Consolidated Financial Statements

Introduction
Concept of Group, Holding Company and Subsidiary Company
It is an era of business growth. Many organization are growing into large corporations by
the process of acquisition, mergers, gaining control by one company over the other company,
restructuring etc. Acquisition and mergers ultimately leads to either cost reduction or controlling
the market or sharing the material supplies or product diversification or availing tax benefits or
synergy.
Whatever the motto behind these ventures is, the ultimate result is the large scale corporation.
Formation of holding company is the most popular device for achieving these objectives.
Group of companies: Many a times, company expands by keeping intact their separate corporate
identity. In this situation, a company (holding company) gains control over the other company
(subsidiary company).
This significant control is exercised by one company over the other by1. Purchasing specified number of shares or
2. Exercising control over the board of directors or on voting power of that company.
Unit of companies connected in these ways is collectively called a Group of Companies.
Holding Company and Subsidiary Company have been defined in Section 2 of the
Companies Act, 2013
Holding company:
As per Clause 46 of Section 2 of the Companies Act, 2013,
Holding company, in relation to one or more other companies, means a company of which
such companies are subsidiary companies. It may be defined as one, which has one or more

subsidiary companies and enjoys control over them. Legally a holding company and its
subsidiaries are distinct and separate entities.
However, in substance holding and subsidiary companies work as a group. Accordingly, users of
holding company accounts need financial information of subsidiaries to understand the
performance and financial position of the holding company.
Subsidiary Company:
According to Section 2(87) of the Companies Act, 2013 subsidiary company or subsidiary,
in relation to any other company (that is to say the holding company), means a company in
which the holding company
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own
or together with one or more of its subsidiary companies: Provided that such class
or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.
Explanation.For the purposes of this clause,
(a) a company shall be deemed to be a subsidiary company of the holding company
even if the control referred to in sub-clause (i) or sub-clause (ii) is of another
subsidiary company of the holding company;
(b) the composition of a companys Board of Directors shall be deemed to be
controlled by another company if that other company by exercise of some power
exercisable by it at its discretion can appoint or remove all or a majority of the
directors;
(c) the expression company includes any body corporate.

Section 19 of the Companies Act, 2013 prohibits a subsidiary company from holding
shares in the holding company. According to this section, no company shall, either by itself or
through its nominees, hold any shares in its holding company and no holding company shall
allot or transfer its shares to any of its subsidiary companies and any such allotment
or transfer of shares of a company to its subsidiary company shall be void:
Provided that nothing in this section shall apply to a case
(a) where the subsidiary company holds such shares as the legal representative of a
deceased member of the holding co.
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a subsidiary
company of the holding company: provided further that the subsidiary company
referred to in the preceding provision shall have a right to vote at a meeting of the
holding company only in respect of the shares held by it as a legal representative or as
a trustee,
But a subsidiary may continue to be a member of its holding company if it was a member
thereof at the commencement of the Act or before becoming a subsidiary of the holding
company.
In such a case, the subsidiary shall not have any voting rights in respect of the shares held. A
subsidiary may also hold shares in the holding company as the legal representative of a deceased
member of the holding company or as trustee (unless the holding company or any subsidiary
thereof is beneficially interested under the trust concerned).
Clause 55 of Section 2 of the Companies Act, 2013 gives following definition of member:
member, in relation to a company, means

(i) the subscriber to the memorandum of the company who shall be deemed to have
agreed to become member of the company, and on its registration, shall be entered as
member in its register of members;
(ii) every other person who agrees in writing to become a member of the company and
whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a
beneficial owner in the records of a depository.
1.2 Wholly Owned and Partly Owned Subsidiaries
A wholly owned subsidiary company (Example A ltd.) is one in which all the shares with
voting rights of 100% are owned by the holding company (Example B Ltd.)
In a partly owned subsidiary, all the shares of subsidiary company are not acquired by the
holding company i.e. only the majority of shares (i.e., more than 50%) are owned by the holding
company.
In a wholly owned subsidiary, there is no minority interest because al the shares with
voting rights are held by the holding company.
On the other hand, in a partly owned subsidiary company, there is a minority interest
because less than 50% shares with voting rights are held by outsiders other than the holding
company.
1.3 Purpose of Preparing the Consolidated Financial Statements
Consolidated financial statements are the financial statements of a group presented as
those of a single enterprise, where a group refers to a parent and all its subsidiaries. Parent
company needs to inform the users about the financial position and results of operations
of not only of their enterprise itself but also of the group as a whole. For this purpose,

consolidated financial statements are prepared and presented by a parent/holding enterprise to

provide
financial information about a parent and its subsidiary(ies) as a single economic entity.
Consolidated Financial Statements are intended to show the financial position of the
group as a whole - by showing the economic resources controlled by them, by presenting the
obligations of the group and the results the group achieves with its resources.
Section 129(Clause 3) of the Companies Act, 2013 requires companies compulsory to
prepare Consolidated Financial Statements According to this section, where a company
has one or more subsidiaries, it shall, in addition to separate financial statements will
prepare a consolidated financial statement of the company and of all the subsidiaries in
the same form and manner as that of its own which shall also be laid before the annual
general meeting of the company, provided that the company shall also attach along with
its financial statement, a separate statement containing the salient features of the
financial statement of its subsidiary or subsidiaries in such form as may be prescribed.
Accounting Standard (AS) 21 also lays down principles and procedures for preparation
and presentation of consolidated financial statements.
The International Accounting Standard 27 Consolidated Financial Statements and
Accounting for Investments in Subsidiaries provides the basic framework for the preparation
and presentation of consolidated statements as well as accounting for investments in subsidiaries
in a parents separate financial statements.
CONSOLIDATED FINANCIAL STATEMENTS
As per AS 21, Consolidated financial statements are the financial statements of a group
presented as those of a single enterprise. The main advantages of consolidation are given

below:
(i) Single Source Document: From the consolidated financial statements, the users of
accounts can get an overall picture of the holding company and its subsidiaries.
Consolidated Profit and Loss Account gives the overall profitability of the group
(ii) Intrinsic value of share: Intrinsic share value of the holding company can be
calculated directly from the Consolidated Balance Sheet.
(iii) Return on Investments in Subsidiaries: The holding company controls its subsidiary.
So its return on investments in subsidiaries should not be measured in terms of dividend
alone. Consolidated Financial Statements provide information for identifying revenue
profit for determining return on investment.
(iv) Acquisition of Subsidiary: The Minority Interest data of the Consolidated Financial
Statement indicates the amount payable to the outside shareholders of the subsidiary
company at book value which is used as the starting point of bargaining at the time of
acquisition of a subsidiary by the holding company.
(v) Evaluation of Holding Company in the market: The overall financial health of the
holding company can be judged using Consolidated Financial Statements. Those who
want to invest in the shares of the holding company or acquire it, need such consolidated
statement for evaluation.
2.1 Requirements of Accounting Standard 21
Accounting Standard (AS) 21, Consolidated Financial Statements should be applied in
the preparation and presentation of consolidated financial statements for a group of enterprises
under the control of a parent.

As per AS 21, consolidated financial statements normally include

Consolidated Balance Sheet
Consolidated Statement of Profit and Loss Account
Consolidated Cash Flow Statement (in case parent presents cash flow statement)
Notes and statements and explanatory schedules that form the integral part thereof.
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.

Meaning
Consolidated financial statements refer to the financial statements which lead to the subsidiaries
of the holding company its summative accounting figure. Putting another way, consolidated
financial statements can be addressed as the combined financial statements of a parent company
and its subsidiaries.
According to International Accounting Standard 27 Consolidated and separate financial
statements, consolidated financial statements are the financial statements of a group presented as
those of a single economic entity.
The consolidated financial statements enable you to determine the general health of an entire
group of companies as compared to a companys standalone position. This is because these
financial statements provide an aggregated look at the financial position of a company and its
subsidiaries.

Purpose
The key purpose of preparing consolidated financial statements is reporting the financial
condition and operating result of a consolidated business group, which is considered as a single
entity comprised of more than one companies under a common control (also counting entities
other than companies)

General principles

The general principles involved in consolidated financial statements are:

1. A consolidated financial statement should essentially provide true and fair picture of financial
condition and operating result of the business faction.
2. A consolidated financial statement needs to be prepared on the basis of legal-entity based
financial statements of the parent company and its subsidiaries which belong to the business
faction, and prepared in accordance with the GAAP.
3. A consolidated financial statement needs provide a clear vision about the financial info
requisite for interested parties not to mislead their judgments about the business groups
condition.
4. The procedures and policies used for preparing consolidated financial statements need to be
applied ad infinitum and should not be changed without any reason.
Checklist for preparation
1. Estimate group holdings and establish each entitys status in the question.
2. Ascertain the fair value of acquired assets and calculate net assets of the subsidiary.
3. Estimate goodwill arising on acquisition.
4. Adjust for any intra-group activities.
5. Estimate the balance carried forward on consolidated retained earnings.
6. Estimate the balance carried forward on consolidated reserves.

Objective
1. 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
1It is clarified that AS 21 is mandatory if an enterprise presents consolidated financial
statements. In other words, the accounting standard does not mandate an enterprise to present
consolidated financial statements but, if the enterprise presents consolidated financial statements
for complying with the requirements of any statute or otherwise, it should prepare and present
consolidated financial statements in accordance with AS
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, Accounting for
Investments3 ). Definitions 5. For the purpose of this Standard, the following terms are used
with the meanings specified:
5.1 Control:
(a) the ownership ,directly or indirectly through subsidiary(ies), of more than one-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.

5.2 A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).
5.3 A parent is an enterprise that has one or more subsidiaries.
5.4 A group is a parent and all its subsidiaries.
5.5 Consolidated financial statements are the financial statements of a
2 Accounting Standard (AS) 23, Accounting for Investments in Associates in Consolidated
Financial Statements, specifies the requirements relating to accounting for investments in
associates in Consolidated Financial Statements. 3 Accounting Standard (AS) 27, Financial
Reporting of Interests in Joint Ventures, specifies the requirements relating to accounting for
investments in joint ventures group presented as those of a single enter prise.
5.6 Equity is the residual interest in the assets of an enterprise after deducting all its liabilities.
5.7 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.
6. 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 the subsidiary and/or a parent having no bearing on the true and
fair view of the consolidated financial statements 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
7. A parent which presents consolidated financial statements should present these
statements in addition to its separate financial statements.
8. 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 9. A parent which presents consolidated
financial statements should consolidate all subsidiaries, domestic as well as foreign, other than
those referred to in paragraph 11.
10. The consolidated financial statements are prepared on the basis of financial statements of
parent and all enterprises that are controlled by the parent, other than those subsidiaries
excluded for the reasons set out in paragraph 11. 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 of:
(i) the board of directors of a company, if it has the powe r, 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 (b) a persons 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 persons 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 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.
11. 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 financial statements, investments in 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.
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 within the meaning of paragraph 11(a).
(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 of. Conversely, if the relevant investment is acquired
with an intention to its 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.
12. 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
13. 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 parents 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 parents portion of equity of the subsidiary, at the date on which investment in the
subsidiary is made, should be described as goodwill to be recognized as an asset in the
consolidated financial statements; (c) when the cost to the parent of its investment in a
subsidiary is less than the parents 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 against the income of
the group in orde r 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 parents
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 parents 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 parents
share in the post-acquisition reserves of a subsidiary.
14. The parents 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 the date of such financial statements and the date of investment in the
subsidiary.
15. 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.
16. 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.
17. 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
18. 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 parents financial statements. In
any case, the difference between reporting dates should not be more than six months.
19. 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 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.
20. 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 applied.

21. 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.
22. 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
23. An investment in an enterprise should be accounted for in 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.
4 Accounting Standard (AS) 23, 'Accounting for Investments in Associates in Consolidated
Financial Statements', defines the term associate and specifies the requirements relating
to accounting for investments in associates in Consolidated Financial Statements.
24. The carrying amount of the investment at the date that it ceases to be a subsidiary is
regarded as cost thereafter.
25. Minority interests should be presented in the consolidated balance sheet separately from
liabilities and the equity of the parents shareholders. Minority interests in the income of the
group should also be separately presented.
26. 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 minoritys share of losses
previously absorbed by the majority has been recovered.
27. 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 subsidiarys
preference dividends, whether or not dividends have been declared.
Accounting for Investments in Subsidiaries in a Parents Separate Financial Statements
28. In a parents separate financial statements, investments in subsidiaries should be accounted
for in accordance with Accounting Standard (AS) 13, Accounting for Investments.
Disclosure 29. In addition to disclosures required by paragraph 11 and 20, following disclosures
should be made:
(a) in consolidated financial statements a list of all subsidiaries including the name, country
of incorporation or residence, proportion of ownership interest and, if different, proportion of
voting power held;
(b) in consolidated financial statements, where applicable:
(i) the nature of the relationship between the parent and a subsidiary ,if the parent does not
own ,directly or indirectly through subsidiaries, more than one-half of the voting power of
the subsidiary;
(ii) the effect of the acquisition and disposal of subsidiaries on the financial position at the
reporting date, the results for the reporting period and on the corresponding amounts for the
preceding period; and
(iii) the names of the subsidiary(ies) of which reporting date(s) is/are different from that of the
parent and the difference in reporting dates.
Transitional Provisions 30. On the first occasion that consolidated financial statements are
presented, comparative figures for the previous period need not be presented. In all

subsequent years full comparative figures for the previous period should be presented in the
consolidated financial
In the case of companies, the information such as the following given in the notes to the separate
financial statements of the parent and/or the subsidiary, need not be included in the consolidated
financial statements:
(i) Source from which bonus shares are issued, e.g., capitalisation of profits or Reserves or from
Share Premium Account.
(ii) Disclosure of all unutilised monies out of the issue indicating the form in which such
unutilised funds have been invested.
(iii) The name(s) of small scale industrial undertaking(s) to whom the company owe any sum
together with interest outstanding for more than thirty days.
(iv) A statement of investments(whether shown under Investment or under Current
Assets as stock-in-trade) separately classifying trade investments and other investments,
showing the names of the bodies corporate (indicating separately the names of the bodies
corporate under the same management) in whose shares or debentures, investments have
been made (including all investments, whether existing or not, made subsequent to the date
as at which the previous balance sheet was made out) and the nature and extent of the investment
so made in each such body corporate.
(v) Quantitative information in respect of sales, raw materials consumed, opening and
closing stocks of goods produced/ traded and purchases made, wherever applicable.
(vi) A statement showing the computation of net profits in accordance with section 349 of
the Companies Act, 1956, with relevant details of the calculation of the commissions payable by
way of percentage of such profits to the directors (including managing directors) or manager (if
any).
(vii) In the case of manufacturing companies, quantitative information in regard to the licensed
capacity (where license is in force); the installed capacity; and the actual production.

(viii) Value of imports calculated on C.I.F. basis by the company during the financial year in
respect of :
(a) raw materials;
(b) components and spare parts;
(c) capital goods.
(ix)

Expenditure in foreign currency during the financial year on account of royalty, know-

how, professional, consultation fees, interest, and other matters.

(x) Value of all imported raw materials, spare parts and components consumed during the
financial year and the value of all indigenous raw materials, spare parts and components
similarly consumed and the percentage of each to the total consumption.
(xi)

The amount remitted during the year in foreign currencies on account of dividends, with a

specific mention of the number of non-resident shareholders, the number of shares held by them
on which the dividends were due and the year to which the dividends related.
(xii) Earnings in foreign exchange classified under the following heads, namely:(a) export of goods calculated on F.O.B. basis;
(b) royalty, know-how, professional and consultation fees;
(c) interest and dividend;
(d) other income, indicating the nature thereof.

Scope
1. This Statement 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 Statement should also be applied in accounting for investments in subsidiaries in the
separate financial statements of a parent.

3. Inthepreparationofconsolidatedfinancialstatements,otherAccounting Standards also apply in

the same manner as they apply to the separate financial statements.
4. This Statement does not deal with:
(a) methods of accounting for amalgamations and their effects on consolidation, including
goodwill arising on amalgamation
(b) accounting for investments in associates (at present governed by AS 13, Accounting for
Investments3 ); and
(c) accounting for investments in joint ventures (at present governed by AS 13, Accounting for
Investments4 ).

Advantages
1.

Broad Picture

The basic advantage when consolidating financial statements is the broad picture it gives.
Investors do not want to go through several different financial statements to add up information
and find out how the corporation is doing overall. The consolidated statements provided by the
parent company accomplish the task automatically and make an excellent reference point for
shareholders, leaders and anyone interested in how all the different parts of the business are
functioning as a whole.
2.

Balance

Consolidating financial statements also lets a corporation effectively balance its appearance to
outside parties. For example, during one period a parent company may lose revenue and perform
poorly, but the subsidiaries may perform very well and increase revenues. The consolidated
statement will balance the poor parent's performance with the positive subsidiary performance,
allowing the company to show that through its diversification it remained profitable.
3.

Exclusions

According to consolidated financial statement guidelines, a corporation can also exclude certain
divisions from the statements. This is also an advantage, because it allows investors to see -- and

companies to show -- that some financial aspects are not long term. For example, subsidiaries are
exempt if the parent company's ownership of them is temporary or if the control of the company
does not actually rest with the majority owner, which can happen through bankruptcy.
4.

Necessity

Consolidated financial statements are required by most governments as an accurate

representation of a parent company's financial activity. In general, tax laws require that a single
accounting entity be represented out of the net resources and operating results of all the divisions
that a company owns. As a result, many companies have become used to producing consolidated
statements for governments, investors and internal analysis.

Disadvantages
1.

Lack of Subsidiary Information

The nature of consolidated financial statements is that a group of companies is viewed as one
entity. By this assumption's nature, the details of the individual companies are not presented. In
some cases, this is not important, as some subsidiaries may not be material to the entire
company's operations and results. In other cases, the amalgamation of financial results can hide
unprofitable subsidiaries and ventures. While the company in whole may be performing well,
consolidated statements may not show the entire picture.
2.

Elimination of Intercompany Transactions

Generally accepted accounting principals require the elimination of intercompany transactions

upon consolidation. Because of this rule, investors are unable to ascertain the flow of funds
between subsidiaries. This could be important in determining which sections of the company are
viable in the long term. Furthermore, in situations where subsidiaries operate using different
functional currencies, these eliminations can lead to complex accounting and tax issues that may
be in accordance with accounting principals, but may be confusing to even seasoned investors.
3.

Higher Group Materiality

When looking at a company on a consolidated basis, the threshold for determining if accounting
misstatements are material is generally higher. For example, if a company had 10 subsidiaries
that each had $1 million in annual sales, a $10,000 sale would be more important to those
subsidiaries on an individual basis than to the group as a whole. Because of this, companies and
auditors need to implement controls to ensure that the financial statements are fairly presented
taken as a whole. This may mean that companies need to reconsider an appropriate level of
accuracy in the financial statements to reflect an acceptable amount of misstatement. Many times
this amount is in between the subsidiary and group level of accuracy.
4.

Significant Influence vs. Control

A major limitation in the presentation of consolidated financial statements is the creation of

loopholes related to the consolidation of joint ventures, variable interest entities, and other
special purpose entities. While revisions in accounting standards have started to address these
issues, the rules of consolidation have allowed unscrupulous companies to hide billions of dollars
of debt from investors over the last couple of decades, by creating entities that they do not
directly control, but only influence. While the accounting for these entities is complex, investors
should be aware that the phenomenon exists and should be vigilant if the performance of their
investment appears too good to be true.

Requirements of Accounting Standard 21

Accounting Standard (AS) 21, Consolidated Financial Statements should be applied in
the preparation and presentation of consolidated financial statements for a group of enterprises
under the control of a parent.
As per AS 21, consolidated financial statements normally include
Consolidated Balance Sheet
Consolidated Statement of Profit and Loss Account
Consolidated Cash Flow Statement (in case parent presents cash flow statement)
Notes and statements and explanatory schedules that form the integral part thereof.

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.
Consolidation Procedures
When preparing consolidated financial statements, the individual balances of the parent
and its subsidiaries are aggregated on a line-by-line basis, and then certain consolidation
adjustments are made.
For example, the cash, trade receivables and prepayments of the parent and each
subsidiary are added together to arrive at the cash, trade receivables and prepayments of the
group, before consolidation adjustments are made.
The objective is that the consolidated financial statements should present the information
contained in the consolidated financial statements of a parent and its subsidiaries as if they were
the financial statements of a single economic entity.
In order that the consolidated financial statements present financial information about the
group as that of a single enterprise, the following steps are then taken:
1. the carrying amount of the parents investment in each subsidiary and the parents
portion of equity of each subsidiary are eliminated. In case cost of acquisition exceeds or is less
than the acquirers interest, goodwill or capital reserve is calculated retrospectively.
2. intragroup transactions, including sales, expenses and dividends, are eliminated, in full;
3. unrealized profits resulting from intragroup transactions that are included in the carrying
amount of assets, such as inventory and fixed assets, are eliminated in full;
4. unrealised losses resulting from intragroup transactions that are deducted in arriving at
the carrying amount of assets are also eliminated unless cost cannot be recovered;
5. minority interest in the net income of consolidated subsidiaries for the reporting period
are identified and adjusted against the income of the group in order to arrive at the net income
attributable to the owners of the parent; and

6. minority interests in the net assets of consolidated subsidiaries are identified and
presented in the consolidated balance sheet separately from liabilities and the parent
shareholders equity.
Calculation of Goodwill/Capital Reserve (Cost of Control)
As on the date of investment, the cost of investment and the equity in the subsidiary
needs to be calculated. AS 21 defines equity as the residual interest in the assets of an enterprise
after deducting all its liabilities. In other words, it is equal to the net worth of the enterprise.
Once the above is calculated, goodwill or capital reserve is calculated as under:
Goodwill = Cost of Investment - Parents share in the equity of the subsidiary on date of
investment Capital Reserve = Parents share in the equity of the subsidiary on date of investment
- Cost of investment
The parents 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 the date of such financial statements and the date
of investment in the subsidiary.
It may be mentioned that positive or negative differential is separately recognised only in
purchase method. This differential calculated as cost of control is shown in the consolidated
balance sheet. Since dividend received is for pre acquisition period, it has been reduced from the
cost of investment in the subsidiary company.

Minority Interests
Minority interest is that part of the net results of operations and of net assets of a
subsidiary attributable to interests which are not owned, directly or indirectly through
subsidiaries, by the holding (parent) company.
In short, minority interest represents the claims of the outside shareholders of a
subsidiary. Minority interests in the net income of consolidated subsidiaries for the reporting
period are identified and adjusted against the income of the group in order to arrive at the net
income attributable to the shareholders of the holding company.
Minority interest in the income of the group should 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
profit, all such profits are allocated to the majority interest until the minoritys share of losses
previously absorbed by the majority has been recovered.
As per para. 13(e) of AS 21, minority interest 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 parents shareholders. Minority interest 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.
Profit or Loss of Subsidiary Company For the purpose of consolidated balance sheet
preparation all reserves and profits (or losses) of subsidiary company should be classified into
pre and post acquisition reserves and profits (or losses).

Profits (or losses) earned (or incurred) by subsidiary company upto the date of acquisition
of the shares by the holding company are pre acquisition or capital profits (or loss).
Similarly, all reserves of subsidiary company upto the date of acquisition are capital
reserves from the view point of holding company. If the holding interest in subsidiary is acquired
during the middle or some other period of the current year, pre-acquisition profit should be
calculated accordingly.
In addition profit or loss on revaluation of fixed assets of subsidiary should also be
treated as capital profit or loss. But if the fall in the value of the asset occurs after the date of
acquisition, the loss should be treated as revenue loss. Adjustment for depreciation would be
made in the profit and loss account of the subsidiary.
The minority interest in the reserves and profits (or losses) of subsidiary company should
be transferred to minority interest account which will also include share capital of subsidiary
company held by outsiders / minority shareholders.
Minority Interest: Share Capital of subsidiary related to outsiders +
Minority interest in reserves and profits of subsidiary co.
The holding companys interest in the pre acquisition reserves and profits (or losses)
should be adjusted against cost of control to find out goodwill or capital reserve on
consolidation. The balance of reserves and profits (or loss) of subsidiary company, representing
holding companys interest in post acquisition or revenue reserves and profits (or losses), should
be added to the balances of reserves and profits (or losses) of holding company.
Dividend Received From Subsidiary Companies
The holding company, when it receives a dividend from a subsidiary company, must
distinguish between the part received out of capital profits and that out of revenue profits - the
former is credited to Investment Account, it being a capital receipt, and the latter is adjusted as
revenue income for being credited to the Profit & Loss Account. It must be understood that the
term capital profit, in this context, apart from the generic meaning of the term, connotes profit
earned by the subsidiary company till the date of acquisition. As a result, profits which may be of

revenue nature for the subsidiary company may be capital profits so far as the holding company
is concerned. If the controlling interest was acquired during the course of a year, profit for that
year must be apportioned into the pre-acquisition and post-acquisition portions, on the basis of
time in the absence of information on the point.
Preparation of Consolidated Balance Sheet
While preparing the consolidated balance sheet, assets and outside liabilities of the
subsidiary company are merged with those of the holding company. Share capital and reserves
and surplus of subsidiary company are apportioned between holding company and minority
shareholders. These items, along with investments of holding company in shares of subsidiary
company are not separately shown in consolidated balance sheet. The net amounts resulting from
various computations on these items, shown as (a) minority interest (b) cost of control (c)
holding companys share in post-acquisition profits of the subsidiary company (added to
appropriate concerned account of the holding company) are entered in consolidated balance
sheet. The method of calculation of these items with detailed treatment of other relevant issues
has been dealt with in various paras separately.
As per para 15 of AS 21, if an enterprise makes two or more investments in another
enterprise at different dates and eventually obtain 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 of AS 21, is generally determined on a stepby-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.
Liabilities due to one group enterprise by another will be set off against the corresponding asset
in the other group enterprises financial statements; sales made by one group enterprise to
another should be excluded both from turnover and from cost of sales or the appropriate expense
heading in the consolidated statement of profit and loss.

To the extent that the buying enterprise has further sold the goods in question to a third
party, the eliminations to sales and cost of sales are all that is required, and no adjustments to
consolidated profit or loss for the period, or to net assets, are needed. However, to the extent that
the goods in question are still on hand at year end, they may be carried at an amount that is in
excess of cost to the group and the amount of the intra-group profit must be eliminated, and
assets reduced to cost to the group.
For transactions between group enterprises, unrealized profits resulting from intra-group
transactions that are included in the carrying amount of assets, such as inventories and
tangible fixed assets, are eliminated in full. The requirement to eliminate such profits in
full applies to the transactions of all subsidiaries that are consolidated even those in which the
groups interest is less than 100%.
Unrealised profit in inventories: Where a group enterprise sells goods to another, the
selling enterprise, as a separate legal enterprise, records profits made on those sales. If these
goods are still held in inventory by the buying enterprise at the year end, however, the profit
recorded by the selling enterprise, when viewed from the standpoint of the group as a whole, has
not yet been earned, and will not be earned until the goods are eventually sold outside the group.
On consolidation, the unrealized profit on closing inventories will be eliminated from the
groups profit, and the closing inventories of the group will be recorded at cost to the group.
Here, the point to be noted is that one has to see whether the intragroup transaction is
upstream or down stream. Upstream transaction is a transaction in which the subsidiary
company sells goods to holding company. While in the downstream transaction holding company
is the seller and subsidiary company is the buyer. Holding sells goods Subsidiary Downstream
Sales Co. to Co. Subsidiary sells goods Holding Upstream Sales Co. to Co.
In the case of upstream transaction, goods are sold by the subsidiary to holding company; profit
is made by the subsidiary company, which is ultimately shared by the holding company and the
minority shareholders. In such a transaction, if some goods remain unsold at the balance sheet
date, the unrealized profit on such goods should be eliminated from minority interest as well as
from consolidated profit on the basis of their share holding besides deducting the same from

unsold Inventory. But in the case of downstream transaction the whole profit is earned by the
holding company, therefore whole unrealized profit should be adjusted from unsold Inventory
account and consolidated profit and loss account only irrespective of the percentage of the shares
held by the parent
Unrealised profit on transfers of non-current assets: Similar to the treatment described
above for unrealized profits in inventories, unrealized inter-company profits arising from
intragroup transfers of fixed assets are also eliminated from the consolidated financial
statements.
Unrealised losses: Unrealised losses resulting from intra-group transactions that are
deducted in arriving at the carrying amount of assets are also eliminated unless cost cannot be
recovered.

Preparation of Consolidated Profit and Loss Account

Preparation of Consolidated Profit and Loss Account of holding company and its
subsidiaries is not very difficult.
All the revenue items are to be added on line by line basis and from the consolidated
revenue items inter-company transactions should be eliminated.
For example, a holding company may sell goods or services to its subsidiary, receives
consultancy fees, commission, royalty etc. These items are included in sales and other income of
the holding company and in the expense items of the subsidiary. Alternatively, the subsidiary
may also sell goods or services to the holding company. These inter-company transactions are to
be eliminated in full.
If there remains any unrealised profit in the Inventory of good, of any of the Group
Company, such unrealised profit is to be eliminated from the value of Inventory to arrive at the
consolidated profit.
Also it is necessary to eliminate the share of holding company in the proposed dividend
of the subsidiary.