Practical Guide to Consolidation of Accounts

1 Practical Guide to Consolidation of Vivek The more you learn, you learn that you still have lot to learn Vivek Vivek Vivek you know ? BeforeCompaniesAct2013, Earlieronlylistedcompanieswasrequiredtod oconsolidationaslistingagreementrequired thesamebutwithcompaniesact2013, Vivek requirement under Companies Act, 2013 ( Act, 2013 ) Section129(3)readwithRule6oftheCompanies ( Accounts )Rules,2014(Rules)providesmanne rofconsolidationoffinancialstatementsofs ubsidiariespursuanttoScheduleIIIoftheAct , (3)clearlystatesthatforthepurposesofthis sub-section,theword subsidiary ,asperSection129oftheAct,2013readwithrul esthereof, , (E)datedOctober14,2014andintroducedtheCo mpanies( Accounts )AmendmentRules, ( JVs ).However, , Vivek Vivek Vivek Vivek of Interest in other entities9 Subsidiary InterestAssociate InterestJoint ArrangementInvestment InterestOwnership>=50%20%-49%Joint<20%Ac counting StandardsAS 21AS 23AS 27AS 13 IndASIndAS 110 IndAS 28 IndAS 28 IndAS 112 accounting TreatmentControl = ConsolidationSignificant Influence = Equity MethodJoint Venture = Proportionate ConsolidationAt Cost for Long Term, Cost or Market Value for Current Vivek for investment in subsidiaries in the separate financial statement of a Vivek of Control11 When one entityControlSubsidiariesDirectlyorindir ectlythroughsubsidiary,ownsmorethan50% Vivek Minority InterestItisthatpartofthenetresultsofope rationsandofthenetassetsofasubsidiaryatt ributabletointerestswhicharenotowned,dir ectlyorindirectlythroughsubsidiary(ies), other words, it is that portion of results and net assets which are not owned by the Holding Vivek Financial Statements (CFS)

2 Contents 13 Consolidated Balance SheetConsolidated Statement of Profit and LossConsolidated Cash Flow Statement (in case parent company presents the same)Notes Vivek 21 Consolidated Financial StatementsPresentation as per Schedule III The CFS prepared in the same format as that of Separate Financial Statements, , Schedule III of Companies Act 2013 Exclusion of Subsidiaries from ConsolidationThe Holding Company shall consolidate the financial statements of all the subsidiaries, domestic or foreign other than : Temporary Investment -When the shares are held in subsidiary company for disposal in near future. Severe Restriction-Where there are long term restrictions on fund transfer from subsidiary to parent CompanyDifferent financial year of SubsidiaryIt will prepare an additional set of financial statement in accordance with financial year of Vivek Procedure : Goodwill Computation15 AtthedateofacquisitionAnyexcessofthecost totheparentofitsinvestmentinasubsidiaryo vertheparent sportionofequityofthesubsidiary,atthedat eonwhichinvestmentinthesubsidiaryismade, shouldbedescribedasgoodwilltoberecognise dasanassetintheconsolidatedfinancialstat ementsCosttoparent>Parent sportionofEquity=GoodwillWhenthecosttoth eparentofitsinvestmentinasubsidiaryisles sthantheparent sportionofequityofthesubsidiary,atthedat eonwhichinvestmentinthesubsidiaryismade, thedifferenceshouldbetreatedasacapitalre serveintheconsolidatedfinancialstatement sCosttoparent<Parent sportionofEquity= Vivek Procedure.

3 Minority Interest Computation16 Minorityinterestsinthenetincomeofconsoli datedsubsidiariesforthereportingperiodsh ouldbeidentifiedandadjustedagainsttheinc omeofthegroupinordertoarriveatthenetinco meattributabletotheownersoftheparent;and Minorityinterestsinthenetassetsofconsoli datedsubsidiariesshouldbeidentifiedandpr esentedintheconsolidatedbalancesheetsepa ratelyfromliabilitiesandtheequityofthepa rent ,companyApurchases75%ofshareofcompanyB,t henremaning25% Vivek Procedure : BS & P&L Consolidation17 Allassets,liabilities, combineassets,liabilities,incomeandexpen sesIntra-grouptransactionsandbalances Profitsandlossesontransactionsbetweengro upmembersshouldbeeliminated Profitswhicharereflectedinthevalueofasse tstobeincludedintheconsolidationshouldbe eliminatedUniformityofaccountingpolicies Vivek Consolidation issues18 CumulativePreferenceShare:Providethepref erencedividendinCFS,whetherdeclaredornot Lossesreportedbysubsidiary& , Vivek Consolidation issues Asfaraspossiblethefinancialstatementsfor allentitiesincludedintheconsolidationsho uldbepreparedforthesameperiodandtothesam edate Appropriateadjustmentsshouldbemadetoinfo rmationpreparedtoanearlierdate Financialstatementsoverthreemonthsbefore thegroup sreportingdateshouldnotbeused Vivek of Control Vivek of Control Vivek To Consolidate TreatmentofProposedDividendandDividendre ceived Distributionsreceivedtobereducedfromcarr yingamountofinvestment Shareinprofitsofassociateisconsideredwit houtconsideringproposeddividend AdjustmentstothecarryingamountofInvestme ntarisingfromchangesinequitythatthathave notbeenincludedinthestatementofprofitand loss.

4 Suchchangesincludethosearisingfromtherev aluationoffixedassetsandinvestments,from foreignexchangetranslationdifferencesand fromtheadjustmentofdifferencesarisingona malgamations. Adjustmentstothecarryingamountofinvestme ntinaninvesteearisingfromchangesintheinv estee Vivek Listofallsubsidiariesincludingname,count ryofincorporation,proportionofownershipi nterestand,ifdifferent,theproportionofvo tingpowerheld UndertheCompaniesAct,2013: TocomplywithInstructionsgivenforpreparat ionofbalancesheetandstatementofprofitand lossinScheduleIII Entity-wise amountofnet-assets and% Entity-wise amountofshareinprofit&lossand% Theabovedetailstobefurtherbifurcatedinto parent,subsidiary,joint ventureandalsointoIndianandForeign Effectofacquisitionanddisposalofsubsidia riesonthefinancialpositionatthereporting date,theresultsforthereportingperiodando nthecorrespondingamountsfortheprecedingp eriod Namesofthesubsidiariesofwhichthereportin gdatesaredifferentfromthatoftheparentand thedifferenceinreportingdates Natureofrelationshipbetweenparentandsubs idiary.

5 Vivek of Subsidiary Consolidation process to be followed till the date parent subsidiary relationship ceases to exist Recognition of difference between sale proceeds and Equity on the date of disposal in the consolidated profit and loss account and Capital Reserve / Goodwill to be Vivek accounting for Investment of Associates in Vivek accounting for Investment of Associates in CFSS ignificant influence may be exercised in several ways: Representation on the Board of directors Participation in policy making process Material intercompany transactions Interchange of managerial personnel Share ownership -20 % or moreDefinition as per Companies Act 2013: Associate company, in relation to another company, means a company in which the other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. Significant influence means control of at least 20% of total share capital, or of business decisions under an agreement.

6 Vivek accounting for Investment of Associates in CFSC onsolidationmethod:Equitymethod UndertheEquityMethod-investmentisinitial lyrecordedatcost,identifyinganygoodwill/ capitalreservearisingatthetimeofacquisit ionand thecarryingamountisincreasedordecreasedt orecognisetheinvestor sshareoftheprofitsorlossesoftheinvesteea fterthedateofacquisition Eliminationofunrealisedprofit/losstothee xtentofinvestor sinterestExclusionfromCFS/Cessation:same asAS21 Adjustmentsofcarryingamount Adjustmentstothecarryingamountofinvestme ntinanassociatearisingfromchangesintheas sociate Forexample,incasetheadjustmentarisesbeca useoafrevaluationoffixedassetsbytheassoc iate,apartfromadjustingthecarryingamount ofinvestmenttotheextentofproportionatesh areoftheinvestorintherevaluedamount, Vivek : Financial Reporting of Interest in Joint Vivek Financial Reporting of Interests in Joint Ventures Ajointlycontrolledentityisajointventurew hichinvolvestheestablishmentofacorporati on, ,exceptthatacontractualarrangementbetwee ntheventurersestablishesjointcontrolover theeconomicactivityoftheentity.

7 Ajointlycontrolledentitymaintainsitsowna ccountingrecordsandpreparesandpresentsfi nancialstatementsinthesamewayasotherente rprisesinconformitywiththerequirementsap plicabletothatjointlycontrolledentity. Jointcontrolisthecontractuallyagreedshar ingofcontroloveraneconomicactivity Controlisthepowertogovernthefinancialand operatingpoliciesofaneconomicactivitysoa stoobtainbenefitsfromit. Accountingofpartnershipfirm/AOPinseparat eandconsolidatedfinancialstatements ProportionateConsolidationisamethodofacc ountingandreportingwherebyaventurer'ssha reofeachoftheassets,liabilities,incomean dexpensesofajointlycontrolledentityisrep ortedasseparatelineitemsintheventurer' Vivek Vivek for share of Vivek Controlled Entities accounting Treatment Separatefinancialstatementsofaventurer:I nterestshouldbeaccountedforasaninvestmen t AS13 Consolidatedfinancialstatementsofaventur er:Usingproportionateconsolidationexcept where: Acquisitionwithaviewtodisposalinthenearf uture Entityoperatesunderseverelong-termrestri ctions Interestinsuchexceptionsasmentionedabove shouldbeaccountedforasaninvestmentinacco rdancewithAccountingStandard13, Vivek Vivek AsperPara22ofAS-21 ,whatwouldbeyourviews?

8 IntentiontocontrolisnotrelevantinAS-21, ,orwoulditdirectlyconsolidate? Vivek , , Asperpara22ofAS-21, Theresultofoperationsofasubsidiaryareinc ludedinCFSfromthedateonwhichtheparent-su bsrelationshipcameintoexistence. , ,isitappropriatetocharge/creditopeningba lanceofreserveswiththeadjustmentsarising duetoharmonisingtheaccountingpoliciesfol lowed(tomakethemuniformforconsolidationp urposes),inrespectofperioduptothebeginni ngoftheyear? Vivek Study Onaccountofharmonizationoftheaccountingp olicies,theresultantadjustments(attribut abletoearlieryears) , (a)parentandsubsidiary,(b)subsidiaryands ubsidiary,(c)parentandassociate,(d)paren tandjointventure,(e)associateandassociat e,(f)jointventureandjointventure,(g)asso ciateandjointventure,(h)subsidiaryandass ociateand(i)subsidiaryandjointventurenee dtobeeliminatedintheCFS? WithAS21,intra-grouptransactionsarerequi redtobeeliminated, (oritsconsolidatedsubsidiaries)andtheass ociatesshouldbeeliminatedtotheextentofth einvestor Transactionsbetweensubsidiaryandsubsidia ry,subsidiaryandassociate,andsubsidiarya ndjointventurewouldneedintra-groupadjust ments Transactionsbetweenassociateandanotheras sociate, Vivek ,howshouldunrealisedprofits/lossesarisin gfromintra-grouptransactionsofearlieryea rsbeadjusted?

9 Inthecaseofunrealizedprofits/lossesarisi ngfromintra-grouptransactionsofearlierye ars,suchprofits/lossesshouldbeadjustedag ainstopeningbalanceofreservesandinthecas eofinadequacyofreserves, ,buttheventurerscontinuetooperateinthesa memanner? ,intheabsenceofacontractualarrangement, Accordingtocircumstancesbuttheinvestor ,forconsistency,suchinvestmentisaccounte dforasaninvestmentaccordingtothemethodof accountingappliedtootherinvestmentswithi nthatinvestmentportfolioratherthanasaJV, Vivek (soldoffduringtheyear)? , ,sinceatthebalancesheetdate, ,1956, ,onprivateplacementbasis,totheGovernment ofIndia, ,whetherthecompanywouldneedtoprepareCFSa ndgetthemaudited? AsperSEBIG uidelines, , Vivek issues -Goodwill Whethergoodwillarisingonconsolidationisr equiredtobeamortised? PracticeunderIndianGAAP ongoodwillisdivergent. AmortisationisnotmandatoryunderAS10(mand atoryunderAS14) AS21, otherissues Whethergoodwillarisesonfurtherinvestment in100%subsidiary Settingoffofgoodwillandcapitalreservesof differentsubsidiaries Vivek Vivek STANDARD 21 Consolidated Financial Statements Vivek ,certainpoliciesinrespectofinvestments,g ratuity, Paragraph20ofAS21,requiresthat: ,thatfactshouldbedisclosedtogetherwithth eproportionsoftheitemsintheconsolidatedf inancialstatementstowhichthedifferentacc ountingpolicieshavebeenapplied.

10 Vivek Vivek RelatedPartyDisclosure ,fromtheConsolidatedFinancialStatements, (a)and11ofAS21,providesasfollows: ,followingdisclosuresshouldbemade:(a)inc onsolidatedfinancialstatementsalistofall subsidiariesincludingthename,countryofin corporationorresidence,proportionofowner shipinterestand,ifdifferent,proportionof votingpowerheld; Vivek ; ,investmentsinsuchsubsidiariesshouldbeac countedforinaccordancewithAccountingStan dard(AS)13, , ,thesamewasneitherincludedinthelistofent itiesthefinancialsofwhichhavebeenconsoli datednoranynoteprovidingthereasonsfornot consolidatingthesubsidiarywasdisclosedas requiredunderparagraph29(a) Vivek OtherCurrentAssets theamountof Assetsheldfordisposal ,providesasfollows: ,thefinancialstatementsoftheparentandits subsidiariesshouldbecombinedonalinebylin ebasisbyaddingtogetherlikeitemsofassets, liabilities,incomeandexpenses. Itwasobservedthattheamountof assetsheldfordisposal assetsheldfordisposal Vivek -From the Consolidated Balance Sheet of a company, it was noted that minority interest was disclosed as part of the Shareholders ,providesasfollows: Itwasviewedthatthepresentationofminority interestaspartofShareholders fundamountstopresentingitasequityofthepa rent Vivek -From the Consolidated notes to account given in the Annual Report of a company, it was noted that it has disclosed only the names of the subsidiaries consolidated by (a)ofAS21,providesasfollows ,followingdisclosuresshouldbemade:(a)inc onsolidatedfinancialstatementsalistofall subsidiariesincludingthename,countryofin corporationorresidence,proportionofowner shipinterestand,ifdifferent,proportionof votingpowerheld.