Consolidated Balance Sheet of holding Companies with One Subsidiary Only

Preparation of Consolidated Balance Sheet for a Holding Company and Its Subsidiary

A consolidated balance sheet combines the financial statements of a holding company with those of its subsidiary to present a unified financial position. The process involves several key steps to ensure that the financial statements accurately reflect the combined financial health of the group.

Steps for Preparing the Consolidated Balance Sheet

1. Aggregate Assets and Liabilities:

• Assets:
  • Combine the assets of both the holding company and the subsidiary.
  • Note: The holding company's investment in the subsidiary is not included in the consolidated assets, as it is offset against the subsidiary's share capital in the consolidation process.
• Liabilities:
  • Combine the liabilities of both companies.
  • Note: The subsidiary's share capital is also excluded from the consolidated liabilities as it offsets the investment made by the holding company.

2. Calculate Minority Interest:

• Definition: Minority interest represents the portion of the subsidiary not owned by the holding company.
• Calculation Formula:
  • Total Share Capital of Subsidiary
    • Less: Investment by Holding Company
    • Add: Proportionate share of Subsidiary’s profit and reserves
    • Less: Proportionate share of losses and decreases in asset value
  • Result: Value of Minority Interest.

3. Determine Goodwill or Capital Reserve:

• Goodwill:
  • If the holding company acquires subsidiary shares at a premium, the premium amount is recorded as goodwill on the asset side of the consolidated balance sheet.
• Capital Reserve:
  • If shares are acquired at a discount, the discount amount is recorded as a capital reserve on the liability side of the balance sheet.

4. Treatment of Pre-Acquisition Reserves and Profits:

• Pre-Acquisition Profits and Reserves:
  • These are shown as capital reserves in the consolidated balance sheet.
  • Adjustment: Deduct the proportionate share of minority interest's profits or reserves from these reserves and add to minority interest’s value.

5. Calculate Post-Acquisition Profits:

• Post-Acquisition Profits:
  • Include the subsidiary’s profits earned after acquisition in the holding company’s consolidated profits.
  • Adjustment: Allocate the portion attributable to the minority interest and add it to the minority interest’s value on the liability side.

6. Eliminate Common Transactions:

• Common Transactions: Exclude transactions between the holding company and its subsidiary, such as:
  • Sales and purchases on credit.
  • Debtors and creditors balances.
• Bill Payables/Receivables: Adjust for any bills discounted from third parties.

7. Treatment of Unrealized Profits:

• Unrealized Profits:
  • If goods are sold between the holding company and subsidiary at a profit but not yet sold to third parties, exclude the unrealized profit from the profit and loss account.
  • Adjustment: Transfer unrealized profit to a stock reserve account and reduce closing stock value by this amount.

8. Treatment of Dividends:

• Dividends Received:
  • Capital Profits: Dividends declared from capital profits are added to capital reserves.
  • Revenue Profits: Dividends declared from revenue profits are included in the general profit and loss account and shown on the liability side of the consolidated balance sheet.

Summary

The preparation of a consolidated balance sheet involves:

• Combining the financial statements of the holding company and its subsidiary.
• Excluding the investment in the subsidiary from assets and the subsidiary's share capital from liabilities.
• Calculating and presenting minority interest, goodwill, or capital reserve as applicable.
• Adjusting for pre- and post-acquisition profits, common transactions, unrealized profits, and dividends.

This process ensures that the consolidated balance sheet provides a true and fair view of the financial position of the group as a whole.