4.1 Meaning of Holding Company and Subsidiary Company

(Holding Company Accounts with One Subsidiary)

Meaning of Holding Company

A holding company is a company that controls another company by:

• Holding more than 50% of its voting shares, or
• Controlling the composition of its Board of Directors.

According to Section 2(46) of the Companies Act, 2013, a holding company is a company of which one or more companies are subsidiaries.

Meaning of Subsidiary Company

A subsidiary company is a company controlled by another company (holding company).

As per Section 2(87) of the Companies Act, 2013, a company is a subsidiary if the holding company:

• Controls the Board of Directors, or
• Holds more than half of the total share capital.

Indirect control through another subsidiary is also considered control.

Types of Subsidiary Companies

1) Wholly Owned Subsidiary

• 100% shares owned by holding company
• Full control

2) Partly Owned Subsidiary

• More than 50% but less than 100% shares owned
• Minority shareholders exist

Group of Companies

A holding company and its subsidiaries together form a Group of Companies.

Each company retains its separate legal identity.

4.2 Consolidated Balance Sheet and Pre-acquisition & Post-acquisition Profits

Meaning of Consolidated Financial Statements

Consolidated Financial Statements present:

• Assets
• Liabilities
• Profit & Loss

of the holding company and subsidiary as one single entity.

Purpose:

• To show true financial position of the group
• To provide complete information to shareholders

Consolidated Balance Sheet

A Consolidated Balance Sheet combines:

• Assets of holding + subsidiary
• Liabilities of holding + subsidiary

Internal transactions are eliminated.

Objectives of Consolidation

1. Better understanding of group performance
2. Correct valuation of shares
3. Proper disclosure of minority interest
4. True and fair view of finances

Pre-acquisition and Post-acquisition Profits

1) Pre-acquisition Profit (Capital Profit)

These are profits earned before acquisition of shares.

Treatment:

• Holding company’s share → Capital Reserve
• Minority’s share → Added to Minority Interest

2) Post-acquisition Profit (Revenue Profit)

These are profits earned after acquisition.

Treatment:

• Holding company’s share → Added to Group Profit
• Minority’s share → Added to Minority Interest

Importance

4.3 Inter-company Debts, Bills, Debentures, Cost of Control & Minority Interest

Inter-company Debts

These are amounts due between holding and subsidiary.

Examples:

• Loans
• Sundry Debtors/Creditors

Treatment:
👉 Cancelled in consolidation (internal transaction).

Bills Receivable and Bills Payable

If holding and subsidiary accept bills for each other:

• Bills Receivable of one = Bills Payable of another

Treatment:
👉 Eliminated in consolidated balance sheet.

Inter-company Debentures

If one company holds debentures of another:

Treatment:
👉 Cancel both asset and liability.

Cost of Control (Goodwill / Capital Reserve)

Cost of Control = Cost of Investment – Share in Net Assets

Calculation:

Cost of Shares

– (Face Value + Pre-acquisition Reserves + Pre-acquisition Profit)

= Goodwill / Capital Reserve

Treatment:

Minority Interest

Minority Interest is the share of outsiders in subsidiary’s net assets.

Calculation:

Paid-up Share Capital (Minority Share)

+ Share in Reserves

+ Share in Profits

– Share in Losses

Treatment:

Shown on liabilities side of Consolidated Balance Sheet.

Joint Stock Company (In Context)

Holding and subsidiary companies are generally Joint Stock Companies registered under Companies Act.

They have:

• Separate legal status
• Limited liability
• Share capital structure

4.4 Practical Problems on Consolidated Balance Sheet (Conceptual Framework)

Steps to Prepare Consolidated Balance Sheet

Step 1: Determine Holding Percentage

Shares Held / Total Shares × 100

Step 2: Calculate Pre and Post Acquisition Profits

Divide profits based on acquisition date.

Step 3: Calculate Cost of Control

Find Goodwill or Capital Reserve.

Step 4: Calculate Minority Interest

Find outsiders’ share.

Step 5: Eliminate Inter-company Transactions

Remove:

• Debts
• Bills
• Investments
• Unrealised profits

Step 6: Prepare Final Consolidated Balance Sheet

Combine adjusted assets and liabilities.

General Format (Simplified)

Consolidated Balance Sheet

As on ___________

Liabilities

• Share Capital
• Reserves & Surplus
• Minority Interest
• Secured Loans
• Current Liabilities

Assets

• Fixed Assets
• Goodwill
• Investments
• Current Assets

✍️ Advantages of Holding Company System

1. Easy expansion
2. Better control
3. Risk diversification
4. Economies of scale
5. Tax benefits

⚠️ Limitations of Holding Company System

1. Manipulation of accounts
2. Minority oppression
3. Complex accounting
4. Lack of transparency
5. Possibility of monopoly

📌 Summary

• Holding company controls subsidiary
• Consolidated statements show group position
• Pre-acquisition = Capital profit
• Post-acquisition = Revenue profit
• Cost of control = Goodwill/Reserve
• Minority interest = Outsiders’ share
• Internal transactions are eliminated

📚 Declaration

These notes have been prepared by referring to and relying upon following standard textbooks and official study materials prescribed by concerned universities and professional bodies. The content has been rewritten, reorganized, and adapted for academic and teaching purposes in accordance with APA referencing standards.

📖 References 

Institute of Company Secretaries of India. (2019). Corporate accounting and financial management: Study material (Executive Programme). ICSI.

Rajasekaran, V., & Lalitha, R. (2011). Corporate accounting. Pearson Education.

Garg, S. K. (n.d.). Corporate accounting (BCOM 301). Directorate of Distance Education, Guru Jambheshwar University.

Jahfarali, T. H. (2026). Advanced corporate accounting. University of Calicut.

Sathrukanbabu, R. (n.d.). Corporate accounting. Manonmaniam Sundaranar University.