In this write-up, I am going to discuss the preparation and presentation of the Consolidated Financial Statement. The Companies Act, 2013 in its Section 129 along with Rule 6 of the Companies (Accounts) Rules, 2014, and Accounting Standard 21 govern the provision related to the consolidation of the financial statement.
Now the question arises what is Consolidated Financial Statement? And why we need it. Though the Companies Act,2013, does not define the consolidate financial statement, however, the same is defined under the Accounting Stndard 21 as
“Consolidated financial statements are the financial statements of a group presented as those of a single enterprise”
So by definition, it is clear that the consolidated financial statement is nothing but the financial statement of the group of the enterprises presented as one.
“Group of enterprise means holding and all its subsidiaries as per the Accounting Standard 21.”
Since the consolidated financial statement is nothing but the financial statement of the group of the enterprise, so we need to understand what financial statement is. The Accounting standard 21 does not specifically define financial statement but the same is defined by the Companies Act, 2013 under Section 2 Clause 40.
Financial Statement includes-
i. a balance sheet as at the end of the financial year;
ii. a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
iii. cash flow statement for the financial year;
iv. a statement of changes in equity, if applicable; and
v. any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement;
It is important to note that, exclusion of the Cash flow from the financial statement will never be applicable in case of holding company because holding company can never be small company as per the definition of the Small Company by the Companies Act, 2013, Section 2 Clause 85. For the reference below is the definition of the Small Company.
“small company” means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
Further Holding Company can never be dormant company because to obtain the status of the dormant company under Section 455, Company must not have any significant financial transaction and as per the Section 455, every transaction other than below transaction are a significant transaction.
a. payment of fees by a company to the Registrar;
b. payments made by it to fulfil the requirements of this Act or any other law;
c. allotment of shares to fulfil the requirements of this Act; and
d. payments for maintenance of its office and records.
Now coming to last option that is One Person Company, One Person Company can never be holding company, since Rule 3 of Companies (Incorporation) Rule, 2014 prohibit One Person Company from investing in the securities of other body corporate.
Now answering why we need to prepare a consolidated financial statement, we need to prepare it because the company is making an investment in other companies and controlling it either directly or indirectly and doing business through it; so to understand the financial position of the Company in entirety it is important to have a holistic view of the company’s account and that can be done only through consolidation of the account of the group companies.
Now we need to understand when we need to prepare a consolidated financial statement. As per Section 129, if the company has a subsidiary company or associate company then the company shall prepare a consolidated financial statement. Further, it is to be noted that consolidated financial statement to be prepared in the same manner as holding prepare its standalone financial statement and to be presented before the board in the same way as a standalone financial statement to be present before the Board.
As per Accounting Standard 21, the parent shall prepare a consolidated financial statement for its group enterprise. Parent means an enterprise having one or more subsidiaries and a group of enterprise is already defined above.
Since both Section 129 and Accounting standard 21 emphasize that the company having a subsidiary company shall prepare consolidated financial statement, so let us understand the definition of the subsidiary as per the Companies Act, 2013 and Accounting Standard 21.
UNDERSTANDING THE SUBSIDIARY AS PER THE COMPANIES ACT, 2013 AND ACCOUNTING STANDARD 21.
As per Section 2 Clause (87) of the Companies Act, 2013, Subsidiary Company means:
“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 voting power either at its own or together with one or more of its subsidiary companies:
Explanation.—for the purposes of this clause
1. 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;
2. the composition of a company’s 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;
As per Accounting Standard 21, Subsidiary Company means
A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).
Control means
(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 the composition of the corresponding governing body in case of any other enterprise to obtain economic benefits from its activities.
It is important to understand the definition of subsidiary both as per the Companies Act, 2013 and Accounting Standard 21, where they are in harmony and where they deviate from each other.
So as per Companies Act, 2013, the holding company must control the composition of the Board of the Director of the other company and as per Companies Act, 2013 control means
“control shall include the right to appoint the majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;”
So if any company have the power to appoint the majority of the director or got the power to influence the decision of the majority of director then such company will be the holding company of such other company in which it exercises such power.
One of the best examples of the following situation will be the joint venture agreement, whereas per the joint venture agreement any one partner of the joint venture can appoint the majority of the director.
Further company will be holding company if they exercise or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.
On deciphering further sub-clause (ii) of clause 87, few very interesting points come to the light that is since both word “exercise and control” is being used so not only direct voting power will be reckoned for holding subsidiary relationship but also control of such voting power i.e. indirect holding.
As per clause 89 of Section 2 “total voting power”, in relation to any matter, means
The total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes.
Further for complete understanding, we have read it with Section 47 and as per Section 47, every member shall having voting right in case of a poll, in the proportion of the share capital held by them.
Preference shareholders also have the right to vote on the resolutions directly affecting their right and in following cases any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital and his voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company, moreover, in the case where no dividend is being paid to any class of preference shareholder for a period of two years or more than such preference shareholders have right to vote on all the resolution.
The voting right of preference shareholder vis-à-vis other preference shareholders shall be in proportion of his share in the preference share capital of the company and voting right of the preference shareholder to the voting right of equity shareholder shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares.
This provision is very important while determining the holding and subsidiary relationship. For better understanding, I am producing the following example.
A Ltd having authorized and paid-up share capital of Rs. 1,000.
Paid-up share capital is in the following manner.
10 Equity Share of Rs. 10 each out of which 51 shares are held by B Ltd. and remaining 49% shares by 6 other individuals, and 9, 4% preference shares of Rs. 100 each out which entire holding is with C Ltd.
First Scenario; A Ltd. is paying the dividend to 4% preference shareholders.
In this scenario; C Ltd. have limited voting right as per Section 47, and B Ltd holds more than 50 % voting power, so A Ltd is the subsidiary of the B Ltd. B Ltd. will prepare the consolidate its accounts with A Ltd.
Second Scenario; A Ltd. is not paying dividend from last 2 years to 4% Preference Shareholders,
Now, C Ltd will have voting right on all the subject matter and voting right will be divided amongst the Equity and Preference Shareholders in the following manner.
Total Paid-up Share Capital 1000 Rs.
Equity Share Capital Rs. 100
4%Preference Share Capital Rs. 900
Now Equity Shareholder will have 10% voting right and preference shareholder will have 90% voting right, hence B Ltd will have 5.1% voting right and C Ltd will have 90 % voting right, hence, A Ltd is now the subsidiary of C Ltd. and consolidation will be done between A Ltd. and C Ltd.
Now coming to a definition of Subsidiary as per Accounting Standard 21, like Companies Act, 2013, Accounting Standard also focus about the voting power, that is if any enterprise holds more than 50% voting in such other enterprise then such other enterprise is its subsidiary. Another condition of being subsidiary is if any enterprise holds the composition of the Board of Director of such other company.
However, on a mere comparison between the definition of Control between Accounting Standard 21 and Companies Act, 2013 it is clear that control of Companies Act, 2013 is much wider as compared to the control of Accounting Standard 21 because it covers not only controlling the composition of the Board Directors but also controlling the policy decision making. Further, as per the Companies Act, a subsidiary can either be a company or a body corporate only. However, under Accounting Standard 21, a subsidiary may be any enterprise and includes a company or a body corporate.
PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT UNDER SECTION 129 AND ACCOUNTING STANDARD 2
As per Section 129 sub-section 3 to be read along with Rule 6 of the Companies (Accounts) Rule, 2014 provides for the consolidation of financial statement of the company along with its subsidiaries and associate company in same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its standalone financial statement.
However, here I am focusing on the consolidation of the financial statement of holding and subsidiary only since I am preparing this write-up with reference to Accounting Standard 21. Whereas consolidation of financial statement of the associate company and the joint venture is to be done as provided under Accounting Standard 23 and 27 respectively along with Section 129 of the Companies Act, 2013 and rules made thereunder.
Coming back to Section 129 Sub-Section 3, the first provision of the referred sub-section provides that along with the preparation of the consolidated financial statement, the holding company shall also prepare a separate statement showing silent features of the subsidiary company and associate company in form AOC-1.
Further Rule 6 of the Companies (Accounts),2014 provides the manner of the consolidation of the financial statement. Rules provide that consolidated financial statement to be prepared in accordance with Schedule III (Provide for the general instruction for the preparation of the Balance sheet and profit and loss accounts) and applicable accounting standard i.e. Accounting Standard 21.
However, the first proviso to Rule 6 provides that in the case where the company is not required to prepare a consolidated financial statement as per Accounting Standard then complying with the Schedule III will be sufficient compliance.
AS per Accounting Standard 21 the conditions where the subsidiary is excluded from preparing consolidated financial statement:
(a) control is intended to be temporary because of 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.
To have a better understanding, we need to analyze the above provision of Accounting Standard 21. In point (a), “temporary” word is important since the consolidation will not be applicable only if control is temporary.
As per Accounting Standard 21, control will be considered “temporary” when the following conditions are satisfied
- Company is having majority voting power due to ownership of shares
- Such shares are held in stock in trade
- Such shares are going to be disposed-off in “near future”
Now the second word that requires further clarification or explanation is “near future”. The Accounting Standard 21 has kept the explanation of “near future” open-ended that is As per Accounting Standard 21 meaning of “near future” depends on facts and circumstance of each case. However, in general circumstances, it means a period not exceeding 12 months.
Further Accounting Standard gives importance to the intention of such purchase of shares, if the intention is to dispose-off such shares then consolidation will not be required till such intention is changed, similarly, if the intention is to keep those shares then it will be consolidated till such dispose-off take place.
It is to be noted that in an above circumstance where Accounting Standard 21 is not to be followed and consolidation to be done as per Companies Act, 2013, then investments in such subsidiaries should be accounted for in accordance with Accounting Standard (AS) 13 and reason for not following AS-21 to be disclosed in the consolidated financial statement.
The second round of exemption from the preparation of consolidated financial statement comes from the second proviso to Rule 6 of Companies (Accounts) Rules, 2014. In the following cases, there is an exemption from the preparation of the consolidated financial statement.
- Company having subsidiary which is also the wholly-owned subsidiary of other company. However, if such ultimate holding should not be a company incorporated outside India.
For example, there are three companies A Ltd, B Ltd, and C Ltd, C Ltd is the wholly-owned subsidiary of B Ltd, and B Ltd is wholly owned subsidiary of A Ltd, in this case, B Ltd is not required to prepare a consolidated financial statement. However, if A Ltd is incorporated outside India then no such relaxation is available to B Ltd.
- Company having subsidiary, which is also the subsidiary of other company, subject to these conditions;
1. Other shareholders including those not otherwise entitled to vote, other than an ultimate holding company, of such company having subsidiary company give its consent in writing of agreeing with not presentation of consolidated financial statement.
2. The ultimate holding company is not the company incorporated outside India and prepares consolidated financial statement.
For example, A Ltd, B Ltd, C Ltd, D Ltd, D Ltd is the subsidiary of the C Ltd, and C Ltd is subsidiary of A Ltd, A Ltd holding 60% shares of C Ltd, and remaining shares of C Ltd i.e. 40% shares are held by B Ltd. In this C Ltd will not be required to prepare consolidated financial statement if A Ltd consolidates the financial statement of C Ltd and D Ltd. and B Ltd give its consent of such non-preparation of consolidated financial statement in writing. Other exemption from the preparation of the consolidated financial statement was time-bound and already saw its sunset time.
There is no exemption available to the listed company or whose shares are in the process of listing in India or outside.
Whereas the Companies Act, 2013 does not provide us with any further insight on the consolidation of the financial statement but Accounting Standard 21 provides the procedure for such consolidation.
Consolidation to be done by combining the line by line items like asset, liabilities, etc of the financial statement of the Parent and the Subsidiary Company, steps to be taken for consolidating financial statement.
1. On Date of investment by the holding to the subsidiary, calculate the following
2. Cost of Investment by holding in each subsidiary
3. Parent’s portion of equity of each subsidiary.
Calculation of Goodwill or Capital Reserve as the case may be;
- order to find the value of Goodwill or Capital Reserve, as the case may be, we need to calculate the value of Parent’s portion of equity of each subsidiary which is as follows;
Parent’s portion of Equity means: {Only holding company portion to be taken}
– Share Capital of Subsidiary
– Reserve and Surplus of Subsidiary (before acquisition)
| PARTICULAR | Pre Acquisition | Post Acquisition |
| Opening Balance of P&L A/c | ***** | |
| Opening Balance other reserves | **** | |
| Profit for the year of acquisition# | **** | ***** |
| Profit of the year after acquisition | ***** | |
| Total | *** | **** |
| Minority Interest* | **** | **** |
| Holding | **** | *****( Note1) |
# if acquired during the year then divides the profit on a pro-rata basis.
*Minority Interest is the amount attributable to the shareholders other than holding company.
Note1. The parent’s 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 the 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 parent’s share in the post-acquisition reserves of a subsidiary.
Calculation of Goodwill/Capital Reserve;
| Cost to the holding of its investment in subsidiary | ****** |
| Less; Parent’s portion of equity of subsidy | |
| Holding’s share in the share capital of subsidiary | ******* |
| Holding’s share in the pre acquisition reserve of the subsidiary | ******* |
| Goodwill/(Capital Reserve) | ******** |
1. Calculation of Minority Interest with regard to Profit and Loss Statement and Balance sheet.
a. In Profit and Loss A/c, after calculating Profit After Tax, deduct minority interest i.e. profit attributable to shareholders other than holding company, so that profit attributable to the owners of the holding company can be identified.
b. Minority interest in the net asset of the subsidiary should be calculated and shown separately from the equity and liability of holding’s shareholders.
Minority Interest in net asset of the company;
| Particular | Amount |
| Minorities’ share in share capital of the subsidiary company | **** |
| Minorities’ share in the pre-acquisition reserve of the subsi comp. | **** |
| Minorities’ share in the post-acquisition reserve of the subsi comp | ***** |
| Minorities’ interest in net asset of the company. | **** |
OTHER IMPORTANT POINTS
1. Tax expense of the holding and subsidiary company to be aggregated for calculating tax expense in the consolidated financial statement.
2. Intragroup balances and 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. Unrealized 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. All the financial statements used in consolidation should be for same reporting period drawn on the same date, however, if the same is not possible then the adjustment to bring consonance in the different balance sheet to be done.
6. Uniform accounting policies to be adopted for the preparation of the consolidated balance sheet.
7. Accounting Standard 13 to be used for accounting of investment.
8. In the standalone financial statement investment in a subsidiary to be accounted for as per Accounting Standard 13.
DISCLOSURES TO BE MADE
1. In the consolidated financial statement, list of subsidiaries to be given, having following details;
- Name
- Country of Incorporation
- Shares held
- Voting right
2. Nature of the relationship between holding and subsidiary, if holding does not hold directly or indirectly more than half of the voting power;
3. 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;
4. Name of the subsidiaries having different reporting period and date of the reporting period.
CA. Nishant Mishra
Associate Company Secretary
Email: [email protected]/[email protected]
Author Bio
Sir, if company A (incorporated in India) has one Director in common with Company B (incorporated in the US) Total number of Directors in A company is 2 whereas in B company in 3. A company does not hold any shares in B company. Whether company A is required to Consolidate its Financials statements with US company i.e., Company B?
Thanks in advance