Skip to main content

Consolidated Financial Statements & CONTROL

1.1 Meaning of Consolidated Financial Statements

Consolidated Financial Statements (CFS) are the financial statements of a group presented as those of single economic entity. A group is a parent and all its subsidiaries. A parent is an investor that controls another entity called subsidiary. The parent and subsidiary (ies) constitute a Group.

A parent company is required to prepare CFS of the Group as a whole. CFS are:

1. Consolidated Balance Sheet

2. Consolidated Comprehensive Income Statement

3. Consolidated Statement of Changes in Equity

4. Consolidated Statement of Cash Flows

5. Notes and other statements

6. Statement of Restatement Analysis

1.2 Meaning of Control

Control: is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Criteria in deciding control over another entity are:

i. Majority voting power (more than half of the voting rights);

ii. Power to govern financial and operating policies of the entity under a statute or agreement;

iii. Power to remove majority of the board members and control of the entity is by that board;

iv. Power to cast majority votes at board meetings.

1.2.1 Potential voting rights: Financial instruments which are convertible into equity shares with voting rights are termed as instruments having potential voting rights. Examples are share warrants, convertible debentures, convertible preference shares, etc. While evaluating control the potential voting rights are taken into account. However, it is necessary to take into account all facts and circumstances including terms of exercise and other agreements before counting such potential voting rights.

Example 1.1 Planet Ltd. holds 45% stake in IStaR Ltd. out of the 20 million equity shares of the investee company. In addition, it holds 20 million out of the 30 million share warrants issued by the company. Does Planet Ltd. control IStaR Ltd.?

Solution 1.1 Total voting rights of IStaR Ltd.:

Current 20 million

Potential 30 million

Total 50 million

Out of which Planet Ltd. holds.:

Current 9 million

Potential 20 million

Total 29 million

So Planet Ltd. holds majority voting right of IStaR Ltd. on the basis of current and potential voting rights. IStaR Ltd. is a subsidiary of Planet Ltd.

It is not relevant to analyze whether the Planet Ltd. intends to exercise the warrants or it has the financial ability to exercise the warrants. Only issue evaluated is whether it has ‘authority’ to exercise the warrants.

Even ‘out-of-money call option’ held by the investor is counted as potential shares despite the fact that the options are currently worthless. The issue is the right to exercise not that whether the entity will exercise or not.

1.2.2 Dual control and issue of consolidation: Dual control may occur in rare situation when an entity establishes control through majority voting rights but another company has appointed majority Board members. In this case both the entities which have control should consolidate.

Comments

Post a Comment

Popular posts from this blog

Maintenance Charges Default: No Water, No Sympathy

In what can only be described as a case of forum shopping (trying to find the friendliest court), an apartment owner in Shiv Vihar CHS, Dombivali (East), took his complaints on a legal tour. The petitioner, Vilas Gopal Dongare member of the society was unhappy. Why? Because his water supply was cut off. The reason? He had not paid his maintenance bills, which had piled up to a whopping Rs. 7 Lakhs! Despite making several complaints about the alleged harassment by the society and even a water tank causing structural issues in his building, his cries were heard and promptly dismissed. The Maharashtra State Human Rights Commission looked into his case and, on 05.02.2020, decided it was not a human rights violation. They said, “Pay your bills first.” The society initiated proceedings under Section 101 of the Maharashtra Co-operative Societies Act, 1960 (MCS Act) to recover arrears and got a Recovery Certificate issued in its favour. When the petitioner’s appeal against this certificate wa...
Post a Comment
Read more

AMORTISED COST CALCULATION: THE EFFECTIVE INTEREST RATE (EIR)

IAS 39 mandates some financial assets and liabilities to be subsequently measured at ‘amortized cost’.  This measurement concept is a management theory put in accounting practice. It means that the contractual interest rate each period should be adjusted to amortize the transaction costs over the expected life of the financial instrument. The amortization is calculated on an effective interest rate (EIR) / yield-to-maturity (YTM) basis. The EIR is the rate that exactly discounts the stream of principal and interest cash flows excluding any impact of credit losses, to the initial net proceeds. It is important to note that EIR method does not take into account any future credit impairments anticipated on that instrument. The carrying amount of the financial instrument subsequently measured at amortized cost is computed as: Transaction costs are an integral part of the amortized cost calculation. They are defined as costs that are directly attributable to the acquisit...
49 comments
Read more

Court Upholds Co-operative Membership Transfer with Release Deed

In the case of Bima Nagar Co-operative Housing Society Ltd. v. Divisional Joint Registrar & Ors. WP 10768 of 2024 , the Bombay High Court on 23.09.2024 dismissed the society’s petition challenging the membership transfer to Pushpa Morey, a widow, following her husband's death. Initially, Pushpa was granted provisional membership but was later denied full membership by the society. Pushpa applied for full membership after her husband's passing. When the society refused, she sought help from the Deputy Registrar, who ordered that the society admit her as a full member under Section 22(2) of the Maharashtra Co-operative Societies Act, 1960. The society’s appeal to the Divisional Joint Registrar was unsuccessful, prompting the writ petition in the Bombay High Court. The society argued that the "family arrangement" concept under Section 154B-13 of the Maharashtra Co-operative Societies Act applies only to a Hindu Undivided Family (HUF). Pushpa, however, contended tha...
2 comments
Read more