PREPARE CONSOLIDATED BALANCE SHEET IN 9 STEPS

CONSOLIDATED FINANCIAL STATEMENTS

Companies can combine and operate in groups by acquiring control over the resources of the other entities , through the mechanism of subsidiaries

The external shareholders have to be made aware of a) Resource controlled by the parent b) Obligation of the group and c) the performance of the group with using such resources . This objective is possible only through consolidated financial statement 

The companies which are having subsidiaries, Joint ventures and associates shall have to prepare consolidated financial statement, it presents the financial position, operating results and statement of cash flow of a group of companies. Consolidation provides reporting as one single economic entity, the financial position and performance of a parent and its subsidiaries.

The consolidated financial statement shall be presented to the extent possible , in the same format as that adopted by parent company.

The Consolidated financial statement comprises of following :

1. Balance sheet
2. Statement of Profit and loss
3. Notes to accounts
4. Cash flow statement

IMPORTANT TERMS

SUBSIDIARY:- It is an enterprise that is controlled by another enterprise.

PARENT:- It is an enterprise that has one or more subsidiaries.

CONTROL:-Ownership , directly or indirectly through subsidiaries of more than one half of the voting power of an enterprise.

Control of composition of the board of directors of an enterprise.

MINORITY INTEREST: It is that part of net results of operation and of the net assets of subsidiary, attributable to interest which owned by the external share holders (i.e. Which are not owned directly or indirectly through subsidiaries , by the parent.

Control important aspects:

It is possible that, though a company is not holding majority of voting power, it may still able to exercise control, for reasons of other shareholders being inactive holders.

Control may be direct or may be indirect . Consider a situation where A ltd has four subsidiaries, each of which have 25% Holding in H ltd . A ltd thus is capable of exercising indirect control . Despite there is no direct investment A ltd will include in its consolidation.

Consolidation procedures

Step 1

Date of acquisition

Ascertain date of acquisition of parent in a subsidiary company

Ex:-X ltd acquired 60% shares on 01^st april 2015 in Y ltd, Here date of acquisition is 01^st april 2015

Step 2

Shareholding pattern

Determine share holding pattern of the subsidiary company as on the date on which the consolidated balance sheet is to be prepared. This pattern is used for apportionment of subsidiary profits.

SL.NO	Particular	No.of.Shares	Percentage(%)
1	Parent company	60000	60
2	Subsidiary Company	40000	40
3	Total(1+2)	100000	100

Step 3

Analysis of subsidiary reserves and surplus

Analysis of reserves and surplus will include losses also. Subsidiary reserves and surplus are divided into pre acquisition and post-acquisition profits based on acquisition date.

Ex:- A ltd acquired 60% shares at Rs.10 lakhs in B ltd as on 31-09-2015,The B ltd reserves as on 01-04-2014 is 100000 and on 31-03-2015 is 200000 profit for the year is 500000

Consolidated balance sheet is prepared on for the period 2014-15

Here the date of acquisition date is  01-09-2015

Pre-acquisition period is before 01-09-2015 and post-acquisition period is          after is 31-09-2015

 Reserves

 As on 31-03-2015 Rs.2,00,000

 As on 01-04-2014 Rs.1,00,000      

 Profit transferred to reserves For the period 2014-15 is Rs.1,00,000/-                 (2,00,000-1,00,000)

So, here pre-acquisition reserve is Rs.1,00,000 plus Rs.50000(Rs.1,00,000x6/12)=   Rs.1,50,000/- (Capital profit) balance in reserve will be treated as revenue reserve

Profit

 Profit for the year is Rs.5,00,000/-

Pre-acquisition period is 6 months, so the profit will be apportioned between pre-acquisition  period and post-acquisition period. Pre-acquisition period profit is Rs.2,50,000/-(500000x6/12)

Remaining period profit will be Rs.2,50,000/-

Step 4

Apportionment of profits

After analysis of profit and dividing into pre-acquisition and post-acquisition the same will be                       apportioned between parent company and subsidiary company, the pre-acquisition reserve and surplus will be treated as capital profit and the same will be deducted from cost of investment in purchasing company, post-acquisition reserves and surplus will be merged in parent company reserves and surplus.

Sl.no	Particular	Pre-acquisition	Post-acquisition profit
		Capital Profit	Revenue Reserves	Revenue  profits
1	General Reserve	1,50,000	50,000	--
2	Other Reserves	xxxx	Xxxx	--
3	Profit and loss	2,50,000	--	2,50,000
4	Less: Miscellaneous expenditure to the extent not written off/unamortized	---	---	---
5	Total	4,00,000	50,000	2,50,000
6	Parent(60%)	2,40,000	30,000	1,50,000
7	Minority Interest(40%)	1,60,000	20,000	1,00,000

Step 5

Minority interest

Compute Minority Interest

Sl.no	Particular	Note	Amount
1	Share capital	Step-2	4,00,000
2	Capital profit	Step-4	1,60,000
3	Revenue reserve	Step-4	20,000
4	Revenue profits	Step-4	1,00,000
5	Equity dividend		--
6	Preference share capital	Held by outsiders	--
7	Preference dividend		--
8	Less:-Stock Reserve	Minority share(upstream)	---
9	Total		6,80,000

Step 6

Determine cost of control

Sl.no	Particular	Amount	Amount
a	Cost of investment  Amount invested- carrying amount as per parent’s balance sheet Less: Dividend received from pre-acquisition profits of subsidiary Adjusted cost of Investment	10,00,000 NIL	10,00,000
b	Value of investment- Aggregate of parent’s share : Share capital Pre-acquisition profits Total	6,00,000 2,40,000	8,40,000
	Cost of control-(Goodwill/Capital reserve)		1,60,000

    Note:-Capital Reserve= If value of investment is more than the cost of              investment  Here in this case it is goodwill = 1,60,000/-

  Goodwill= If Cost of Investment is more than the value of investment.

Step 7

Inter company transaction- Elimination/Adjustment

Inter company owing or debts

Usual items like debtors/Creditors , Bills payable/Bills receivable, Loans given/loans taken, dividend payable/dividend receivable etc

Adjustments for above items will lead to reduction in both companies

Assets comprising goods or machinery purchased from other company

For the inter company transaction we need to ascertain unrealised profits left over in the balance of stock or Instalment payable for machinery.

  In transactions between companies involving fixed assets, eliminate unrealized profit by applying downstream and upstream concepts

 

Particulars	Downstream	Upstream
Transaction flow	From Parent to subsidiary	From Subsidiary to parent
Total of unrealized profit To be eliminated from asset	100 percent	100 percent
Adjustment Parents reserve Minority Interest	100 percent Nil	Respective share in subsidiary Step 2

Step 8

Reserves for consolidated balance sheet

Particulars	Capital reserve	Revenue reserve	Profit and loss
Reserves as appearing in parents balance sheet	100000	200000	400000
Less: Dividend received from subsidiary company out of pre-acquisition profits transferred to investment		(XXXX)	(XXXX)
Add:Parents share of post acquisition reserves and profits of subsidiary(step 4)		20000	100000
Less: Reserve for unrealized profits			(xxxx)
Add: Capital Reserve (step 6)	Xxxx
The net result is the value of reserves to be shown in consolidated balance sheet	100000	220000	500000

Step 9

Preparation of consolidated Balance sheet

  Liabilities

Share capital	Only parent company
Reserves	Step-8
Minority Interest	Step-5
Other liabilities ,loans, current liabilities and provisions	Total of both companies Less: Inter company owing

  

  Assets 

Fixed assets	Total of both companies And goodwill in step 6
Investment	Total outside investment of parent and subsidiary company
Current assets,Loans and advances	Total of both companies Less: Inter company owing
Miscellaneous expenditure to the extent of not written off	Only parent company Subsidiary amount will be net off during process of analysis of profits Step -4

To download excel format click below link

Excel format of consolidated financial statement