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Consolidated statements: An introduction

May 26, 2001

Markets still do not seem to be looking a year ahead to March 2002. The fiscal year by which all holding companies will have to compulsorily furnish a consolidated picture of their group businesses. In addition the parent and subsidiary will also have to report their accounts separately. Accounting Standard (AS) - 21 -- Consolidated Financial Statements -- issued by the Institute of Chartered Accountants of India (ICAI), comes into effect from fiscal 2002. The aim of the standard is to present financial information about a group as a single entity -- the resources controlled, the obligations and the overall performance. Consolidated Financial Statements include consolidated balance sheet, income statement and cash flow statement if presented by the parent.

For consolidation a holding - subsidiary relationship has to be established. As per the standard a subsidiary is company is one in which the holding company owns, either directly or indirectly, more than 50% of the voting power. Also, a relationship can be established if the holding company controls the composition of the board of directors or any other corresponding governing body. The objective of the relationship is to obtain economic benefits.

The consolidation pertains to both domestic as well as foreign subsidiaries. E.g. According to the US GAAP Satyam Computers had reported a consolidated net loss of US$ 29 m in the first nine months of FY01. This is due to the losses made by its subsidiaries. The total losses incurred by Satyam subsidiaries in FY01 were Rs 737 m. Satyam Computers reported a net profit of Rs 3,162 m for FY01.

(Rs m)Satyam
Europe Ltd
Satyam Asia
Pte Ltd.
Dr. Millenium
Japan KK
% Stake52.5%100.0%100.0%100.0%100.0%100.0%
Profit / (Loss) for FY00 (263) (512) (52) (21) - (13)
Satyams share (138) (512) (52) (21) - (13)
Total (737)

Under the accounting standards, the financial statements of the parent and the subsidiary should be combined on a line-by-line basis. Similar items of assets, liabilities, income and expenses should be added together. However, certain precautions should be taken:

  • The cost of investment to the holding company and the parent's portion of equity in the subsidiary company should be eliminated from the consolidated balance sheet.

  • In case the cost of investment to the parent is in excess of the book value of the portion of equity purchased the excess should be recorded as goodwill in the consolidated balance sheet. In the reverse scenario, cost of investment is lower than the book value; the excess of book value over investments should be recorded as capital reserve.

  • Intra group balances and transactions including sales, expenses and dividends are to be eliminated in full from the consolidated statements.

  • Minority interest (non-promoter holding) in the subsidiary company has to be accounted for in the consolidated balance sheet for their share of net assets and profits.

The consolidation should be based on financial statements drawn on the same accounting dates. However, if statements are drawn on different reporting dates, the transactions occurring between the reporting dates of the subsidiary and parent company and having significant impact only should be accounted for in the consolidated statements. For all other purposes the financial statements can be consolidated on line-by-line basis. However, in any case the gap between the reporting dates cannot be more than six months.

The report attempts at drawing out the basic premises for consolidating financial statements. The market may not be reflecting the consolidated picture as the exercise is challenging and participants may not be comfortable with the accounting procedure. However, clarity on the subject will improve as companies disclose their consolidated results.

Income Statement
Reliance Industrial Investments & Holdings Ltd.Reliance Industries Ltd
IncomeRs mRs mIncomeRs mRs m
Investment Income 798.0  Sales 203,013.9  
Other interest received 133.8  Other income 6,873.0  
   931.8    209,886.9
Expenditure  Expenditure  
Establishment costs 3.2  Variation in stock (3,436.8) 
Discount on debentures 21.3  Purchases 4,860.1  
Prov. decline in mkt value of invst 30.1  Mfg & other exps 160,997.5  
Interest 130.5  Interest 10,080.0  
Depreciation 0.0 185.1 Depreciation 12,783.6 185,284.4
Profit Before Tax  746.7    24,602.5
Tax  55.0    570.0
Profit after tax  691.7    24,032.5
Consolidated Income Statement
IncomeRs mRs m
Sales 203,811.9  
Other Income 7,006.8  
Establishment costs 3.2  
Discount on debentures 21.3  
Prov. decline in mkt value of invst 30.1  
Interest 10,210.5  
Depreciation 12,783.6  
Variation in stock (3,436.8) 
Purchases 4,860.1  
Mfg & other exps 160,997.5 185,469.5
Profit Before Tax  25,349.2
Tax  625.0
Profit after tax  24,724.2

Balance Sheet
Reliance Industrial Investments & Holdings Ltd.Reliance Industries Ltd.Consolidated
Sources of FundsRs mRs mRs mRs mRs mRs m
Equity share capital 1,475.0   10,534.5   12,009.5  
Preference share capital -   2,929.5   2,929.5  
Reserves & surplus 820.6   126,363.5   127,184.1  
Networth  2,295.6   139,827.5   142,123.1
Borrowed Funds      
Secured loans 505.2   59,881.1   60,386.3  
Unsecured loans 17,025.8   55,321.3   72,347.1  
   17,531.0   115,202.4   132,733.4
Total  19,826.6   255,029.9   274,856.5
Application of funds      
Fixed assets 0.5   154,483.1   154,483.6  
Investments 19,796.7   60,665.6   80,462.3  
Net current assets 29.4   39,881.2   39,910.6  
Total  19,826.6   255,029.9   274,856.5

*RIIHL is a 100% subsidiary of RIL and is an investment company. There are no inter group transactions except for dividends.

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