INVESTMENT IN SHARES OF SUBSIDIARY COMPANY
(a) when all the shares of the subsidiary are held by the holding company – (acquired at par): In such a case, the investment in shares of subsidiary company represent the ownership of the holding company in the equity or net assets of the subsidiary company. Net assets are the difference between the total assets and the liabilities of the subsidiary. Net assets are also equal to the total of all accounts relating to the shareholders, i.e., Share Capital, Reserves, Profit and Loss Account balance, etc. The principle of consolidation is very simple in this case. While preparing the Consolidated Balance Sheet, investments of the holding company in shares of subsidiary company have simply to be replaced by the net assets (i.e., total assets and liabilities) of subsidiary company.
Illustration 1
The Balance Sheet of the H Ltd. and S Ltd. as on 31st March, 2014 are given below:
| I EQUITIES AND LIABILITIES | H Ltd. Amount (Rs) | S Ltd. Amount (Rs.) |
| 1 Shareholders’ funds | ||
| (a) Share Capital | ||
| Authorised, Issued subscribed and paid | ||
| up capital | ||
| Equity shares of ` 100 each, fully called | 6,00,000 | 2,00,000 |
| up and paid up | ||
| (b) Reserve and surplus | ||
| Profit and Loss A/c 80,000 | 80,000 | 80,000 |
| 2 Current Liabilities | ||
| Trade Payables | 75,000 | 48,000 |
| TOTAL | 7,55,000 | 2,48,000 |
| II. ASSETS | ||
| 1 Non-current Assets | ||
| (a) Fixed Assets | ||
| Fixed Assets | 5,55,000 | 2,48,000 |
| (b) Long term Investment | ||
| Shares in S Ltd. (at cost – | 2,00,000 | ______-_______ |
| TOTAL | 7,55,000 | 2,48,000 |
Solution:
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as at 31st March, 2014
| I EQUITIES AND LIABILITIES | S Ltd. Amount (`) |
|
| 1 Shareholders’ funds | ||
| (a) Share Capital | ||
| Authorised, Issued subscribed and paid up capital | ||
| Equity shares of ` 100 each, fully called up and paid up | 6,00,000 | |
| (b) Reserve and surplus | ||
| Surplus A/c | 80,000 | |
| 2 Current Liabilities | ||
| Trade Payables | ||
| H Limited | 75,000 | |
| S Limited | 48,000 | 1,23,000 |
| TOTAL | 8,03,000 | |
| II ASSETS | ||
| 1 Non-current Assets | ||
| (a) Fixed Assets | ||
| H Limited | 5,55,000 | |
| S Limited | 2,48,000 | 8,03,000 |
| TOTAL | 8,03,000 | |
It is clear from the above consolidated balance sheet that the investment of H Ltd. in shares of S Ltd. amounting toRs. 2,00,000 has been replaced by the net assets of S Ltd. amounting to Rs. 2,00,000 (i.e., Sundry Assets Rs.
2,48,000 – Trade Payables Rs.48,000)
(b) When some of the shares of the subsidiary are held by the outsiders – In such a case, the outsiders holding shares in the subsidiary company will naturally claim a share in the net assets (i.e., the total assets minus liabilities) of the subsidiary company in proportion to their shareholding. While preparing the consolidated balance sheet, the amount of claim of the outside shareholders must be treated as a liability of the holding company and as such it has to be shown on the liabilities side of the balance sheet under the heading “Minority Interest”. All the assets and liabilities of the subsidiary company have to be merged with those of the holding company which will eliminate investments of the holding company in the shares of the subsidiary company.
Illustration 2
The Balance Sheet of H Ltd. and S Ltd. as on 31st March, 2014 are given below:
Balance Sheet
| I EQUITIES AND LIABILITIES | H Ltd. Amount | S Ltd. Amount |
| 1 Shareholders’ funds | ||
| (a) Share Capital | ||
| Authorised, Issued subscribed and paid | ||
| up capital | ||
| Equity shares of ` 100 each, fully called up | 2,00,000 | 6,00,000 |
| and paid up | ||
| (b) Reserve and surplus | ||
| Surplus A/c | 80,000 | 80,000 |
| 2 Current Liabilities | ||
| Trade Payables | 75,000 | 48,000 |
| TOTAL | 7,55,000 | 2,48,000 |
| II ASSETS | ||
| 1 Non-current Assets | ||
| (a) Fixed Assets | ||
| Fixed Assets | 6,05,000 | 2,48,000 |
| (b) Long term Investment | ||
| 1,500, Shares in S Ltd. (at cost) | 1,50,000 | ____ -_____ |
| TOTAL | 7,55,000 | 2,48,000 |
Prepare the consolidated balance sheet of H Ltd. and S Ltd. as on 31st March, 2014.
Solution:
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as at 31st March, 2014
| I EQUITIES AND LIABILITIES | S Ltd. Amount (`) |
|
| 1 Shareholders’ funds | ||
| (a) Share Capital | ||
| Authorised, Issued subscribed and paid up capital | ||
| Equity shares of ` 100 each, fully called up and paid up | 6,00,000 | |
| (b) Reserve and surplus | ||
| Surplus A/c | 80,000 | |
| 2 Non-current liabilities | ||
| Minority Interest | 50,000 | |
| 3 Current Liabilities | ||
| Trade Payables | ||
| H Limited | 75,000 | |
| S Limited | 48,000 | 1,23,000 |
| TOTAL | 8,53,000 | |
| II. ASSETS | ||
| 1 Non-current Assets | ||
| (a) Fixed Assets | ||
| H Limited | 6,05,000 | |
| S Limited | 2,48,000 | 8,53,000 |
| TOTAL | 8,53,000 |
In this case, out of total 2,000 shares of S Ltd. 1,500 shares are held by H Ltd. Therefore, number of shares held by outsiders = (2,000 – 1,500) = 500 which is 1/4th of the total shares.
The net assets of S Ltd. =Rs.(2,48,000 – 48,000) = Rs.2,00,000.
Therefore, the claim of the outside shareholders in the net assets of S Ltd. 1/4 xRs.2,00,000 =Rs. 50,000. This claim can also be ascertained by the paid-up value of the shares held by them i.e., 500 xRs. 100 =Rs. 50,000. This amount has been shown as a liability under the heading minority interest.