20 October 2012
If, Say X and Y company have same management OR controlling power of more than 50, than how it can not be possible to consolidate ? either its subsidiary or assosicate, pl reply. where its mentioned that its is not possible ?
14 July 2024
If X and Y companies have the same management or controlling power, typically defined as having common control, it would generally indicate that one company has significant influence over the other or both companies are under common control. Here’s how this situation relates to consolidation under accounting standards:
### Consolidation of Subsidiaries and Associates:
1. **Subsidiaries:** - A subsidiary is an entity controlled by another entity (the parent company). Control is typically presumed when the parent owns more than 50% of the voting rights of the subsidiary. - If X and Y companies both have the same management or controlling power, and one owns more than 50% of the other’s voting rights, then one of them is considered a subsidiary of the other. - In such cases, consolidation would be required under applicable accounting standards (such as Ind AS 110 or AS 21), where the financial statements of the subsidiary are combined with those of the parent company.
2. **Associates:** - An associate is an entity over which another entity has significant influence but not control, generally defined as holding between 20% to 50% of the voting rights. - If X and Y companies are under common control and do not meet the definition of subsidiaries or associates (due to ownership percentages falling outside these thresholds), they may not be required to consolidate each other’s financial statements. - However, if there is significant influence or control exerted by one over the other, additional disclosures may be required in the financial statements to reflect the nature of the relationship.
### Where it is Mentioned:
- **Accounting Standards:** - The requirement to consolidate subsidiaries and disclose relationships with associates or entities under common control is typically governed by accounting standards applicable in the jurisdiction (e.g., Ind AS, IFRS, or local GAAP). - For example, Ind AS 110 (Consolidated Financial Statements) requires entities to consolidate subsidiaries when control is present, which includes situations where there is common control.
- **Legal and Regulatory Frameworks:** - Company law and regulations in many jurisdictions specify criteria for determining when consolidation is required based on control or significant influence. - Common control situations where entities have the same management or controlling power are usually addressed within these legal frameworks to ensure proper financial reporting and transparency.
### Conclusion:
In summary, if X and Y companies have the same management or controlling power, and one entity owns more than 50% of the voting rights of the other, it typically indicates a subsidiary relationship. Therefore, consolidation would generally be required under applicable accounting standards to reflect the financial position and performance of the group as a whole. The specific requirements and disclosures related to consolidation and relationships with entities under common control are outlined in the relevant accounting standards and legal frameworks applicable to the jurisdiction in which the companies operate.
CAclubindia
