MCom I Semester Accounts Holding Companies Study Material Notes

///

MCom I Semester Accounts Holding Companies Study Material Notes 

MCom I Semester Accounts Holding Companies Study Material Notes: Definition Holding Company Definition of Subsidiary Company Requirements of Schedule  accounting for Dividend From Subsidiaries Consolidation Balance Sheet Profit Loss Account Preparing Consolidated Balance Sheet

Accounts Holding Companies
Accounts Holding Companies

BCom 1st Year Human Resource Accounting Study Material Notes In Hindi

Accounts of Holding Companies

An important development of modern business organisation has been the combining on groups. Holding companies have been the most popular form of combination, modern business organization has been the combining of units into have been the most popular form of combination, particularly in U.S.A. In this case, one company acquires the whole or a large proportion of the paid-up share capital or among portion of the paid-up share capital of another so as to secure a controlling interest in that other company. The company acquiring the controming another company is called the “holding company’ or the parent company and the company which Extraosidiary company’. In this form of combination, subsidiary companies retain their institutions, and carry on their business as if they were distinct entities but their policies and management are controlled by the holding company due to latter holding a majority of shares and the consequent voting power.

Definition of Holding Company

Section 4 (4) of Companies Act, 1956 states that “a company shall be deemed to be the holding company of another if, but only if, that other is its subsidiary.” This definition indicates that there can be no holding company without there being one or more subsidiaries. So, in order to understand the meaning of holding company, it is necessary to know what makes a company the subsidiary of another.

Definition of Subsidiary Company

According to Section 4 (1), “a company is subsidiary of another, if, but only if –

(a) That other company controls the composition of its Board of Directors; or

(b) That other company –

(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 respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company; or

(ii) Where the first mentioned company is any other company, holds more than half in nominal value of its equity share capital; or

(c) The company is a subsidiary of any company which is that other company’s subsidiary.” For example,if B Ltd. is a subsidiary of A Ltd. and C Ltd. is a subsidiary of B Ltd., then C Ltd. is a subsidiary of A Ltd. as well.

AS-21 issued by ICAI has given the name ‘parent company to the holding company. According to this AS, the parent company is an enterprise that has one or more subsidiaries and subsidiary company is an enterprise that is controlled by another enterprise known as parent.

Documents to be attached to the Balance Sheet of the Holding Company

Section 212 (1) of Companies Act, 1956 requires that the following documents in respect of each subsidiary company must be attached to the balance sheet of a holding company :

(1) a copy of the balance sheet of the subsidiary :

(2) a copy of the its profit and loss account ;

(3) a copy of the report of its Board of Directors:

(4) a copy of the report of its auditors;

(5) a statement of the holding company’s interest in the subsidiary as specified in sub-section 3 :

(6) if the dates of the accounting year of the holding company and the subsidiary company do not coincide then a statement showing the changes in interest, assets and liabilities in between the period from the date  of closing the accounts of subsidiary company up to the date of closing the accounts of the holding company, and

(7) If for any reason the Board of directors of the holding company is unable to obtain information due to which the revenue profit of the subsidiary for the holding company can not be screamed, writing to that effect.

The financial year of Subsidiary Company: The financial year of the subsidiary company may or may not end on the same date as that of the holding company but it should not be earlier than o months from the date on which the financial year of the holding company ends.

Accounts Holding Companies

Statement of Holding Company’s Interest

Section 212 (3) provides that this statement must contain the following particulars in respect of each subsidiary company :

(a) the extent of the holding company’s interest in the subsidiary at the end of the financial year of the subsidiary ;

(b) the net aggregate amount of subsidiary’s profit after deducting its losses or vise versa so far as it concerns the members of holding company and is not dealt with in the accounts of holding company –

(i) for the aforesaid financial year of the subsidiary:

(ii) for the previous financial years of the subsidiary since it became the subsidiary of the holding company

(c) the net aggregate amount of subsidiary’s profits after deducting its losses or vice versa so far as those profits are dealt with, or provision is made for those losses in the holding company’s accounts –

(i) for the financial year of subsidiary aforesaid; and

(ii) for the previous financial years of the subsidiary since it became the subsidiary of the holding company.

Illustration 1. The share capital of S Ltd. on 1st January 2002 was 10,000 shares of Rs. 100 each. On 1st July 2002, H Ltd. acquired 7,500 shares at Rs. 8,40,000. The profits of S Ltd. were as under:

For the year ending 31st December 2002                Rs. 1,60,000

For the year ending 31st December 2003                Rs. 2,00,000

For the year ending 31st December 2004                Rs. 1,60,000

For the year ending 31st December 2005              Rs. 1,20,000

Dividend was declared at 10% each year. Prepare a Statement of Holding Company’s Interest in Subsidiary. H Ltd. closes its accounts on 31st March each year.

Solution :

Balance Sheet of H Ltd. as on 31st December 2005

Statement pursuant to Section 212 (3) of Companies Act, 1956

Re. S Ltd. – a subsidiary

(d) There has been no change in the interest of H Ltd. in S Ltd, during time-lag (i.e. between 31st December 2005 and 31st March 2006)

(e) There has been no material change during time-lag in respect of the subsidiary’s fixed assets, investments, moneys lent buy it and moneys borrowed by it for any purpose other than that of meeting current liabilities.

Accounts Holding Companies

Requirements of Schedule VI

Holding Company

Part 1 of Schedule VI to the Companies Act, 1956 requires that the Balance Sheet of a holding company must disclose the following: –

(i) Secured loans due to subsidiaries.

(ii) Unsecured loans due to subsidiaries.

(iii) Current debts for goods and services due to subsidiaries.

(iv) Loans and advances to subsidiaries showing separately –

(a) good and in respect of which the company is fully secured,

(b) good for which the company holds the borrower’s person security only, and

(c) bad or doubtful.

(v) Investments in shares, debentures or bonds of subsidiary companies showing separately shares fully paid-up and partly paid-up and stating the different classes of shares.

Besides, Part II of Schedule VI requires that the Profit & Loss Account of the holding company must disclose the following: (i) Dividend received from subsidiary, and (ii) Provisions made for losses of subsidiary.

Subsidiary Company

In the balance sheet of a subsidiary company, the number of shares held by (i) the holding company, (ii) the subsidiaries of the holding company, (iii) the ultimate holding company, and (iv) the subsidiaries of the ultimate holding company must be separately stated in respect of subscribed share capital.

Profits and Losses of Subsidiary Companies

The profits of a subsidiary company do not become the property of the holding company unless they are properly declared as dividend. The dividend declared by a subsidiary company is accounted for in the books of the holding company in the financial year during which it is declared. But dividend declared by a subsidiary company after the date of the balance sheet of a holding company can not be included in that balance sheet unless it is in respect of a period which closed on or before the date of balance sheet.

Accounts Holding Companies

Accounting for Dividend from Subsidiaries

For accounting the dividend received (whether final or interim) from a subsidiary in the books of holding company, it is to be seen whether the dividend paid by the subsidiary is out of its pre-acquisition profits (i.e. out of profits existing on the date of acquisition of its shares by the holding company) or out of post-acquisition profits (i.e, out of profits earned subsequent to the acquisition of its shares by the holding company).

If dividend received from a subsidiary company is out of its pre-acquisition profits, it is of capital nature from the point of view of holding company and hence must be credited to “Investment Account” because while paying the price of shares acquired, the holding company must have taken into consideration the undistributed profits and reserves of the subsidiary company existing at the date of acquisition. So cash received by way of dividend out of such profits and reserves is considered as a return of the part of the price of shares paid at the time of their acquisition and is, therefore, of a capital nature. This transaction is accounted for as follows:

Bank Account                                                Dr

To Investment Account

(B) Bonus Dividend : There will be no entry for receipt of bonus shares in the books of H Ltd., since no extra payment has been made for these shares. Moreover, receipt of bonus shares does not effect the true value of equity, only the number of shares held are increased by such shares.

Consolidation of Balance Sheet and Profit and Loss

Account Consolidation of Balance Sheet and Profit and Loss Account implies preparation of a single Balance Sheet and Profit and Loss Account covering the holding company and its subsidiary company or companies. Consolidated accounts have been made compulsory under the English Law. But in India, the Companies Act, 1956 does not make it compulsory for a holding company to prepare consolidated accounts. However, as large funds of the holding company are invested in the shares of the subsidiary company, its shareholders are vitally interested in the affairs of the subsidiary company, hence it is desirable for the directors of a holding company to place before the members consolidated accounts of the group so as to enable them to understand their interest better. 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.

Preparing Consolidated Balance Sheet

Consolidated Balance Sheet is prepared by aggregating the corresponding figures in the separate Balance Sheets of the holding company and its subsidiaries but it is subject to the following adjustments : –

1 Elimination of Investment in Shares Account of Subsidiary : The item “Investment in shares of Subsidiary” which appears in the Balance Sheet of the holding company, is cancelled out with the holding company’s equity in the subsidiary as on date of its acquisition of subsidiary’s shares. The holding company’s equity in the subsidiary implies the total of holding company’s share in the share capital. reserves and undistributed profits of the subsidiary as on the date of its acquisition of subsidiary’s shares.

Accounts Holding Companies

2. Calculation of Capital Profits and Revenue Profits of Subsidiary : It is essential to divide the profits of subsidiary company into capital profits (post-acquisition profits) because holding company’s share in the former is set off against the cost of investment in subsidiary whereas its share in the latter is shown in the consolidated balance sheet as an addition to its profits. For this division, the date of acquisition of the shares in subsidiary is the deciding factor. Accumulated profits and reserves, which appear in the balance sheet of the subsidiary company on the date of acquisition of its shares by the holding company, are called pre-acquisition or capital profits. Profits earned and reserves built up subsequent to the date of acquisition are called post-acquisition or revenue profits and reserves. Revenue profits are shown in consolidated balance sheet as an addition to holding company’s own profits and revenue reserves are added to the general reserve of the holding company.

If there are losses in the balance sheet of subsidiary company on the date of acquisition of its shares by the holding, such losses will be capital losses and the share of holding company in these losses should either be added to the cost of acquisition of shares in subsidiary company or be deducted from the holding company’s equity in subsidiary. Subsidiary company’s losses subsequent to the date of acquisition of shares are revenue losses and holding company’s share in these losses is deducted from the holding company’s own profits in the consolidated balance sheet.

The above distinction of capital and revenue profits is immaterial from the point of view of minority shareholders since their share in the total profits and reserves of the subsidiary, whether capital or revenue, is added to the amount of minority interest.

Note: If controlling interest is acquired during the course of the year, profits to the date of acquisition in the absence of any indication to the contrary, will be assumed to be accruing from day-to-day, i.e., the apportionment shall be on time basis.

3. Calculation of Goodwill or Capital Reserve : For this purpose, cost of shares acquired is compared with the value of holding company’s equity in subsidiary, e.g.

Cost of Shares acquired

Less Value of Equity in Subsidiary :

Face Value of Shares acquired

Holding Co.’s share in Capital Profits

Goodwill/Capital Reserve

If the cost of acquisition of shares exceeds the value of equity, the excess is termed as goodwill or cost of control. Conversely, if the amount of value of equity in subsidiary exceeds the cost of investment, the excess is called as capital reserve. In the consolidated balance sheet goodwill is shown on the assets side and capital reserve on the liabilities side.

Illustration 3. X Ltd. acquired all the shares in Y Ltd. on Ist Oct. 2003 and the Balance Sheet of the two companies on 31st Dec. 2003 were as follows:

Accounts Holding Companies

6. Revaluation of Assets and Liabilities of Subsidiary : If the assets and liabilities of a subsidiary were revalued at the time of acquisition of its shares by the holding company for determining the value of share. then these assets and liabilities are shown in the consolidated balance sheet at their revised values and profit or loss on revaluation is treated as capital profit or capital loss, as the case may be, and shared by the holding company and minority shareholders in proportion to their respective equity holdings. It is to be further that any increase in the value of fixed assets of the subsidiary after the date of acquisition will treated as capital profit but in case of reduction in the value of fixed assets, the loss should be treated as ordinary revenue loss.

Here is to be remembered that if fixed assets of the holding company are revalued then, pronto revaluation will be transferred to capital reserve, which may be utilised for setting off goodwill, any. the other hand, loss on revaluation will be canital loss to be set off against capital reserve. If no capital reserve exists then, this loss may be set off against general reserve or revenue profit. In the balance sheet the assets are shown at their revalued figure. Depreciation on Valuation Difference of Depreciable Fixed Assets: If on revaluation, the fixed assets of subsidiary are shown in the consolidated balance sheet at their revalued value then the total revenue profits of the subsidiary company should be adjusted for over or under depreciation provision on valuation difference of depreciable fixed assets for the period passed since the date of revaluation to the date of balance sheet. Thus, if on revaluation there is increase in the value of asset, additional depreciation on revaluation profit should be deducted from the revenue profits and excess depreciation on revaluation loss should be added to revenue profits. Here, it is to be remembered that share of holding company and minority shareholders in the revenue profits shall be determined only after adjusting these profits for the difference in the depreciation provision.

Illustration 8. From the following Balance Sheets of H Ltd. and its subsidiary S Ltd. drawn up at 31st December 2003, prepare a Consolidated Balance Sheet as at that date having regard to the following:

1 Reserves and Profit & Loss Account (Cr.) of S Ltd. stood at Rs. 25,000 and Rs.15,000 respectively on the date of acquisition of its 80% shares by H Ltd.

Accounts Holding Companies

2. Machinery ( Book Value Rs 1,00,000 ) Furniture ( Book Value Rs 20,000 ) and Land ( Book value of Fixing the Price of its shares ; book values of other assists remaining unchanged

Dividends of Subsidiary Company :

(A) Dividend Paid : The treatment of dividend by the subsidiary company in the books of holding company depends on the source from which dividend is paid. If it is out of pre-acquisition profits, it should be credited to ‘Investment in Subsidiary Account’ but if it is out of post-acquisition profits, it should be credited to Profit and Loss Account. If dividend declared by subsidiary company is partly out of pre-acquisition profits and partly out of post-acquisition profits, the dividend received by the holding company is divided into two parts in proportion to its declaration out of pre-acquisition and post-acquisition profits. The first part is credited to Investment in Subsidiary Account and the second part, to Profit and Loss Account.

If dividend received (whether final or interim) from subsidiary company out of its pre-acquisition profits has been credited to Profit and Loss Account of the holding company then this mistake should be rectified in the consolidated balance sheet by debiting Profit and Loss Account (i.e. reducing the balance of Profit and Loss Account of holding company) and crediting Investment in Subsidiary Account (i.e. reducing the cost of acquisition of shares in subsidiary) with the amount of such dividend.

(B) Proposed Dividend : Proposed dividend appearing in the balance sheet of holding company will be shown in the liabilities side of the consolidated balance sheet under the heading Provisions.’ But the amount of proposed dividend in the balance sheet of subsidiary company must be added with the current year’s profits of the subsidiary and then share of holding company and minority shareholders is ascertained in the usual manner. Minority shareholders’ share of proposed dividend may, alternatively, be shown as a separate item in the liabilities side of the consolidated balance sheet. If the holding company has already taken credit for its share of proposed dividend, the amount will be eliminated as mutual indebtedness, in between Proposed Dividend and Dividend Accrued.

If the directors of holding and/or subsidiary company have not appropriated the profit for proposed dividend (i.e. the item of proposed dividend does not appear in the balance sheet) but there is a proposal to do so, then the amount of proposed dividend of holding company will be deducted from its profits and shown as a separate item on the liabilities side of consolidated balance sheet. There is no need to take any adjustment for such proposal of subsidiary company. Minority shareholders’ share in the proposed dividend may, alternatively, be deducted from minority interest and in that case the same will be shown as a separate item in the consolidated balance sheet.

(C) Unpaid (or Unclaimed) Dividend : Assuming that the whole amount of this item belongs to outside shareholders, it must be added in full to the total of minority interest in the consolidated balance sheet. It may, alternatively, be shown as a liability in the consolidated balance sheet. Illustration 16, Dividend from Post-acquisition Profit

The Indian Tubes Ltd. acquired the whole of the shares in the Bharat Pipes Ltd, as at 1st July 2002 at a tal cost of Rs. 11.20,000. The Balance Sheets at 30th June 2003 when accounts of both companies were prepared were as under:

 

Accounts Holding Companies

 

chetansati

Admin

https://gurujionlinestudy.com

Leave a Reply

Your email address will not be published.

Previous Story

MCom I Semester Corporate Accounting Interanl Reconstruction Reorganisation Study Material notes

Next Story

MCom I Semester Accounts Holding Companies Study Material Notes ( Part 2 )

Latest from MCom I Semester Corporate Accounting