A holding company is a parent company that owns enough voting stock in a subsidiary to dictate policy and make management decisions. This is generally done through influence of the company's board of directors.
This doesn't mean that the holding company owns all of the subsidiary's stock, or even a majority of it. However, holding companies that control 80% or more of the subsidiary's voting stock gain the benefits of tax consolidation, which include tax-free dividends for the parent company and the ability to share operating losses.
Advantages of Holding Companies
Acquiring a controlling interest in a subsidiary as a holding company has certain advantages over a merger:
§ The ability to control operations with a small percentage of ownership and, thus, smaller up-front investment
§ Holding companies can take risks through subsidiaries, and limit this risk to the subsidiary alone rather than placing the parent company on the line
§ Expansion can happen through simple stock purchases in the public market, which avoids the difficult step of gaining approval from the subsidiary's board of directors
Disadvantages of Holding Companies
The holding company model has the following disadvantages:
§ If less than 80% of the subsidiary is owned by the parent, the holding company pays multiple taxes on the federal, state, and local levels
§ A holding company can be forced to dissolve more easily than a single merged operation
§ A holding company may expand through the use of leverage or debt, building a complex corporate structure that can include unrealized values, and creating a risk if interest rates on debt or the valuation of the assets posted as collateral for loans change dramatically.
How to prepare Consolidated Balance Sheet of Holding Company
Under Indian Company Act , there is no need to prepare combined or consolidated final accounts of holding and subsidiary company in the books of holding company but holding company attaches the copy of balance sheet , one copy of profit and loss account and one copy of audit report of subsidiary company with his final accounts . But for showing true financial position, often holding company prepare consolidated balance sheet. It is easy to understand that consolidated balance sheet is a balance sheet in which all the assets and liabilities of holding company and subsidiary company are added with each other but practically, it is tough to make consolidated balance sheet of holding and subsidiary company.
Steps for preparing consolidated balance Sheet of the holding company and its subsidiary company.
1st Step
Add all the assets of subsidiary company with the assets of holding company. But Investment of holding company in Subsidiary company will not shown in consolidated balance sheet because, investment in subsidiary company will automatically adjust with the amount of share capital of subsidiary company in holding company.
2nd step
Add all the liabilities of subsidiary company with the liabilities of holding company. But Share capital of subsidiary company in holding company will not shown in the consolidated balance sheet in the books of holding company. Because, this share capital automatically adjust with the amount of the investment of holding company in to subsidiary company.
3rd Step
Calculate of Minority Interest
First of all we should know what minority interest is. Minority interest is the shareholder but there is not holding company’s shareholder. So, when holding company shows consolidated balance sheet, it is the duty of accountant to show minority interest in the liability side of consolidated balance sheet.
We can calculate minority interest with following formula
Total share capital of Subsidiary company = XXXXX
Less Investment of Holding company in to subsidiary company = - XXXX
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Add proportionate share of the subsidiary company‘s profit and Reserves or increase in the value of assets + XXXX
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Less proportionate share of the subsidiary company’s loss and decrease In the value of total assets of company - XXXXX
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Value of Minority Interest XXXXX
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4th Step
Calculate cost of capital / Goodwill or Capital Reserve
If holding company purchases shares of subsidiary company at premium, then the value of premium will be deemed as goodwill or cost of capital and shows as goodwill on the assets side of consolidated balance sheet.
But if holding company purchases the shares of subsidiary company at discount, then this value of discount will be capital reserve and show in the liability side of consolidated balance sheet.
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