturer of locomotives, the company manufactured its first commercial
vehicle in 1954 in a collaboration with Daimler-Benz AG, which ended in 1969. Tata Motors entered
the passenger vehicle market in 1988 with the launch of the Tata Mobile followed by the Tata
Sierra in 1991, becoming the first Indian manufacturer to achieve the capability of developing a
competitive indigenous automobile.[4] In 1998, Tata launched the first fully indigenous Indian
passenger car, the Indica, and in 2008 launched the Tata Nano, the world's cheapest car. Tata Motors
acquired the South Korean truck manufacturer Daewoo Commercial Vehicles Company in 2004 and
purchased Jaguar Land Rover from Ford in 2008.

HISTORY

Tata Groups entered the commercial vehicle sector in 1954 after forming a joint venture
with Daimler-Benz of Germany. After years of dominating the commercial vehicle market in India,
Tata Motors entered the passenger vehicle market in 1991 by launching the Tata Sierra, a sport utility
vehicle based on the Tata Mobile platform. Tata subsequently launched the Tata Estate (1992;
a station wagon design based on the earlier Tata Mobile), the Tata Sumo (1994, a 5-door SUV) and
the Tata Safari (1998).

Tata launched the Indica in 1998, the first fully indigenous Indian passenger car. Although initially
criticized by auto analysts, its excellent fuel economy, powerful engine, and an aggressive marketing
strategy made it one of the best-selling cars in the history of the Indian automobile industries. A newer
version of the car, named Indica V2, was a major improvement over the previous version and quickly
became a mass favourite. Tata Motors also successfully exported large numbers of the car to South
Africa. The success of the Indica played a key role in the growth of Tata Motors.[6]
In 2004, Tata Motors acquired Daewoo's South Korea-based truck manufacturing unit, Daewoo
Commercial Vehicles Company, later renamed Tata Daewoo.[7]
On 27 September 2004, Tata Motors rang the opening bell at the New York Stock Exchange to mark
the listing of Tata Motors.

70
In 2005, Tata Motors acquired a 21% controlling stake in the Spanish bus and coach
manufacturer Hispano Carrocera. Tata Motors continued its market area expansion through the
introduction of new products such as buses (Starbus and Globus, jointly developed with subsidiary
Hispano Carrocera) and trucks (Novus, jointly developed with subsidiary Tata Daewoo).
In 2006, Tata formed a joint venture with the Brazil-based Marcopolo, Tata Marcopolo Bus, to
manufacture fully built buses and coaches.

In 2008, Tata Motors acquired the English car maker Jaguar Land Rover, manufacturer of the Jaguar
and Land Rover from Ford Motor Company.

In May 2009, Tata unveiled the Tata World Truck range jointly developed with Tata Daewoo; the
range went on sale in South Korea, South Africa, the SAARC countries, and the Middle East at the
end of 2009.

Tata acquired full ownership of Hispano Carrocera in 2009

In 2009, its Lucknow plant was awarded the "Best of All" Rajiv Gandhi National Quality Award.

In 2010, Tata Motors acquired an 80% stake in the Italian design and engineering company Trilix for
€1.85 million. The acquisition formed part of the company's plan to enhance its styling and design
capabilities.

In 2012, Tata Motors announced it would invest around ₹6 billion in the development of Futuristic
Infantry Combat Vehicles in collaboration with DRDO.

In 2013, Tata Motors announced it will sell in India, the first vehicle in the world to run on
compressed air (engines designed by the French company MDI) and dubbed "Mini CAT".
In 2014, Tata Motors introduced first Truck Racing championship in India "T1 Prima Truck Racing
Championship".

On 26 January 2014, the Managing Director Karl Slym was found dead. He fell from the 22nd floor to
the fourth floor of the Shangri-La Hotel in Bangkok, where he was to attend a meeting of Tata Motors
Thailand.
On 2 November 2015, Tata Motors announced Lionel Messi as global brand ambassador at New
Delhi, to promote and endorse passenger vehicles globally.
On 27 December 2016, Tata Motors announced the Bollywood actor Akshay Kumar as brand
ambassador for its commercial vehicles range.
On 8 March 2017, Tata Motors announced that it has signed a memorandum of understanding
with Volkswagen to develop vehicles for India's domestic market.
On 3 May 2018, Tata Motors announced that it sold its aerospace and defense business to another
Tata Group Entity, Tata Advanced Systems, to unlock their full potential.

71
BALANCESHEET OF TATA MOTORS

I. ASSETS
(1) NON-CURRENT ASSETS
(a) Property, plant and equipment 3 18,192.52 17,897.12
(b) Capital work-in-progress 1,371.45 1,902.61
( c) Goodwill 99.09 99.09
(d) Other intangible assets 5 (a) 3,312.14 2,776.71
(e) Intangible assets under development 5 (b) 3,825.15 5,368.38
(f) Investments in subsidiaries, joint ventures and associates 6 13,950.60 14,330.02
(g) Financial assets
(i) Investments 8 310.19 528.37
(ii) Loans and advances 10 143.96 391.46
(iii) Other financial assets 12 793.40 196.32
(h) Non-current tax assets (net) 695.75 772.67
(i) Other non-current assets 14 1,546.39 1,858.45
44,240.64 46,121.20
(2) CURRENT ASSETS
(a) Inventories 16 5,670.13 5,553.01
(b) Investments in subsidiaries and associate (held-for-sale) 7 681.91 -
( c) Financial assets
(i) Investments 9 1,820.87 2,437.42
(ii) Trade receivables 17 3,479.81 2,128.00
(iii) Cash and cash equivalents 19 546.82 228.94
(iv) Bank balances other than (iii) above 20 248.60 97.67
(v) Loans and advances 11 140.27 215.96
(vi) Other financial assets 13 646.31 141.54
(d) Current tax assets (net) 73.88 129.49
(e) Assets classified as held-for-sale 47(iv) 223.33 -
(f) Other current assets 15 1,439.73 1,825.05
14,971.66 12,757.08
TOTAL ASSETS 59,212.30 58,878.28
II. EQUITY AND LIABILITIES
EQUITY
(a) Equity share capital 21 679.22 679.22
(b) Other equity 19,491.76 20,483.39
20,170.98 21,162.61
LIABILITIES
(1) NON-CURRENT LIABILITIES
(a) Financial liabilities
(i) Borrowings 23 13,155.91 13,686.09
(ii) Other financial liabilities 25 211.28 1,130.23
(b) Provisions 27 1,009.48 892.18
( c) Deferred tax liabilities (net) 154.61 147.58
(d) Other non-current liabilities 30 291.09 321.24
14,822.37 16,177.32
(2) CURRENT LIABILITIES
(a) Financial liabilities
(i) Borrowings 24 3,099.87 5,158.52
(ii) Trade payables [includes dues of micro and small enterprises ` 141.59 crores 9,411.05 7,082.95
(as at March 31, 2017 ` 125.11 crores)]
(iii) Acceptances 4,814.58 4,379.29
(iv) Other financial liabilities 26 4,091.16 2,485.94
(b) Provisions 28 862.92 477.17
( c) Current tax liabilities (net) 21.77 83.68
(d) Other current liabilities 31 1,917.60 1,870.80
24,218.95 21,538.35
TOTAL EQUITY AND LIABILITIES 59,212.30 58,878.28

72
Sl. Name of Subsidiary CIN of subsidiary company Percentage Subsidiary / Sectio Addres
No. of shares Associate / n s
held by Joint Venture
holding
company

1 Tata Precision Industries Pte Ltd 197100574C 78.39 Subsidiary 2(87) 1 Robinson Road, #19-01, AIA Towers, Singapore 048
542

2 Tata Technologies Limited U72200PN1994PLC013313 72.29 Subsidiary 2(87) Plot No. 25, Pune Infotechpark, MIDC Taluka - Mulshi
Hinjawadi, Pune - 27

3 Tata Marcopolo Motors Limited U34101MH2006PLC164771 51 Subsidiary 2(87) Bombay House, 24, Homi Mody street, Mumbai-400001

4 Tata Daewoo Commercial Vehicle Company 401-81-22865 100 Subsidiary 2(87) 172 Dongjangsan-ro, Gunsan-si, Joellabuk-do, 54006,
Limited Korea

5 Tata Motors (Thailand) Ltd 0105550023406 95.28 Subsidiary 2(87) 199 Column Tower 20th Floor, Ratchadapisek Road,
Klongtoey, Bangkok 10110 Thailand

6 Tata Motors (SA)(Proprietary) Ltd 2007/034689/07 60 Subsidiary 2(87) 39 Ferguson Road, Illova 2196

7 Jaguar Land Rover Automotive Plc 6477691 100 Subsidiary 2(87) Abbey Road, Whitley, Coventry, CV3 4LF - England UK

8 Tata Technologies Pte Limited 198100504W 72.29 Subsidiary 2(87) 8 Shenton Way, #19-05 AXA Tower, Singapore 068811

9 Tata Motors Finance Solutions Limited U65910MH1992PLC187184 100 Subsidiary 2(87) C/o Tata Motors Finance Ltd., 10th floor, 106 A & B, Maker
Chambers III, Nariman Point, Mumbai 400 021

10 Jaguar Land Rover Holdings Limited 4019301 100 Subsidiary 2(87) Abbey Road, Whitley, Coventry, CV3 4LF, England, UK

11 Tata Technologies (Thailand) Limited 10554812171 72.29 Subsidiary 2(87) 889 Thai CC Tower, Room 108-9, 10th Floor, South
Sathorn Road, Kwhaeng Yannawa, Khet Sathorn,
Bangkok Metropolis 10120

12 Tata Manufacturing Technologies (Shanghai) 310000400732137 72.29 Subsidiary 2(87) 11F,Aurora plaza,99 Fucheng Rd,Room 1131, Shangai
Co. Ltd 200120, China

13 INCAT International Plc 02377350 72.29 Subsidiary 2(87) 2 Temple Back East, Temple Quay, Bristol BS1 6EG

14 INCAT GmbH HRB 18622 72.29 Subsidiary 2(87) Breitwiesenstrasse 19, 70565 Stuttgart, Germany

15 Tata Technologies Europe Limited 02016440 72.29 Subsidiary 2(87) 2 Temple Back East, Temple Quay, Bristol BS1 6EG

73
CHAPTER
4
CONCLUSION

74
CONCLUSION

A look at the path we have traversed indicates that what started as direct or indirect control, be it
shareholding or otherwise has inevitably resulted in having to rope in Subsidiary Companies being
increasingly set up by foreign companies. That these companies should, no doubt, be brought within
the regulatory provisions as applicable to Indian companies but the matrix of Holding-Subsidiary
Company relationship has become more complex and complicated. This appears to be inevitable in
the context of globalisation of Indian economy and increasing flow of foreign exchange into our
country through Foreign Direct Investment (FDI) in joint ventures(A business arrangement in which
two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This
task can be a new project or any other business activity. In a joint venture (JV), each of the
participants is responsible for profits, losses and costs associated with it) or Subsidiary companies.

SUMMARY

1. Consolidation of accounts is governed by AS 21

2. The date of purchase of shares is the date of acquisition of shares which is very important in

consolidation.

3. Profit upto the date of acquisition is the capital profit

4. Profit from the date of acquisition is the revenue profit

5. Pre-acquisition profits and reserves are taken into account for calculation of cost of control.

6. Post acquisition profits are not considered in determination of cost of control.

7. Inter-company transactions are eliminated from the consolidated balance sheet.

8. Share capital of subsidiary company and investment in share if subsidiary of company should be

eliminated.

9. Minority interest is shows in consolidated balance sheet on liability side.

10. Cash in transit is shown in consolidated balance sheet on assets side.

11. In the case of revaluation of any asset the change in the value is adjusted to capital profit.

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12. Any unrealized profit include in the stock is deducted from stock and P & L a/c in consolidated

balance sheet.

13. Issue of bonus shares by the subsidiary company should be added to the shares held by holding

Company in subsidiary Company Minority interest is also increased by the bonus shares Issued

to them and the capital profit or revenue profit from which bonus issue is made is reduced.

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CHAPTER
5
BIBLIOGRAPHY

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BIBLIOGRAPHY

https://en.wikipedia.org/wiki/Holding_company

https://www.blueshorefinancial.com/ToolsAdvice/Articles/BusinessBanking/HoldingC
ompanies/

http://www.accountingnotes.net/companies/holding-companies-definition-advantages-and-
disadvantages/8965

https://legalvision.com.au/what-are-the-features-of-a-parent-company/

https://managementation.com/types-of-holding-companies/

https://www.thebalancesmb.com/what-is-a-subsidiary-company-4098839

http://mcaindia.co.in/advantages-and-disadvantages-of-a-subsidiary-company/

https://smallbusiness.chron.com/advantages-disadvantages-creating-subsidiary-operating-
companies-25733.html

https://blog.ipleaders.in/difference-between-holding-and-subsidiary-company/

https://smallbusiness.chron.com/difference-between-holding-company-subsidiary-25698.html

https://smallbusiness.chron.com/reasons-companies-subsidiaries-81965.html

https://www.upcounsel.com/parent-company-subsidiary-relationship

https://en.wikipedia.org/wiki/Tata_Motors

http://investors.tatamotors.com/financials/73-ar-html/bal-sheet.html

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