CONSOLIDATION OF ACCOUNTS

This query is : Resolved

JIGNESH (Querist)
Follow

03 November 2010 SIR, MY QUESTION IS HOW TO CONSOLIDATE CO A/CS AS PER ACCOUNTING STANDARD LAID DOWN BY ICAI?

SECOND QUESTION IS TO HOW TO CONSOLIDATE BRANCH ACCOUNTS WITHOUT SHOWING BRANCH BALANCES IN HO BALANCE SHEET?

THIRD QUESTION IS TO HOW TO DO VALUATION OF INVENTORIES AS PER ACCOUNTING STANDARD LAID DOWN BY ICAI IN CASE OF MFG COS.? AND CO IS LIABLE UNDER CENTRAL EXCISE.

I WOULD BE PLEASED, IF SAME WOULD BE EXPLAINED THRU CITING AN EXAMPLE IN EACH OF ABOVE CASES RATHER TO REFER ACCOUNTING STANDARD DIRECTLY.

sudhakar ca cwa

sudhakar ca cwa (Expert)
Follow

03 November 2010 For 1st no one can tell shortly you need to read AS-21. no other alternative. if u have any specific incidence then any one can help us.

For Questn no.3 AS-2 which says cost or net realisable value which ever is low. AS-2 clearly explains what is cost and NRV.

Asha Kanta Sharma online

Asha Kanta Sharma

(Expert)
Follow

20 July 2024 Certainly! Let's address each of your questions one by one with examples:

### 1. Consolidation of Company Accounts as per Accounting Standards:

Consolidation of accounts involves combining financial statements of a parent company and its subsidiaries into one single set of financial statements. Here’s an example illustrating the consolidation process:

**Example: Consolidation of Company A and its Subsidiary B**

- **Company A:** Parent company
- **Company B:** Subsidiary of Company A

**Steps for Consolidation:**

1. **Prepare Individual Financial Statements:**
- Company A and Company B prepare their individual financial statements including balance sheets, income statements, and cash flow statements.

2. **Eliminate Intra-Group Transactions:**
- Identify and eliminate transactions between Company A and Company B such as sales/purchases, dividends, and loans.
- Example: Company A sells goods to Company B for $100,000. In the consolidated accounts, this transaction is eliminated to avoid double counting of revenue and expenses.

3. **Adjust for Unrealized Profits/Losses:**
- Adjust for any unrealized profits or losses on intra-group transactions.
- Example: Company A sells inventory to Company B at a profit of $10,000. In the consolidated financial statements, the profit is eliminated to reflect only the profit made outside the group.

4. **Consolidate Financial Statements:**
- Combine the adjusted financial statements of Company A and Company B to prepare consolidated financial statements.
- Example: Consolidated balance sheet will include assets, liabilities, equity, revenues, and expenses of both Company A and Company B, adjusted for intra-group transactions and unrealized profits/losses.

### 2. Consolidation of Branch Accounts without Showing Branch Balances in Head Office Balance Sheet:

Consolidation of branch accounts involves preparing financial statements for the head office that do not include the branch balances. Instead, only the net amount due to or from branches is shown. Here’s an example:

**Example: Consolidation of Branch Accounts**

- **Head Office:** Company A with branches B1 and B2
- **Objective:** To consolidate head office accounts without showing individual branch balances.

**Steps for Consolidation:**

1. **Prepare Head Office Financial Statements:**
- Head office (Company A) prepares its standalone financial statements including balance sheet and profit and loss account.

2. **Account for Branch Balances:**
- Instead of including branch balances in the head office balance sheet, create a memorandum account called "Branch Balances" to record net balances due from/to branches.
- Example: If Branch B1 owes $50,000 to Head Office and Branch B2 owes $30,000 to Head Office, the "Branch Balances" account will show a net amount of $20,000 (B1 $50,000 - B2 $30,000).

3. **Disclosure:**
- Disclose in the notes to the financial statements the nature of branch operations, significant transactions with branches, and the net balances due from/to branches.

### 3. Valuation of Inventories for Manufacturing Companies under ICAI Standards:

Valuation of inventories for manufacturing companies involves determining the cost of inventories and complying with accounting standards such as AS 2 issued by ICAI. Here’s an example illustrating inventory valuation:

**Example: Valuation of Inventories**

- **Company:** Manufacturing Company X
- **Inventory Type:** Finished goods inventory

**Steps for Valuation:**

1. **Cost of Inventories:**
- Determine the cost of finished goods inventory including direct materials, direct labor, and manufacturing overheads.
- Example: Company X manufactures chairs. The cost of finished goods inventory includes direct materials ($20 per chair), direct labor ($10 per chair), and manufacturing overheads ($5 per chair).

2. **Valuation Method:**
- Use appropriate valuation methods such as FIFO (First-In-First-Out) or weighted average cost method to value inventories.
- Example: Company X uses FIFO method. It has 100 chairs in inventory. Cost of the latest batch of 50 chairs is $35 per chair. Cost of earlier batch of 50 chairs is $30 per chair. Ending inventory valuation will reflect cost of the latest batch first.

3. **Compliance with AS 2:**
- Ensure compliance with AS 2 requirements including recognition of costs, net realizable value, and proper disclosure in financial statements.

By following these steps and examples, you can effectively handle consolidation of company accounts, branch accounts without showing balances, and valuation of inventories as per ICAI standards. Always refer to the specific accounting standards (like AS 21 for consolidation and AS 2 for inventories) for detailed guidance and compliance requirements.

Upgrade to CAclubindia Pro. Subscribe Now!