Consolidated Financial Statements of Group of Companies

{Topic of CA -Final - Financial Reporting }

Consolidated financial statements of group of companies means that financial statements which shows all the financial result and positions of both parent company and its subsidiary companies. Suppose, A is holding company. B is its wholly owned subsidiary company. C is subsidiary of B. D is subsidiary of C. E is subsidiary company of E. Now, if A company makes financial statement  in which it includes B,C,D and E's financial result and position. This financial statement will be consolidated financial statement of group of companies.

Benefits of Making Consolidated Financial Statements of Group of Companies 

Main benefit will be to the users of holding company's financial statements. If it will provide the financial information of its all subsidiaries, user can estimate its real financial position.

Example of Group of Companies

Before study consolidated financial statements of group of companies, it is good to tell the one example of group of companies. Future group is group of companies. It was founded by Mr. Kishore Biyani. Pantaloon Retail India ltd is its subsidiary company. Future group is parent company of Pantaloon and big bazaar for operating 150 big bazaar stores all over the India. Like Future group, TATA group is also doing business in India.

Steps to Prepare Consolidated Financial Statements of Group of Companies:

{A} Steps : Consolidated Balance Sheet of Group of Companies as one entity

1st Step : Asset Side of Consolidated Balance Sheet 

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

2nd Step : Liability Side of Consolidated Balance Sheet 

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

3rd Step : Calculate of Minority Interest

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

We can calculate minority interest with following formula

Total share capital of Subsidiary company = XXXXX

Less Investment of Holding company in to subsidiary company = - XXXX
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Add proportionate share of the subsidiary company‘s profit and
Reserves or increase in the value of assets + XXXX
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Less proportionate share of the subsidiary company’s loss and decrease
In the value of total assets of company - XXXXX
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Value of Minority Interest XXXXX
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4th Step : Calculate cost of capital / Goodwill or Capital Reserve

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

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

5th Step : Treatment of Pre – Acquisition of reserve and profit

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

Total profit before acquisition of subsidiary company = XXXX

Less share of minority interest - XXXX

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


Pre – acquisition profit and reserve shown as capital reserve XXX

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6th Step : Calculate post acquisition profits

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

7th Step : Elimination of common transactions

All common transaction between holding company and subsidiary company will not show in the consolidated balance. There following common transaction

1. goods sold and goods purchase on credit and the value of debtor or creditor either subsidiary company or holding company will not shown in consolidated balance sheet

2. Value of bill payable or bill receivable of holding company on subsidiary company will also not shown but if some bills value is discounted from third party then either of both company’s payable value shown as liability in the consolidated balance sheet .

8th Step : Treatment of Unrealized profit

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

Suppose

Closing stock of H 50000
Closing stock of S 50000
_________________________

100000

Less stock reserve

2000
----------------------------------

98000
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If subsidiary company has also other outsider’s shares then holding company makes reserve up to his shares proportion.

9th Step : Treatment of Dividends

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

{A} Steps : Consolidated Profit and Loss Account of Group of Companies as one entity


1st Step : Eliminate of Inter - Group Incomes and Expenses 


a) Sale by holding company to subsidiary company will not be shown in consolidated profit and loss account.

b) Sale by subsidiary company to holding company will not be shown in consolidated profit and loss account .

c) If already sale has been shown, then inter-group sale will be deducted.

d) All other income and expenses of inter-group will not be shown in consolidated profit and loss account.


2nd Step : Eliminate of Inter-group unrealized profit 


If there is unrealized profit in the closing stock, this will be eliminated in the consolidated profit and loss account by creating reserve of unrealized profit.


3rd Step : Eliminated of Holding Company's share of proposed dividend in subsidiary company 


Holding company's share of proposed dividend in subsidiary company will not be shown in consolidated profit and loss account.


4th Step :  Add Expenses 


All other expenses of holding and subsidiary company for knowing total expenses.


5th Step : Add Incomes 


All other incomes of holding and subsidiary company for knowing total expenses.


6th Step : Transfer of Net Profit or Net Loss to Consolidated Balance Sheet 


Net profit or net loss of consolidated profit and loss account will be transferred to consolidated balance sheet.