My query is relating to the consolidation as per the requirements of the Companies Act 2013. A Company is having 80% Share in Capital of an LLP, represented by the Company's managing director. When preparing the Consolidated financial statement of the Company, whether the Company need to consider the financials of the LLP for consolidation along with other subsidiary companies as per the Companies Act ? If consolidation is required, whether fixed capital account is only to be considered or fluctuating capital account is also to be considered for determining goodwill and capital reserve ?
04 March 2016
Dear Pratik, could you please share me any wording or provisions of Companies Act which excludes the Consolidation of LLP in to Holding Company either Specifically or generally ?
20 July 2024
In your case, where a company holds 80% share in the capital of an LLP, and is considering consolidation under the Companies Act 2013, here’s how you should approach the consolidation process:
### 1. Requirement for Consolidation:
According to the Companies Act 2013, a company is required to prepare consolidated financial statements when it has subsidiaries. Subsidiaries include entities over which the company has control, which is typically defined as holding more than 50% of the voting rights or having the ability to control the composition of the board of directors.
- **LLP as a Subsidiary:** Since the company holds 80% share in the LLP, it likely has control over the LLP's operations. Therefore, under the Companies Act 2013, the financials of the LLP should be consolidated with the financials of the company.
### 2. Consideration for Consolidation:
When preparing the consolidated financial statements, you need to consider the following aspects regarding the LLP:
- **Fixed vs Fluctuating Capital Account:** - **Fixed Capital Account:** This typically refers to the capital contributed by partners which remains fixed unless there is a change in partnership agreement. - **Fluctuating Capital Account:** This reflects changes in partners' capital accounts due to profit allocations, withdrawals, etc.
### 3. Treatment of LLP Financials for Consolidation:
- **Balance Sheet Items:** Include the LLP's assets, liabilities, income, and expenses in the consolidated balance sheet. - **Goodwill and Capital Reserve:** Determine goodwill and capital reserves based on the company's share of the LLP's net assets.
### Example Scenario:
Let’s illustrate with an example:
- **Company C** holds 80% share in **LLP L**. - **LLP L** has a fixed capital structure where partners contribute capital. - **LLP L**'s financials show assets worth $100,000 and liabilities worth $30,000.
**Consolidation Steps:**
1. **Eliminate Intra-Group Transactions:** Remove any transactions between Company C and LLP L.
2. **Include Net Assets of LLP L:** Include LLP L's net assets ($70,000 after deducting liabilities) in the consolidated balance sheet of Company C.
3. **Calculate Goodwill:** Determine goodwill based on the excess of the cost of investment over the company's share of the net assets of LLP L.
4. **Account for Capital Reserves:** Capital reserves are created based on the company's share of any reserves in LLP L's financials.
### Conclusion:
In summary, under the Companies Act 2013, if the company holds 80% share in the capital of an LLP, it should include the LLP's financials in its consolidated financial statements. Consider both fixed and fluctuating capital accounts of the LLP for determining goodwill and capital reserves. Ensure compliance with accounting standards and Companies Act requirements while preparing the consolidated financial statements.
For specific calculations and detailed guidance, it’s advisable to consult with a qualified accountant or financial advisor who can tailor the consolidation process to your company’s specific circumstances and compliance needs.
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