Consolidated Financial Statement | Financial Statement of Subsidiary Company

Financial statements of a Subsidiary Company in India

Financial statements of a Subsidiary Company in India

How a subsidiary company works in India:

Subsidiary company is a form of company in which 50% or more shares are owned by a holding or parent company. If the shares are wholly-owned by the parent company then it is called a wholly-owned subsidiary company registration. A subsidiary company is considered a separate legal identity from its holding organization.

In most cases any company usually decides to operate through a subsidiary for many reasons which can be either one of these or all of these-

  1. For the purpose of diversifying and multiplying the investments.
  2. For holding more assets.
  3. For the purpose of enjoying tax benefits and exemptions.

Consolidated financial statementFinancials of a subsidiary company in India:

There have been a lot of confusion regarding the preparation of financial statements of a subsidiary company due its ownership rights to the main parent company. But as per various statutes, the financial statements of a subsidiary company in India is prepared independently and then provided to its parent company. While making the main financial statement, the parent company, consolidates the subsidiary company’s statement and club it in the annual financial report.

The parent company for convenience uses the consolidated financial statement in which all the financial statement of subsidiary company under it, are being aggregated instead of filing multiple statements.

Consolidated financial statements:

A consolidated financial statement can be said as combined financial statements of the subsidiaries and the parent company. The purpose of preparing a consolidated statement is to provide a complete outlook on the financial position of the holding company and its subsidiary companies.

Preparation of consolidated financial statement of a company demands for a lot of efforts as it requires expert knowledge to categorize transactions that must be included and the ones that must be deluded.

In short we can say that a consolidated financial statement is a financial report stating the total finances of all the legal entities separate from the parent company that are mainly registered as foreign companies in India.

Procedure for preparing of the consolidated financial statement:

While preparing a consolidated financial statement a basic procedure is followed by the companies. These are broadly divided in two fundamental procedures which are-

  1. As per the first procedure for preparing the consolidated financial statement, every item that is considered as a liability to another and the asset in a single company are cancelled. Then all the other items that are not cancelled must be added in the statement. Majorly, there are two types of things or items that cancel each other out in the consolidated financial statements position.
  2. In the second procedure, the investment made in a subsidiary company is considered as an asset for the holding company and is canceled out by another item i.e. share capital. Share capital is the amount that is recorded in the financial statements of the subsidiary company. Therefore, the share capital of the holding company is considered while preparing the consolidated financial statements.

Note: It is to be noted that when there is trading between different companies take place in a single group then one company’s payables are canceled by the receivables of another company.

Preparation of Consolidated Financial Statements:

A consolidated financial statement of the company is prepared in a step by step manner. These steps are-

  1. Firstly, the preparation of the consolidated financial statements is also determined through the need of preparing them by the parent or holding company. It becomes utterly important to prepare the statements when the parent company has majority control over the subsidiary company, which is the main case in most of the subsidiary companies operating in India.

If ever a situation of bankruptcy is faced by the subsidiary company then the parent company usually loses its major control over the operations of such a company and the requirement to prepare the consolidated financial statement is canceled.

  1. Secondly, the balance sheet of the subsidiary and information on income statement is listed next to the accounting data of the parent company. Then all the items mentioned in each line are added for determining the consolidated balance.
  2. In the third step, the inter-corporate stock holdings are adjusted in the statements since its issue can overstate the outstanding stock balance and report the subsidiary stocks owned by the main holding. To overcome this problem an equal amount to the investment in the stocks of the account of the subsidiary company must be credited and the other items such as retained earning accounts, common stocks and the paid in capital excess of par must be debited.
  3. In the next step, the inter-corporate sales are adjusted which have arisen from a transfer of inventory between the subsidiary and its parent company. After identification of such transactions, the consolidated retained earnings must be debited and the consolidated ending inventory for the value equal to the transfer must be credited.
  4. In the last step, the inter-corporate receivables and payables are adjusted. It is necessary for these to be included in the consolidated financial statements by debiting the consolidated accounts payable and crediting the consolidated accounts receivable.

Subsidiary company and accounting:

There is a basic process of putting in the transactions in the books of accounts, whenever the accounting

System of the subsidiary company is considered. The following items must be recorded under the same-

  1. Purchase of the subsidiary stocks by parent company- This is recorded in the books by debiting the investments made in inter-corporate sector and crediting available cash.
  2. Dividend paid by the subsidiary company to the holding company- The cash is debited and the inter-corporate investment is credited to record it.
  3. Annual profits of the subsidiary company as per the percentage share of the parent company- This done by debiting the inter-corporate investment and crediting the revenue generated through the investment.
  4. Identification of the transactions that require adjustments in the consolidated financial statements- For easier preparation of the consolidated financial statements, it is always recommended that all the transactions that must be adjusted in the books, should be identified at an early stage. Such adjustable transaction to be included in the consolidated financial statements are-
  • Any sales transaction occurring between the subsidiary and the parent company
  • Accounts receivable
  • Accounts payable

 Such transactions are marked in the ledger under a special reference tag for accounting them easily in the consolidated financial statement, at the end of the financial year.

 

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.