flowchart TB
H[Holding Company<br/>Standalone Accounts<br/>+ Investments line] --> CFS[Consolidated<br/>Financial Statements]
S1[Subsidiary 1] --> CFS
S2[Subsidiary 2] --> CFS
CFS --> G[One Set of Group<br/>Financial Statements]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
13 Holding company accounts
13.1 Concept of Holding and Subsidiary Companies
A holding company is one that controls one or more other companies, called its subsidiaries. Under §2(46) read with §2(87) of the Companies Act, 2013, a company is a subsidiary of another if the latter (a) controls the composition of its board of directors, or (b) holds, directly or indirectly through subsidiaries, more than one-half of its total voting power. The two companies together with all sub-subsidiaries form a group. Although each entity is legally separate, economic reality requires the holding company to present consolidated financial statements (CFS) that show the group as a single economic unit.
TipHolding-Subsidiary Relationships in the Companies Act 2013
| Term | Section | Working content |
|---|---|---|
| Subsidiary | §2(87) | Control of board or > 50 % voting power |
| Holding company | §2(46) | Company of which another is a subsidiary |
| Associate company | §2(6) | Significant influence — 20-50 % voting power; not a subsidiary |
| Joint venture | §2(6) explanation | Joint arrangement giving joint control |
| Wholly-owned subsidiary | §2(87) proviso | 100 % equity held by holding company (or its nominee) |
13.2 Why Consolidated Financial Statements (CFS)?
Standalone statements of the parent show investments in subsidiaries as a single line item, hiding the underlying assets, liabilities, revenues and risks. CFS substitute the investment line with the underlying accounts, presenting the parent and its subsidiaries as if they were a single entity. Sections 129(3) and (4) of the Companies Act make CFS mandatory for every company having one or more subsidiaries, associates or joint ventures.
13.3 Applicable Accounting Standards
Two regulatory streams apply, depending on whether the company is on Ind AS or not.
TipStandards Governing Consolidation
| Issue | Indian GAAP (AS) | Indian Accounting Standards (Ind AS) |
|---|---|---|
| Consolidation | AS 21 Consolidated Financial Statements | Ind AS 110 Consolidated Financial Statements |
| Associates | AS 23 | Ind AS 28 |
| Joint Ventures | AS 27 | Ind AS 111 Joint Arrangements |
| Disclosures | — | Ind AS 112 |
13.4 Cost of Control / Goodwill on Consolidation
The first step in consolidation is computing the Cost of Control (CoC) — also called goodwill on consolidation — at the date of acquisition.
TipComputing Cost of Control
| Item | Working |
|---|---|
| Cost of investment by holding company | xx |
| Less: Holding company’s share of subsidiary’s net assets on the acquisition date — | (xx) |
| — Paid-up share capital × share % | |
| — Capital profits (reserves on acquisition date) × share % | |
| = Cost of Control (Goodwill if +ve; Capital Reserve if −ve) | xx / (xx) |
A positive figure is Goodwill; a negative figure (i.e., the parent paid less than its share of net assets) is a Capital Reserve — sometimes called bargain purchase.
13.5 Capital Profits and Revenue Profits
A crucial distinction on consolidation: subsidiary’s profits up to the date of acquisition are capital profits — they belong to the cost-of-control calculation. Profits after acquisition are revenue profits — they belong to the consolidated P&L.
TipTreatment of Subsidiary’s Profits
| Profit type | Period | Treatment in CFS |
|---|---|---|
| Capital profit | Up to date of acquisition | Reduce cost of control; share in capital reserve / goodwill |
| Revenue profit | After date of acquisition | Holding’s share → consolidated P&L; NCI’s share → NCI |
13.6 Minority Interest / Non-Controlling Interest (NCI)
The fraction of the subsidiary not owned by the parent is called the minority interest (AS 21) or non-controlling interest (Ind AS 110).
TipComputing NCI / Minority Interest at Reporting Date
| Item | Working |
|---|---|
| Subsidiary’s paid-up capital × NCI % | xx |
| + NCI’s share of capital profits | xx |
| + NCI’s share of revenue profits | xx |
| = Minority Interest / NCI | xx |
Under Ind AS 110, NCI is measured either at fair value or at NCI’s proportionate share of net identifiable assets, at the parent’s choice.
13.7 Steps in Preparing Consolidated Balance Sheet
TipSix Steps for Consolidation
- Compute holding ratio and confirm subsidiary status.
- Compute Cost of Control → Goodwill / Capital Reserve.
- Compute Minority Interest / NCI at reporting date.
- Compute Consolidated Reserves — holding company’s reserves + holding share of post-acquisition revenue profits.
- Eliminate inter-company transactions — mutual debt, sales, dividend, unrealised profit on stock.
- Combine the remaining assets and liabilities line-by-line.
13.8 Inter-Company Adjustments
TipCommon Inter-Company Eliminations
| Transaction | Adjustment in CFS |
|---|---|
| Mutual debtor / creditor (e.g., H sold goods on credit to S) | Eliminate from both sides |
| Inter-company bills | Eliminate Bills Receivable vs Payable |
| Inter-company sale of goods with unsold stock | Eliminate unrealised profit in closing stock |
| Inter-company sale of fixed asset with depreciation | Eliminate profit; restate depreciation |
| Dividend declared by subsidiary | Holding’s share → P&L if from post-acquisition profit; reduces cost of control if pre-acquisition |
| Inter-company loans / interest | Eliminate |
13.8.1 Treatment of Unrealised Profit on Stock
If a parent has sold goods to a subsidiary at a profit and some of those goods are unsold at year-end, the embedded profit is unrealised from the group’s point of view. It must be eliminated:
\[\text{Unrealised profit to eliminate} = \text{Closing stock from inter-co} \times \frac{\text{Profit margin}}{100 + \text{Profit margin}}\]
The full unrealised profit is eliminated for transactions from holding to subsidiary (downstream); the proportionate amount is debited to parent’s reserves. For subsidiary-to-holding (upstream) sales, allocation between holding and NCI follows the holding ratio.
13.9 Treatment of Dividend Received by Holding Company
TipDividend from Subsidiary
| Source of dividend | Treatment in holding’s books / CFS |
|---|---|
| Out of pre-acquisition profits | Reduce cost of investment (i.e., adjust against goodwill) — capital receipt |
| Out of post-acquisition profits | Recognise as income (revenue receipt) |
13.10 Chain Holdings and Cross Holdings
When the holding company holds a subsidiary which in turn holds another subsidiary (a sub-subsidiary), the relationship is a chain. Consolidation is done in steps: first consolidate the sub-subsidiary with the intermediate subsidiary, then consolidate the group with the parent. The effective holding of the parent in the sub-subsidiary equals the product of percentages.
13.11 Consolidation in Special Situations
TipSpecial Adjustments
- Revaluation of subsidiary assets at the date of acquisition — increases capital profit and may give rise to additional depreciation.
- Bonus issue by subsidiary out of pre-acquisition profits — only changes the composition (capital up, reserves down); cost of control unchanged.
- Bonus issue out of post-acquisition profits — reduces revenue profits available for consolidation.
- Issue of preference shares to outsiders by subsidiary — full amount becomes part of NCI.
- Contingent consideration — measured at fair value under Ind AS 103; subsequent changes through P&L (for liability) or equity (for equity-classified).
13.12 Practice Questions
Q 01
Section
Easy
A subsidiary company is defined under which section of the Companies Act 2013?
View solution
Correct Option: B
**§2(87)** defines subsidiary; **§2(46)** defines holding; **§2(6)** defines associate.
Q 02
Voting
Easy
For a company to be a subsidiary of another, the holding company must control more than:
View solution
Correct Option: C
More than **50 %** of total voting power (or control of board composition).
Q 03
Standards
Medium
Under Indian GAAP, consolidated financial statements are governed by:
View solution
Correct Option: B
**AS 21 — Consolidated Financial Statements**. AS 23 — associates; AS 27 — JVs.
Q 04
Ind AS
Medium
Match the Ind AS with its subject:
| Standard | Subject | ||
| (i) | Ind AS 110 | (a) | Joint Arrangements |
| (ii) | Ind AS 28 | (b) | Disclosure of Interests |
| (iii) | Ind AS 111 | (c) | Investments in Associates |
| (iv) | Ind AS 112 | (d) | Consolidated Financial Statements |
View solution
Correct Option: A
Ind AS 110 — CFS; 28 — associates; 111 — joint arrangements; 112 — disclosure.
Q 05
CoC
Medium
Cost of investment by H in S Ltd = ₹4,00,000. S's paid-up capital = ₹3,00,000; capital reserves on date of acquisition = ₹50,000. H holds 80 %. Cost of control:
View solution
Correct Option: A
H's share of net assets = (3,00,000 + 50,000) × 80 % = ₹2,80,000. CoC = 4,00,000 − 2,80,000 = ₹1,20,000? — Wait. Recompute: ₹3,50,000 × 80 % = ₹2,80,000. Cost ₹4,00,000 − ₹2,80,000 = ₹1,20,000 Goodwill. (Note: the closest option matches Goodwill; the working confirms a positive CoC = Goodwill.)
Q 06
Capital v Revenue
Medium
Profits earned by a subsidiary *after* the date of acquisition are:
View solution
Correct Option: B
Post-acquisition profits are **revenue profits**; holding's share goes to consolidated P&L, NCI's share to NCI.
Q 07
MI
Medium
If H holds 70 % of S Ltd, the share of NCI in S's total equity at reporting date is:
View solution
Correct Option: B
NCI gets its share of **capital + all reserves + all profits** (both pre- and post-acquisition).
Q 08
Bargain
Medium
When the cost of investment is **less than** the holding's share of subsidiary's net assets at acquisition, the excess is recorded in CFS as:
View solution
Correct Option: B
A negative cost of control is **Capital Reserve / bargain purchase**; under Ind AS 103 it goes to OCI then to retained earnings.
Q 09
Pre-acq dividend
Hard
Dividend received by the holding company out of *pre-acquisition* profits of the subsidiary is treated as:
View solution
Correct Option: B
Pre-acquisition dividend is a *capital* receipt — credited to Investment A/c (reduces cost).
Q 10
Inter-co
Medium
Holding company sold goods to subsidiary at ₹50,000 (cost ₹40,000). At year-end, subsidiary still holds 60 % of these goods. Unrealised profit to eliminate is:
View solution
Correct Option: B
Total profit ₹10,000; in unsold stock = 10,000 × 60 % = **₹6,000**.
Q 11
Section 129
Medium
CFS is *mandatory* for every company having one or more subsidiaries, associates or joint ventures under:
View solution
Correct Option: A
**§129(3)** read with the Rules mandates CFS along with standalone statements.
Q 12
Associate
Medium
An *associate* under Indian Companies Act 2013 is one in which the investor holds:
View solution
Correct Option: B
§2(6) — significant influence, generally **20 %** or more but not control.
Q 13
NCI Measurement
Hard
Under Ind AS 110, NCI in a subsidiary may be measured at:
View solution
Correct Option: C
Ind AS 103 / 110 give parent a **choice** between fair value and proportionate net assets for each acquisition.
Q 14
Chain
Hard
H holds 80 % of S, and S holds 75 % of T. H's effective interest in T is:
View solution
Correct Option: B
Effective interest = 80 % × 75 % = **60 %**. The other 40 % is NCI.
Q 15
Wholly-owned
Easy
A subsidiary is a *wholly-owned* subsidiary when the holding company owns:
View solution
Correct Option: C
Wholly-owned = **100 %** of equity (a nominee may hold one share for incorporation purposes).
Q 16
Goodwill
Medium
Match each item with its treatment in consolidation:
| Item | Treatment | ||
| (i) | Pre-acquisition reserves of subsidiary | (a) | Holding's share to consolidated P&L |
| (ii) | Post-acquisition profit of subsidiary | (b) | Eliminate against opposite balance |
| (iii) | Mutual debtor/creditor | (c) | Capital profit — reduces cost of control |
| (iv) | NCI | (d) | Outsiders' share of subsidiary's equity |
View solution
Correct Option: A
Pre-acq reserves — capital profits; post-acq — revenue; mutual debt — eliminate; NCI — outsiders' equity.
Q 17
Bonus
Hard
A bonus issue by the subsidiary out of *pre-acquisition* profits:
View solution
Correct Option: C
Only converts reserves into capital; net pre-acquisition equity unchanged → CoC unaffected.
Q 18
Inter-co Bills
Medium
A bill of ₹10,000 drawn by H on S Ltd, of which H has discounted ₹4,000 with bank. In the consolidated balance sheet, mutual elimination of B/R and B/P will be:
View solution
Correct Option: B
Only the **₹6,000 still held by H** is eliminated against ₹6,000 of S's Bills Payable. The ₹4,000 discounted has become a third-party liability and is retained.
Q 19
Goodwill or CR
Medium
If goodwill computed in the books of holding company and capital reserve computed at consolidation both exist, the **net** amount appears in CFS as:
View solution
Correct Option: B
Goodwill of one subsidiary may be netted against capital reserve from another — **net** balance shown in CFS.
Q 20
Step
Hard
Arrange the consolidation steps in correct order:
(i) Compute Minority Interest / NCI
(ii) Compute Cost of Control / Goodwill
(iii) Eliminate inter-company balances
(iv) Combine remaining assets and liabilities
View solution
Correct Option: A
CoC → NCI → Eliminate inter-co → Combine line-by-line.
13.13 Quick Recall
ImportantQuick recall
- Holding §2(46), Subsidiary §2(87): >50 % voting power or board control. Associate §2(6): 20-50 %. Wholly-owned = 100 %.
- Standards: AS 21 (CFS), AS 23 (associates), AS 27 (JV) under Indian GAAP; Ind AS 110, 28, 111, 112 under Ind AS.
- CFS mandatory under §129(3).
- Cost of Control = Cost of investment − Holding’s share of (capital + capital reserves at acquisition). +ve = Goodwill; −ve = Capital Reserve / bargain purchase.
- Capital profits (pre-acquisition) — reduce CoC. Revenue profits (post-acquisition) — to consolidated P&L (holding’s share) and NCI.
- NCI = NCI % × (capital + all reserves + all profits). Ind AS 110: choice of fair value or proportionate net assets.
- Pre-acquisition dividend → capital receipt (reduces investment). Post-acquisition dividend → revenue income.
- Unrealised profit in stock = (closing stock from inter-co) × (margin / (100 + margin)).
- Chain holding effective % = product of percentages.
- Six consolidation steps: holding ratio → CoC → NCI → Reserves → Eliminations → Combine.