Accounting Standard 21 — which speaks of consolidated financial statements — gives holding companies the leeway of not showing the composite effect of all its subsidiaries if the control in the subsidiary is intended to be temporary. That is, if the subsidiary is acquired and held with a view that it will be subsequently disposed in the near future, consolidation of financial statements is not required.
It is believed that holding companies often abuse this relaxation to prevent poor performance of loss-making subsidiaries causing a dip in their consolidated profits. The proposal for mandatory consolidation will help investors to take an informed decision on the financial status of companies.
Although the parent company is now required to disclose before the Registrar of Companies a copy of the financial results of its subsidiaries along with its own financial statements, officials say that investors are often kept in the dark about the financial effect that subsidiaries have on the group.
Consolidated statements, which provide financial information about the economic activities of a group company, are important to assess the economic resources controlled by the group, their collective obligations and the resources available. They said that the present proposal would be put into force once the new company law introduces mandatory parent-subsidiary account consolidation.