Guidance of treatment in consolidated books of holding co

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Querist : Anonymous

Querist : Anonymous (Querist)

12 February 2014 Guidance on Treatment of Excess of Investment in Subsidiary in the bks of Holding Co. over Share Capital and security Premium in the books of Subsidiary in Consol books.
Some history: in Q1 FY 14, in Subsidiary books Capital Reduction Scheme, we had written off all the brands against the Security Premium and Share Capital. This causes reduction in Security Premium and Share Capital. Accordingly we are adjusting the same in P&L Appropriation. Earlier (before Capital Reduction schm), the Investment in Subsidiary was = SC+SP of Subsidiary, therefore no question of GW or CR in Consol.

CA Deven

CA Deven (Expert)
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12 February 2014 NOT UNDERSTANDING YOUR QUESTION ...CAN YOU PLZ EXPLAIN IN A BETTER LANGUAGE ...WITH AN EG.

Querist : Anonymous

Querist : Anonymous (Querist)

12 February 2014 Ok.
in FY 13, Holding Co has investment of Rs. 100 against Share Cap + Sec Pre of Rs 100 (10+90 resp.) & Brands of Rs 70 in Subsidiary.
While consolidation, there is not GW or Capital Reserve on Consolidation since Investment = NW of Sub (SC + SP).

In Q1, FY 14: we got the Capital Reduction scheme approved from high court, Thereby the subsidiary had the Brands in its books (of say Rs 70) which we adjusted against SC + Security Prim). Therefore, SC + SP got reduced to Rs. 30.
Now while Consolidation of Books as per AS 21, Investment in Holding Co (Rs 100) and SC + SP (Net worth) in Subsidiary (currently of Rs 30).
now this Excess of Investment over Net Worth of Subsidiary (100 - 30 = 70), what treatment should we give in Consol books?
As per my opinion we should not create a GW on Consol since this NW is not of at the time of Acquisition, then what would be appropriate Treatment @ Consol Books

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Querist : Anonymous

Querist : Anonymous (Querist)

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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27 July 2024 In the context of consolidated financial statements, the treatment of excess investment in a subsidiary over its adjusted share capital and security premium (post-capital reduction) needs careful consideration. Here’s a structured approach to dealing with this situation as per AS 21 (Accounting for Consolidated Financial Statements) and other relevant accounting standards:

### **1. Understanding the Scenario**

**Background:**
- **Initial Investment**: Holding Co invested Rs. 100 in Subsidiary, which was initially allocated between Share Capital (SC) and Security Premium (SP).
- **Capital Reduction**: The subsidiary undertook a capital reduction scheme, writing off brands against SC and SP. This led to a reduction in SC and SP to Rs. 30 from the original Rs. 100.
- **Current Status**: Post-reduction, the holding company's investment is Rs. 100, while the subsidiary's net worth (SC + SP) is Rs. 30.

### **2. Consolidation Principles**

**A. Consolidation Framework:**
- **Investment in Subsidiary**: In the consolidated balance sheet, the investment in the subsidiary is eliminated against the equity of the subsidiary.
- **Net Worth of Subsidiary**: The equity of the subsidiary, post-reduction, is lower than the investment made by the holding company.

**B. Goodwill or Capital Reserve:**
- **Goodwill**: AS 21 does not explicitly cover the treatment of capital reduction affecting goodwill. However, goodwill arises when the cost of acquisition exceeds the net assets acquired.
- **Capital Reserve**: If the net worth of the subsidiary decreases after acquisition (due to capital reduction), it does not typically result in recognizing goodwill. Instead, it often results in a capital reserve.

### **3. Treatment in Consolidated Books**

**A. Excess Investment over Net Worth:**
- **No Goodwill Creation**: Since the capital reduction occurred post-acquisition and the investment was initially equal to the net worth, there is no basis for recognizing goodwill.
- **Capital Reserve**: The excess of investment over the net worth of the subsidiary (Rs. 70) should be treated as a **Capital Reserve**. This reserve reflects the adjustment due to changes in the subsidiary's equity structure after acquisition.

**B. Accounting Entries:**
1. **Eliminate Investment in Subsidiary**:
- Debit: Investment in Subsidiary (Rs. 100)
- Credit: Share Capital (Rs. 30)
- Credit: Security Premium (Rs. 30)

2. **Recognize Capital Reserve**:
- The excess amount (Rs. 70) should be credited to a **Capital Reserve**. This is a balancing figure that accounts for the difference between the holding company's investment and the subsidiary’s reduced net worth.

**C. Disclosures:**
- **In Financial Statements**: Disclose the nature and amount of capital reserves in the notes to the consolidated financial statements.
- **Accounting Policies**: Explain the treatment of capital reserves due to post-acquisition adjustments.

### **4. Summary and Recommendations**

1. **No Goodwill**: Since the excess of investment over the net worth arises due to post-acquisition changes, goodwill is not created.
2. **Capital Reserve**: The excess amount should be recognized as a capital reserve in the consolidated financial statements.
3. **Disclosure**: Ensure proper disclosure of the capital reserve and the nature of adjustments due to capital reduction in the notes to the consolidated financial statements.

### **Additional Considerations**

- **Review of Deeds and Agreements**: Ensure that the capital reduction scheme and its impact are fully documented and aligned with accounting standards and regulatory requirements.
- **Consultation with Professionals**: Given the complexity of consolidation accounting, consider consulting with a professional accountant or auditor for detailed guidance and to ensure compliance with relevant accounting standards.

By following this approach, you ensure that the consolidation is accurate and compliant with AS 21, and that the financial statements reflect a true and fair view of the group’s financial position.