Consolidated Financial Statements 4set

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<p>Consolidated Financial Statements</p> <p> 19CONSOLIDATED FINANCIAL STATEMENTS</p> <p>INTRODUCTIONConsolidated financial statementsrefer to the financial statements which lead to the subsidiaries of the holding company its summative accounting figure. Putting another way, consolidated financial statements can be addressed as the combined financial statements of a parent company and its subsidiaries.According to IAS 27 "Consolidated and separate financial statements",consolidated financial statementsare the financial statements of a group presented as those of a single economic entity.As stated by Investopedia, the consolidated financial statements enable you to determine the general health of an entire group of companies as compared to a companys stand alone position. This is because these financial statements provide an aggregated look at the financial position of a company and its subsidiaries.</p> <p>DEFINITIONS VIDE AS 21Consolidated financial statements can be defined as:1. A Subsidiary is a company that is controlled by another company (known as parent)2. A Parent (also known as a Holding Company) that has one or more subsidiaries.3. A Group is a parent and all its subsidiaries4. Consolidated financial statements are the financial statements of a group presented as those of a single company.5. Equity is the residual interest in the assets of a company after deducting all its liabilities.6. Minority Interest is the part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent.7. ControlControl means, basically,a. The ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of the company; or b. Control of the composition of the board of directors of a company so as to obtain economic benefits from its activities. A company is considered to control the composition of the board of directors of a company, if it has power, without the consent or concurrence of any other person, to appoint or remove all or a majority of directors of that company. A company is deemed to have the power to appoint a director, if any of the following condition is satisfied: a person cannot be appointed as director without the exercise in his favour by that company of such a power as aforesaid; or a persons appointment as director follows necessarily from his appointment to apposition held by him in that company; or the director is nominated by that company or a subsidiary thereof.Objective and Purpose of Consolidated financial statementsThe key purpose of preparing consolidated financial statements is reporting the financial condition and operating result of a consolidated business group, which is considered as a single entity comprised of more than one companies under a common control (also counting entities other than companies)The objective of this Standard is to lay down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. These statements are intended to present financial information about a parent and its subsidiaries as a single economic entity to show the economic resources controlled by the group, the obligations of the group and results the group achieves with its resources.1. A parent that presents CFS should present these statements in addition to its separate financial statements. Users of the financial statements of a parent are usually concerned with, and need to be informed about, the financial position and results of operations of not only the enterprise itself but also of the group as a whole. This need is served by providing the users-a) Separate financial statements of the parent; andb) CFS , which present financial information about the group as that of single enterprise without regard to the legal boundaries of the separate legal entities.2. CFS is presented by a parent (also known as holding company) to Provide financial information about the economic activities of its group.3. CFS present financial information about a parent and its subsidiary as a single economic entity4. CFS shows the economic resources controlled by the group, the obligations of the group and results the group activities with its resources.</p> <p>Meaning of "Holding Company and Subsidiary as per Companies Act, 1956 </p> <p>Simple Definitions: </p> <p>Holding Company: A holding company is a parent company that owns enough voting stock (more than 50%)in a subsidiary to make management decisions,influenceand control the company's board of directors. However, holding companies that control 80% or more of the subsidiary's voting stock gain the benefits of tax consolidation, which include tax-free dividends for the parent company and the ability to share operating losses. </p> <p>Subsidiary Company: A subsidiary is a company that is controlled by a holding company or parent; this means at least 50% of its stock is controlled by another company. This 50% or greater stake gives the parent company control.Meaning of holding company and subsidiarySection 4(1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be asubsidiaryof another if, but only if,-</p> <p>(a)that other controls the composition of its Board of directors; or</p> <p>(b)that the other exercises or controls more than one-half of its total voting power in a case where it has issued securities and such securities have the same voting rights as equity shares; or</p> <p>(c)that the other holds more than one-half in value of its paid-up capital, in any other case;</p> <p>(1A)No company which is asubsidiaryof another company shall, after the commencement of the Companies (Amendment) Act, 2003, become aholdingcompany;</p> <p>(2)For the purposes of sub-section (1), the composition of a companys Board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following conditions is satisfied, that is to say-</p> <p>(a)that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid;</p> <p>(b)that a persons appointment thereto follows necessarily from his appointment as director or manager of, or to any other office or employment in, that other company, or</p> <p>(c)that the directorship is held by an individual nominated by that other company or asubsidiarythereof.</p> <p>(3)In determining whether one company is asubsidiaryof another-</p> <p>(a)any shared held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it;</p> <p>(b)subject to the provisions of clauses (c) and (d), any shares held or power exercisable </p> <p>(i)by any person as a nominee for that other company (except where that other is concerned only a fiduciary capacity); or</p> <p>(ii)by, or by a nominee for, asubsidiaryof that other company, not being asubsidiarywhich is concerned only in a fiduciary capacity;</p> <p>shall be treated as held or exercisable by that other company;</p> <p>(c)any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned company or of a trust deed for securing any issue of such debentures shall be disregarded;</p> <p>(d)any shares held or power exercisable by, or by a nominee for, that other or itssubsidiarynot being held or exercisable as mentioned in clause(c) shall be treated as not held or exercisable by that other, if the ordinary business of that other or itssubsidiary, as the case may be, includes the lending of money and the shares are held or the power is exercisable as foresaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business.</p> <p>4. For the purposes of this Act, a company shall be deemed to be theholding companyof another if, but only, if that other is itssubsidiary.</p> <p>5. In this section, the expression company includes any body corporate, and the expression equity share capital has the same meaning as in sub-section (2) of section 85.</p> <p>6. In the case of a body corporate which is incorporated in a country outside India, asubsidiaryorholdingcompany of the body corporate under the law of such country shall be deemed to be asubsidiaryorholdingcompany of the body corporate within the meaning and for the purposes of this Act also, whether the requirements of this section are fulfilled or not.</p> <p>7. A private company, being asubsidiaryof a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be asubsidiaryof a public company if not less than ninety-nine per cent. of the share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.Consolidated balance sheet of Holding Company Vs Subsidiary Company's Balance Sheet</p> <p>Subsidiary company's balance sheet's assets and liabilities will become the part of consolidatedbalance sheet of holding company.1.All the liabilities of subsidiary company will be added in the consolidated balance sheet ofsubsidiary company. But Share capital of subsidiary company in holding company will not shown in the consolidated balance sheet in the books of holding company. Because, this share capital automatically adjust with the amount of the investment of holding company in to subsidiary company.</p> <p>2. Add all the assets of subsidiary company with the assets of holding company. But Investment of holding company in Subsidiary company will not shown in consolidated balance sheetbecause, investment in subsidiary company will automatically adjust with the amount of share capital of subsidiary company in holding company.</p> <p>3. Add minority interest in liability side. First of all we should know what minority interest is Minority interest is the shareholder but there is not holding companys shareholder. So, when holding company shows consolidated balance sheet, it is the duty of accountant to show minority interest in the liability side of consolidated balance sheet.</p> <p>Under Indian Company Act, there is no need to prepare combined or consolidated final accounts of holding and subsidiary company in the books of holding company but holding company attaches the copy of balance sheet, one copy of profit and loss account and one copy of audit report of subsidiary company with his final accounts. But for showing true financial position, often holding company prepare consolidated balance sheet.</p> <p> It is easy to understand that consolidated balance sheet is a balance sheet in which all the assets and liabilities of holding company and subsidiary company are added with each other butpractically, it is tough to make consolidated balance sheet of holding and subsidiary company</p> <p>Steps of Consolidation In order that the consolidated financial statements present financial information about the group as that of a single enterprise, the following steps should be taken:1. Eliminate parents cost of Investment &amp; Portion of Equity.2. Calculate Goodwill &amp; Capital Reserve arising on Investment3. Calculate Minority Interest.4. Analyse Profits of subsidiaries into profits before and after acquisition5. Make Intra- Group Adjustments6. Treat of Investments made on different date7. Consolidate Profit &amp; Loss Statement8. Harmonise reporting Dates9. Harmonise Accounting PrinciplesThese steps are explained and illustred in detail</p> <p>Advantages of CFS:The main advantage of consolidation are given below:1. Overall Picture: From the consolidated financial statements, the users of accounts can get an overall picture of the holding company and its subsidiaries. Consolidated Profit &amp; Loss Account gives the overall profitability of the group after adjustment of unrealized profit involved in mutual transaction and division of profit of the subsidiaries into capital and revenue. Similarly, Consolidated Balance Sheet shows the state of affairs of the group after adjustments of mutual indebtedness and putting separately the minority interest.2. Share Value of Holding Company: Intrinsic share value of the holding company can be calculated directly from the Consolidated Balance Sheet.3. Return on Investments in Subsidiaries: The holding company controls its subsidiary. So its return on investments in subsidiaries should not be measured in terms of dividend alone. Consolidated Financial Statements provide information for identifying revenue profits for determining return on investments.4. Acquisition of Subsidiary: The minority interest data of the Consolidated Financial Statements indicates the amount payable to the outside shareholders of the subsidiary company at book value which is used as the starting point of negotiations at the time of acquisition of a subsidiary by the holding company.</p> <p>5. Evaluation of Holding Company in the Market: The overall financial health of the holding company can be judged using Consolidated Financial Statements. Those who wants to invest in the shares of the holding company or acquire it, need such data.Contents of CFS1. Which Statements: Consolidated Financial Statements normally includea. Consolidated Balance Sheet,b. Consolidated Statements of profit and loss accountc. Notes, other statements and explanatory material that form an integral part thereof.d. Consolidated Cash Flow statement is presented in case a parent presents its own cash flow statement.</p> <p>2. Format: The consolidated financial statements are presented, to the extent possible, in the same format as that adopted by the parent for its separate financial statements.Basis of Consolidation: In preparing CFS, The Financial statements of the parent and its subsidiaries should be combined on a line by line basis by adding together like items of assets, liabilities, incomes, and expenses.</p> <p>General principles of consolidated financial statementsThe general principles involved in consolidated financial statements are: A consolidated financial statement should essentially provide true and fair picture of financial condition and operating result of the business faction. A consolidated financial statement needs to be prepared on the basis of leg...</p>

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