Query- A wholly owned subsidiary (WOS) issues shares in a right issue to its parent. The subsidiary incurs an expense of Rs. 1,000,000, on the issue of shares. In the financial statements of the subsidiary, this amount is adjusted against the securities premium account as permitted under section 78 of the Companies Act, 1956. In the Consolidated Financial Statements (CFS) of the parent, the shares issued to the parent, including securities premium account, are eliminated against the parent’s investment in the subsidiary. There is no securities premium account in the CFS.

How should the share issue expense incurred by WOS be accounted for in  the CFS of the parent?

Response

Indian GAAP does not provide any specific guidance on this issue. In the absence of such guidance, the following two arguments seem possible on this matter:

(i)    In the CFS, no fresh issue of shares has taken place. Thus, the group, comprising parent and its subsidiary, cannot treat the amount as the share issue expense at a CFS level. Accordingly, the amount should be charged to the profit and loss account as an expense.

(ii)   To preserve the sanctity of the rights provided by section 78 of the Companies Act, the accounting treatment in the subsidiary’s financial statements should be retained in the CFS. As there is no securities premium at the CFS level against which the share issue expenses incurred by WOS can be adjusted, the parent should charge this amount to another appropriate reserve.

We believe that till ICAI issues any specific guidance on the matter, both views are arguable and should be acceptable.

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