Subsidiary and holding companies PDF

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Subsidiary and holding companies
Consolidated financial Statements, Consolidating procedure....

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Subsidiary and holding companies Consolidated financial Statements, Consolidating procedure.

Holding and subsidiary companies Definitions Subsidiary company A subsidiary company is a company owned and controlled by another company. The owning company is called a parent company or sometimes a holding company. A subsidiary’s parent company may be the sole owner or one of several owners. Holding company A holding company is a company that owns other companies’ outstanding stock. A holding company usually does not produce goods or services itself; rather, its purpose is to own shares of other companies to form a corporate group. According to the companies act of 2015 section 3 a company is deemed to be a holding company if: -Controls the composition of that composition of that other companies board of directors -Controls more than half of the voting rights in that other company -Holds more than half of that other company’s issued share capital or -Is a holding company of a company that is that other company’s holding company. Relationship between Holding and subsidiary company Consolidated balance sheet This is an accounting relationship between a holding and subsidiary company and shows the combined assets and liabilities of both companies. It shows the financial position entire business which consist of the parent company and all its subsidiaries. Stockholding A holding company is the primary and sole shareholder of stocks belonging to the subsidiary company. This gives the holding company power to make decisions such as the election and appointment of the board of directors in the subsidiary company. Nevertheless, the subsidiary company remains as a separate and independent legal entity from the parent company. Management and control The holding company is in charge of preparing the bylaws that govern the subsidiary, especially on matters of hiring and appointing senior management employees. Moreover the subsidiary company may not amend these bylaws on its own without the consent and approval of the sole shareholder that is the parent company. Responsibility The subsidiary and holding companies are separate legal entities; each may be sued by other companies or may sue others. However, the parent company has the responsibility of acting in the best interest of the subsidiary by making the most favourable decisions that affect the management and financials of the subsidiary company of the subsidiary company. The

holding company may be found guilty in a court, for breach of fiduciary duty, if it does not fulfil its responsibilities. The holding company and the subsidiary are perceived to be one and the same if the holding company fails to fulfil its fiduciary duties to the subsidiary company. Both companies would share liabilities incurred by either.

Consolidated financial statements Definition Consolidated financial statements are the financial statements of a group presented as those of a single enterprise. Consolidated financial statements normally include consolidated balance sheet, consolidated statement of profit and loss, and notes, other statements and explanatory material that form an integral part thereof. A consolidated cash flow statement is presented in case a parent presents its own cash flow statement and the format used is the same as that adopted by the parent company for its separate financial statements. When a parent company is presenting the consolidated financial statements it should also present its separate financial statements. Many corporations are composed of numerous separate companies and, in turn, prepare consolidated financial statements. Consolidated financial statements present the financial position and results of the operations for a parent (controlling entity) and one or more subsidiaries (controlled entities) as if the individual entities actually were a single company or entity. Consolidation is required when a corporation owns a majority of another corporation’s outstanding common stock. The accounting principles applied in the preparation of the consolidated financial statements are the same accounting principles applied in preparing separate-company financial statements. Two companies are considered related when one controls the other company. Consolidated financial statements are generally considered to be more useful than the separate financial statements of the individual companies when the companies are related. Whether the subsidiary is acquired or created, each individual company maintains its own accounting records, but consolidated financial statements are needed to present the companies together as single economic entity for general –purpose financial reporting. Benefits of consolidated financial statements Consolidated financial statements are presented primarily for the benefit of the shareholders, creditors, and other resources providers of the parent. Significantly, consolidated financial statements often represent the only means of obtaining a clear picture of the resources of the combined entity that are under the control of the parent company. Limitations of consolidated financial statements

Some information is lost any time data sets are aggregated; this is particularly true when the information involves an aggregation across companies that have substantially different operating characteristics.

Exclusion from consolidation A subsidiary should be excluded from consolidation when control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future. In addition the exclusion may come as because the subsidiary company operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent. Consolidation procedures The financial statements of the holding company and its subsidiaries should be combined on a line to line basis by adding together like items of assets, liabilities, income and expenses. For consolidated statements to present financial information about a group as that of a single enterprise, the following steps should be taken. -Firstly, the cost to the parent of its investment in each subsidiary and the parent’s portion of equity of each subsidiary is made, should be eliminated. -Any excess of the cost to the parent of its investment in a Subsidiary over the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, should be described as goodwill to be recognised as an asset in the consolidated financial statement. -When the cost to the parent of its investment in a subsidiary is less than the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference should be treated as a capital reserve in the consolidated financial statements. -Minority interests in the net income of consolidated subsidiaries for the reporting period should be identified and adjusted against the income of the group in order to arrive at the net income attributable to the owners of the parent. -Finally, the minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated balance sheet separately from liabilities and the equity of the parent’s shareholders. The minority interests in the net assets here consists of the amount of equity attributable to minorities at the date on which investment in a subsidiary is made and the minorities’ share of movements in equity since the date the parent-subsidiary relationship came in existence.

References Jain, S & Narang-Kalyani, K (2005). Advanced accounting accounting starndards volume 111. K.L Narang- Kalyani publishers. Wicks, D. The Relationship between a Holding & subsidiary company. Retrieved from https://smallbusiness.chron.com/relationship-between-holding-subsidiary-company14683.html What is a subsidiary company. Retrieved from https://www.thebalancesmb.com/what-is-asubsidiary-company-4098839-...