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Holding company Accounts and Preparation of consolidated balance sheet

Holding company Accounts and Preparation of consolidated balance sheet. Dedicated to. ALL CA STUDENTS…………. HOLDING COMPANIES –IMPORTANT ISSUES TO SOLVE PROBLEMS. 1.ANALYS OF CAPTAL PROFIT- 2.ANALYSYS OF REVENUE PROFIT 3.CALCULATION OF CAPITAL RESERVE/COST OF CONTROL(GOODWILL)

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Holding company Accounts and Preparation of consolidated balance sheet

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  1. Holding company Accounts and Preparation of consolidated balance sheet

  2. Dedicated to ALL CA STUDENTS………….

  3. HOLDING COMPANIES –IMPORTANT ISSUES TO SOLVE PROBLEMS • 1.ANALYS OF CAPTAL PROFIT- • 2.ANALYSYS OF REVENUE PROFIT • 3.CALCULATION OF CAPITAL RESERVE/COST OF CONTROL(GOODWILL) • 4.CALCULATION OF MINORITY INTEREST • 5.Consolidated Balance sheet

  4. 1.ANALYSYS OF CAPTAL PROFIT • MEANING: PROFIT/RESERVE OF ANY TYPE IN THE SUBSIDIARY COMPANY BEFORE THE DATE OF ACQUISITION

  5. CAPTAL PROFITEXAMPLE -I • BALANCE SHEET OF SUBSIDIARY LIMITED AS ON 31-03-2007 LIABILITIES GENERAL RESERVE (1-4-2006) 5,00,000 PROFIT AND LOSS 2,00,000 THE BUSINESS WAS ACQUIRED ON O1-O1-2007

  6. ANSWER EX.1 • RESERVE BEFORE ACQUISITION- 5,00,000 • PROFIT UP TO O1-O1-2007 (2,OO,OOO*9/12) 1,50,000 TOTAL CAPITAL PROFIT 6,50,000 HOW MUCH IS THE REVENUE PROFIT?

  7. REVENUE PROFIT? • 2,OO,OOO-1,5O,OOO= 50,000 Exercise-2: • SUPPOSING THE BUSINESS WAS ACQUIRED ON 30-09-2006 HOW MUCH IS CAPITAL PROFIT? /REVENUE PROFIT?

  8. ANSWER-2 • CAPITAL PROFIT: • RESERVE(PRE-ACQISITION) 5,OO,OOO SHARE OF P/L A/C (2,OO,OOO*6/12) 1,OO,OOO TOTAL 6,OO,OOO REVENUE PROFIT: (2,OO,OOO *6/12) 1,OO,OOO ENTIRE RESERVE PROFIT EARNED BY THE SUBSIDIARY WAS PRE-ACQUISITION PROFIT

  9. CALCULATION OF CAPITAL RESERVE • AMOUNT INVESTED BY THE HOLDING COMPANY IN SUBSIDIARY COMPANY(REFLECTED AS INVESTMENT IN THE ASSET SIDE) • LESS:1.AMOUNT RECEIVED OUT OF CAPITAL PROFIT IN THE FORM OF DIVIDEND 2.PAID UP VALUE OF THE SHARE(NOMINAL VALUE) 3. SHARE OF REMAINING CAPITAL PROFIT OF HOLDING COMPANY

  10. Cost of control/goodwill The holding company purchased shares of subsidiary more than the real worth of the subsidiary What is the meaning of real worth? If all assets are sold and third party liabilities are paid what remain to share holders is known as real worth Real worth= Assets(realisable value) –third party liabilities Or Equity shares + reserves and surplus(both capital profit and revenue reserve)

  11. How do you calculate goodwill on the shares acquired by Holding company? The excess amount paid over real worth to acquire subsidiary company’s share is known as goodwill. Example-3 4000 shares are purchased for Rs. 50,000. The nominal value is Rs.10. The excess amount of Rs.10,000 is goodwill. Goodwill is shown in the consolidated balance sheet. Assumed no profits in the balance sheet

  12. If goodwill appears already in the holding and subsidiary company? Balance sheet as on 31st March 2008 Date of acquisition was 31-3-2008

  13. 1.Total Capital profits • General reserve 60,000 • Profit on 1-4-2007 20,000 • Profit during the year 2007-08 70,000 • Total 150,000 • Less:-Preliminary expenses (10,000) • Less: Preference share holders (12,000) (cumulative preference shares) Profit to equity share holders 1,28,000

  14. Have You observed that all profits are capital profits. Why? • It is not due to real capital profits. But because profits are earned by subsidiary before the date of acquisition. • Note:1. General reserve before the date of acquisition, Revenue profit before the date of acquisition and all capital profits after the date of acquisition less all wasteful preliminary expenses(Capital loss) are capital profit. • Note:2: Any benefits(money,dividend, bonus shares) derived by holding company out of capital profits reduce their cost of control(Investments)

  15. Capital reserve If the subsidiary company shares are purchased less than the subsidiary’s worth,(Purchased at cheaper rate) the benefits earned at the time of acquisition is known as capital reserve. The capital reserve is a capital profit Example 4: If nominal value of shares of subsidiary is Rs.10 and 4000 shares are acquired for Rs. 35,000, then there is a gain of 5000 to holding company is known as capital reserve

  16. What is capital profit? What is the reason of differentiating between Capital profits and revenue profits? Capital profits: 1. Profits of subsidiary company earned by operation or non-operation prior to holding company’s acquisition. 2. Capital profits earned after acquisition Capital profits are not available for declaration of dividend. After the acquisition date, profits earned by subsidiary company by a normal business operations is a revenue profit. Such profits are available for declaration of dividend.

  17. Equity shares 4,00,000 (Rs.100 per share) General reserve 50,000 Profit and loss a/c 30,000 (on 31-3-2007) Profit and loss a/c 80,000 (For the year 2007-2008) 3,000 shares were acquired by holding company in subsidiary company on 1st January 2008 for Rs.4,50,000. Exercise-5 Balance sheet of subsidiary as on 31st March 2008

  18. Date of acquisition is 1st January 2008 Reserves and Profits Capital Profit Before or After acquisition Revenue Profit General reserve (Before ) Nil 50,000 P/L on 31-3-2007 (Before) 30,000 Nil P/L for 2007-08 (9 months before And 3 months after) 9 months profit 9/12 x 80,000 =60,000 3 months profit 3/12 x 80,000 =20,000 Rs.1,40,000 Total Rs.20,000

  19. Minority/Majority Minority Majority 1000x 100 1,00,000 Shares Capital 4,00,000 3,000x 100 3,00,000 Value on the Date of acquisition ¼ x 1,40,000 =Rs.35,000 Capital profits Rs.1,40,000 ¾ x1,40,000 =Rs.1,05,000 Rs.4,05,000 ¼ x 20,000 =Rs.5000 ¾ x 20,000 =Rs.15000(P/L) Revenue profits Rs.20,000 Rs.4,05,000-goodwill purpose Rs.15,000-profit and loss a/c In the consolidated B/S Rs.1,40,000 Total Rs.5,60,000

  20. Good will/Capital reserve It is calculated from the point of view of Holding company What is the value of total investment made by Holding company? It is Rs.4,50,000 What was it worth on the date of acquisition? It is Rs.4,05,000. Have they invested more than the real worth? Yes. It means they had paid extra for the goodwill of the subsidiary company.

  21. Suppose subsidiary company declares dividend after the acquisition out of revenue profits which were earned before the date acquisition? Holding company had invested in subsidiary.If dividend is declared out of pre-acquisition profits of subsidiary, the holding company gets parts of its investments back.Therefore such dividend received to be reduced from investment of the holding company in subsidiary. Does it affect goodwill/capital reserve of the company?

  22. Exercise-6 • Yes.It affects goodwill.It decrease the goodwill. Suppose subsidiary declares dividend out of general reserve (Capital profit because it was earned before acquisition) Rs.40,000 to all share holders, the holding company’s share of general reserve is ¾ of 40,000=30,000. Since 30,000 is received by holding out of their investments The investment value decreased to Rs.4,20,000(4,50,000-30,000). Therefore goodwill is Rs.15,000.

  23. If dividend declared by subsidiary out of post acquisition profit? Post acquisition profit is a revenue profit.Such dividend received by holding from subsidiary does not reduce the value of investment of the holding company. It is included with the profits of holding company.The journal entry in the books of holding company is: Cash a/c debit Profit and loss a/c credit

  24. Elimination of common transactions 1.Bills drawn by holding company on subsidiary company or vice-versa: Holding company Subsidiary company Bills receivable a/c debit To subsidiary company a/c Holding company a/c debit To Bills payable a/c Balance sheet Asset side Bills receivable Balance sheet Liability side Bills payable

  25. When we prepare a consolidated Balance sheet? Treat the holding and the subsidiary company as one unit.Therefore eliminate both bills receivables and payable to the extent of holding company’s share of Bills receivable from consolidated balance sheet. The same treatment is applicable for debtors and creditors on goods sold by holding to subsidiary or vice versa. Suppose a girl friend given loan to her Boy friend before marriage and they get married; who has to pay to whom? No one has to pay to no one( after their marriage) provided???????????!!!!!!!!!!!

  26. Provided??????!!!!! • They get married each other.

  27. Exercise-8 How do you deal in the consolidated Balance sheet? • Loan given by holding company to subsidiary? 2. Debentures issued by holding to subsidiary? 3. Loan given by subsidiary to holding? Only one answer: In one company balance sheet they are shown as asset and an another company they are shown as liability. If combined(Consolidated) both asset and liability are eliminated.Only outsiders’ liabilities are shown in the consolidated balance sheet See the exercise in the next page

  28. Exercise-9 Balance Sheet Bills receivable of S ltd. include bills for Rs.8000 accepted by H Ltd and creditors of S Ltd include Rs.20,000 due to H Ltd. How do they appear in the combined(consolidated) balance Sheet?

  29. Balance Sheet(observe other than share capital) Bills receivable of S ltd. include bills for Rs.8000 accepted by H Ltd and creditors of S Ltd include Rs.20,000 due to H Ltd. How do they appear in the combined(consolidated) balance Sheet?

  30. Bills accepted by H Ltd is B/P in H ltd Balance sheet. • Remove Rs.8000 from B/P and B/R 2. Creditors of S Ltd. of Rs. 20,000 is equal to Rs.Debtors of H Ltd. Both to be eliminated to the extent of Rs. 20,000 3. Debentures of Rs.80,000 of S ltd is an investment for H Ltd. Both to be eliminated in the consolidated Balance sheet.The Remaining debentures belong to outsiders to be shown in the Consolidated Balance sheet. See the consolidated Balance sheet in the next slide

  31. Consolidated Balance sheet How do you show share capital of both the companies in The consolidated Balance sheet? See in the next slide

  32. Consolidated Balance sheet Holding company Rs.20,00,000 Subsidiary company Rs.10,00,000 80,000 shares Majority (Holding company) Consolidated Balance sheet 20,000 shares Minority Nominal value 2,00,000(Appear in the consolidated Balance sheet) Paid up value-8,80,000 Real value- 8,00,000 Good will- 80,000 (consolidated B/S)

  33. Explanations • Share capital of holding company appears in the • consolidated Balance sheet 2. Minority interest appears as liability in the consolidated B/S 3. Investments of Holding company in subsidiary disappears in the consolidated Balance Sheet 4.Goodwill estimated appears along with other existing goodwill

  34. How do you deal interest outstanding and accrued interest from holding to subsidiary or vice-versa? Both should be eliminated on either side of the consolidated Balance sheet as they Belong to the same home Home is the place for loving and living. No creditor and debtor relationship

  35. How do you deal contingent liability? Accepted and discounted with in the Group (H to S or vice-versa) Accepted by outsiders Will become actual liability Therefore eliminated either Side of consolidated B/S Appear as contingent liability In the consolidated B/S

  36. If goods are sold to subsidiary to holding or vice-versa? Concept:- Profits can be realised only when goods are sold outside the boundary of subsidiary and holding company. 1. If goods supplied are completely sold out, profit would Have been realised therefore, no problem arises at the time of consolidation except if such goods sold are on credit. If the goods were sold on credit, (If, not yet paid on the B/S date) might have been included with creditors and debtors in subsidiary and holding company respectively.If so, eliminate both such debtors and creditors in the consolidated Balance sheet.

  37. Exercise-10 On February 2008 H. Ltd sold goods to S Ltd. goods costing Rs.8000 for Rs.10,000.25% of such goods not yet sold by subsidiary (S.Ltd.).Creditors of S.ltd include Rs.4,000 Due to H Ltd on account of these goods. Solution: 75% of the goods are sold out side the boundary. So, profits are realised on those goods.But on 25% of the goods not yet sold are not yet realised. The unrealised profit is Rs.500(2000 x25%). 1.We remove from stock Rs. 500 2.We remove profit Rs.500 3. Eliminate from debtors and creditors Rs.4000.

  38. If goods supplied by subsidiary to holding or vice versa Are not fully sold on the date of balance sheet? 1.Unrealised profit on supplied goods with in the group to be eliminated from closing stock. 2.Eliminate the profit on such unsold stock from the supplier company(either H or S) to the extent of holding company’s share.

  39. Treatment of dividend Dividend already paid out of Subsidiary Ltd. to Holding Dividend Proposed(not paid) By subsidiary Ltd. Capital Profit Dividend out of Revenue Profits Holding company Subsidiary company REDUCE FROM INVESTMENT IN SUBSIDIARY Credited to P/L A/c And appears In the consolidated Balance sheet Added to Minority Interest Do not disclose separately the proposed Dividend in the consolidated B/S??

  40. Do not disclose separately the proposedDividend in the consolidated B/S Why? • It is because, the proposed dividend of subsidiary is shown with the minority interest(Minority’s share )and also in the P/L A/c of Holding (Holding company’s share).

  41. Exercise-11 Balance Sheet as on 31st March 2008 A Ltd. acquired 40,000 shares of B Ltd . On the date of acquisition, the B Ltd. had profits and reserves undistributed Rs. 1,00,000. Out of pre- Acquisition profits Rs.60,000 was distributed as dividend. Prepare :-1.Minority Interest 2.Cost of control/goodwill 3.Consolidated Balance sheet as on 31st March 2008

  42. Note:- Do not bother about Holding Company’s Balance sheet While preparing Minority Interest or cost of Control Step-1 A Ltd in B Ltd: Minority shares in B Ltd. 40:20=2:1 Step-2: Capital Profit of B Ltd= 1,00,000(Pre- acquisition profit) Holding company A’s share Rs.66,667 Minority share holders Rs.33,000 Less:Dividend received out of Capital profits Rs60,000 x 1/3= Rs.20,000 : 60,000 x 2/3=40,000 Remaining capital profits Rs.66,667-Rs.40,000=Rs.26,667 Rs.33,000-20,000=13,333

  43. Step-2:Revenue profit(Post acquisition profit) =[Rs.1,20,000-(1,00,000-60,000)](Remaining Reserve) +1,80,000(P/L A/c)=Rs.2,60,000 The reserve of Rs.1,20,000 remains in the Balance sheet is after paying dividend of Rs.60,000 (ie.,out of the capital Profits of Rs.1,00,000.) to the share holders. Rs.2,60,000 Majority(A Ltd) Rs.2,60,000 x2/3=Rs.1,73,333 Minority Rs.2,60,000 x1/3=Rs.86,667

  44. Note:- Amount of dividend received by minority shareholders has not been added as they have already received the dividend in cash. Step-3:- Minority Interest 1.Share capital 20,000 x 10 = Rs.2,00,000 Share of remaining Capital Profit Rs.13,333 Share of revenue profit Rs.86,667 Total Rs.3,00,000

  45. Calculation of goodwill or cost of control (for Holding company point of view) Step-4 Amount paid to acquire shares Of B Ltd. Rs.5,00,000 Less: Capital profits received In the form of dividend Rs.40,000 Less: Face value of share 40,000 x 10=Rs.4,00,000 Less:-Holding company’s share of Remaining capital profits Rs.26,667 Rs.33,333 Good will

  46. Consolidated Balance sheet(Exercise-11)

  47. Important observations in consolidated Balance sheet 1.All assets of Holding and subsidiary are added and disclose in the consolidated Balance sheet. 2. All third party liabilities of both the companies are added and disclosed(displayed) 3.From the profits of holding company and holding company’s share of subsidiary’s revenue profits subtract capital profits received in the form form of dividend as such dividend taken to calculate capital reserve(reduced from investments).

  48. How do you deal Bonus Shares issued by subsidiary? Issued out of Post-acquisition profits Issued out of Pre-acquisition profits No effect on Consolidated Balance sheet Shares of investments held by Holding company in subsidiary Increases due to which cost of Control reduced(See exercise) Note:- Anything is received from subsidiary either in the form of dividend or Bonus Shares out of Pre-acquisition profits or amounts of pre-acquisition profits reduces the investment made by holding in subsidiary.

  49. Exercise-12 Balance Sheet as on 31st March 2008 A Ltd. acquired 20,000 shares of B Ltd on 31st March 2007. On the date of acquisition, the B Ltd. had reserves undistributed Rs. 5,00,000 and Rs.2,00,000 in the Profit and Loss Account when A Ltd. acquired B Ltd. B Ltd.issued bonus shares @1 for every 5 shares Held out of post-acquisition profits. Calculate: 1. Cost of control before and after issue of bonus shares 2. prepare consolidated Balance sheet

  50. Cost of control before issue of Bonus shares Step-1 Cost of 20,000 shares 30,00,000 Less: Face value 20,00,000 share of capital profits 1. Reserves 5,00,000 x 4/5=4,00,000 2. Profit 2,00,000 x 4/5=1,60,0005,60,000 25,60,000 Cost of control 4,40,000 Cost of acquiring 20,000 shares 30,00,000 Less:-Paid up value including bonus shares (24,000 x 10 ) 24,00,000 Less:Share of Capital profits ( 7,00,000 x 4/5) 5,60,000 Cost of control 40,000 Step-2 Cost of control after issue of Bonus shares Number of shares after bonus issue are (20,000 + 1/5 x 20,000) =24,000

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