#1 Consolidated Financial Statements (Holding Company) - Basic Concepts - CA INTER -By Saheb Academy

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Hi everyone, welcome back to Sahab Academy. Now, in today's video, we're going to start this new chapter of CA Inter Group 2 Advance Accounts, that is called Consolidated Financial Statements. And I know you people are very worried about this chapter, like how are we going to do this? Because when we see the study material, we find that there are lots of adjustments going on over there. And on top of that, we have to prepare so many working notes in each and every question. And overall, this chapter is very lengthy, so we feel this is very difficult. Yes, it's quite difficult, I'm not gonna lie to you. But if you understand the basics properly, if you get a strong grip on the basic concepts, then believe me, this chapter is not going to be that much difficult. Of course, it will be lengthy, but not that much difficult as you think. Now, and the adjustments and everything, it will totally immerse into your mind if you get the concepts clear. Okay, so let's just get on the basics right now and let's start the video.

Now, first, let's take this simple example to understand the meaning and purpose of consolidated financial statement. See, in this example, here we have Reliance Industries Limited. And then below, we have these four companies: Jio, Reliance Petroleum, Alok Industries, and Network 18 Group. These four companies are being controlled by Reliance. So, if there is a control on these companies by Reliance, then automatically here we have parent or holding company and subsidiary company relationship. This Reliance company would be the parent or the holding company because it is controlling other companies. And Jio would be what? Subsidiary of Reliance. Reliance Petroleum, subsidiary of Reliance. Alok Industries, subsidiary of Reliance. Network 18 Group, subsidiary of Reliance. Why is that? Because they are being controlled by Reliance. Simple as that. This is father or mother, and these are the children. Okay.

Now, these are separate entities. Okay? They are not amalgamated together or something. No, they are separate entities. They have their own separate financial statements also. See here, they will prepare their own separate financial statement. Jio financial statement, Reliance Petroleum financial statement. Yeah, balance sheet, profit and loss, cash flow statement, statement of changes in equity, everything. All right. And it's called standalone financial statement, separate financial statement, that's what it means. And Reliance company also, separate financial statement, standalone financial statement. Okay. But this whole thing, yeah, the parent company, subsidiaries, joint ventures, associates, yeah, all these together are called as what? They are called as one group. Yeah, they are not together actually. It's just that Reliance company has control over them. And in financial technical language, we call this whole thing, joint venture, associate, subsidiary, and parent company, this whole thing, we call it as group. A single economic entity, just in the financial statements. Okay, that's in the financial terminology, we call that as one group. Okay.

Now, what is that group? Reliance Industries Limited Group. Okay. So, the shareholders of Reliance Industries Limited, they are very interested to know the financial position and the performance of this whole group. Reliance Industries Limited, all its joint ventures, all its associates, and all its subsidiaries. This whole thing. Okay. So, how are they going to understand? Do they need to go and see separate financial statement of Jio, of Reliance Petroleum, of Alok Industries, of Network 18? And you know, whatever subsidiaries are there. You know, actually, there are more than 100 subsidiaries of Reliance Industries Limited. So, are the shareholders of Reliance, are they going to go and see each and every financial statement? No, they are not. So, that's where consolidated financial statements comes in. See here, CFS, not Cash Flow Statement, Consolidated Financial Statement, are the financial statement of a group presented as a single economic entity, single enterprise. And they are meant to show the financial position of the group as a whole. That's what consolidated financial statement is. And the purpose of that is to show the financial position, the performance of the whole group. Okay, whole group.

Now, here in your CA Inter syllabus, we only have what? Subsidiaries. One parent and one subsidiary relationship. That's all we have. Okay. But actually, in reality, what is there? There are joint ventures, you know, AS 27. And then we have, you know, associate, AS 23. And subsidiary is AS 21. All right. We are just concerned with AS 21 in CA Inter. Is that clear? Right. So, the contents of consolidated financial statement would be what? Balance sheet, statement of profit and loss, cash flow statement, notes to accounts, and also other explanatory material, whatever that is required. Okay. But here in CA Inter syllabus, what you have, the relevant part is only the balance sheet and statement of profit and loss. Exactly. You don't have cash flow statement, neither the notes to accounts. Is that clear? Right. So, this is what consolidated financial statement is.

Now, who says we have to prepare consolidated financial statements? Section 129, subsection 3 of the Companies Act, 2013 says, every company which has subsidiaries, they have to create what? They have to prepare consolidated financial statement. Exactly. Right. Now, how are we going to do it? What is the procedure and the principles that we have to follow to prepare the consolidated financial statements? To prepare that, we have to go according to Schedule 3 of the Companies Act, 2013, which will prescribe as the format. And Accounting Standard 21, this will give us the guidance regarding how to prepare consolidated financial statements. So, what are consolidated financial statements? See, very simple. In this chapter, we don't do accounting. In this chapter, consolidated financial statement, we don't do accounting. All we do is, we just combine the financial statements. Okay. See, already separate financial statements are there. Yeah, separate, separate financial statements are already prepared. So, what are we going to do over here in this chapter is, we are just going to take all the financial statement and combine it into one. One balance sheet, one profit and loss, one cash flow statement, one notes to accounts. Yeah. So, what are we doing? We are preparing financial statements of the whole group. Is that clear? Of one single entity. Here, CFS are the financial statements of a group presented as a single enterprise. And they are meant to show the financial position of the group as a whole. Is that clear? I think you are clear with this. It's very simple.

Now, let's just see the difference between amalgamation and consolidation. Yeah, most of the people have misconceptions regarding that. So, let's clear it up. Now, let's understand how consolidation is different from amalgamation. See, it's very simple. In amalgamation, the companies are directly purchased. For example, let's say there were two companies, A Limited and B Limited. They wanted to amalgamate, they wanted to become one. So, what did they do was, they liquidated their old companies. They went into the coffin, into the box, and they got liquidated and formed a new company called as AB Limited. This is called amalgamation. Another example, let's say there were two companies, P Limited and Q Limited. Q Limited wanted to absorb P Limited. So, what happened? They finalized the deal and everything. This company paid the purchase consideration. And P Limited lost its existence. It got liquidated. It got into the coffin, into the box, to become part of Q company. So, this company got liquidated. And now we just have Q company. And P company is also included in that. Yeah, it became part of Q company. Right. So, this is what amalgamation is. The old companies get liquidated, and the companies are directly purchased.

Whereas in consolidation, it's not like that. See here, in consolidation, a stake is acquired in the equity. For example, the Walmart acquired stake. It acquired shares of Flipkart. Right. So, Walmart became what? Walmart became parent company. Flipkart became subsidiary of Walmart. It's like that. Okay. And, you know, at the report date, what they do? They just do the financial reporting. What is that consolidation? They just combine the financial statement. Here, businesses are combined. The companies, the entities are combined into one. AB Limited, Q Limited. B is no more. A is no more. B is no more. AB Limited is there. Q Limited is there. So, businesses are combined over here. Business combination. Here, it's not like that. Here, both entities are existing, isn't it? Flipkart still exists, isn't it? Yes. So, here, on the reporting date, what do we do? We financially report the financial statement together as a whole group. That's what we do in consolidation. Only standalone financial statements are combined into consolidated financial statement. That's what we do in consolidation. Are you clear regarding this? There is no liquidation, nothing. Flipkart still exists. Walmart also still exists. Exactly. And of course, the accounting standard. Yeah, amalgamation accounting standard is AS 14. And consolidation, AS 21. Right. So, that's a difference. Simple. You clear with this? Right. Let's move on.

Now, let's discuss the control. How the parent company gets control over the subsidiary company. I mean, another company. Now, let's understand how can a company control another company. And what does this control actually signify in our chapter? See, it's very simple. There are two criteria for control. And if you satisfy any one of those two criteria, then you have control. Okay. So, let's say, for example, you want to control Alok Industries. How can you do that? You have to get more than 50% of voting power of Alok Industries. If you have that, then you have control. But how are we going to get more than 50% of voting power? Simple, by acquiring more than 50% of equity shares and convertible preference shares. Is that clear? That's the first criteria. If you have more than 50% of voting power, you control Alok Industries. Alok Industries is your subsidiary, and you are its parent. Simple as that.

Now, the second criteria is that if you control the composition of the board of directors, then you have control over the Alok Industries. Now, let's understand regarding this control, the composition of the board of directors. What does that mean? Who are board of directors? Board of directors are the people who run the company on behalf of the shareholders. So, they are the agents of shareholders, right? They are running the company. If you control the composition of board of directors, what does that mean? Controlling composition of board of directors. For example, let's say there are 10 board of directors in Alok Industries. And if you can appoint or remove majority of them, yeah, six minimum, yeah, more than 50% majority. I'm talking about simple majority. Six board of directors. If you can appoint or remove, then you have control over the composition of board of directors, which ultimately leads to control on Alok Industries. Alok Industries is your subsidiary, and you are its parent. Simple as that. Two criteria: More than 50% of voting power. Second is, control the composition of BOD, that is, you can appoint or remove the majority of board of directors. Simple as that.

Now, control is binary. Either there is control or there is no control. Okay. Control is binary. Always remember that. Either you have control or you don't have control. If you have control, then you have to consolidate it. Simple as that. And if you don't have control, you need not consolidate. Just disclosure. Fine. If you have some investment, what are you going to do? AS 13, Accounting for Investments. Okay. If you have control over that company, then that's your subsidiary, and you have to consolidate 100%. Is that clear? Consolidate 100%. Right. Now, you will wonder, if we are controlling only 60%, let's say, then are we not going to consolidate 60%? No, no. It doesn't work like that. You always have to consolidate 100% whenever you have control. Is that clear to you? Simple as that. Okay. Keep that in your mind. So, the significance of control is that whenever we have control, we have to consolidate 100%. Simple as that.

Now, let's talk about minority interest. See here, what is minority interest? See, let's say there is this subsidiary company. And we are controlling 80% of that company. Okay. So, that's our controlling interest. 80% controlling interest. 80% is owned by us and controlled by us. Okay. And the remaining 20% is not owned by us. The remaining shares are not owned by us. So, they are owned by outsiders. And those outsiders are called in India as minority interest. Okay. Minority interest, outsiders. These are also the shareholders. But this portion is not in our control. Actually, we are controlling the whole company. But this portion of net asset is not owned and controlled by us. Okay. That's what. So, if it's not owned and controlled by us, then that's minority interest. These are the outsiders. Right. So, minority interest is that part of net assets which is not owned by the parent company. We don't own this part. So, that's the non-controlling interest, or it's also called as minority interest. Fine. But still, 100% full consolidation has to be done because we have control. Yes, that's what I said. Whenever we have control. But control is binary. Either you have the control, you don't have the control. If you have the control, what you have to do? The parent, what the parent has to do? Parent has to take all the subsidiary's financial statement and its own financial statements and combine that 100%. It's not like 80% because we own Jio 80%, just for example. We own Alok Industries, you know, 60%. Let's just take 60% of assets and liabilities. No, it's not gonna work like that. 100% consolidation. The whole thing will be consolidated. Everything will be consolidated.

Now, this is just happening in financial statements. These are separate entities. They are running separately. They are just being controlled by Reliance. Okay. On the reporting date, what are we doing? We have financially reporting the group performance, group financial position. So, what are we doing? We are consolidating. We are combining all the financial statements together. And we are showing the results as one single economic entity, which is called as whole group, which consists of subsidiaries, joint ventures, and associates, and of course, the parent. Right. So, that's what happens. Fine. So, this is what. What is minority interest? Minority is that part of net asset which is not owned by the parent company. But still, 100% full consolidation has to be done because we have control. Control is binary. We have control. We have to consolidate. And minority interest in the balance sheet, in the consolidated balance sheet, within equity, shall be presented separately from the equity of the owners of the parent. So, see, this much equity is, this much net assets are owned by whom? Owned by parent. This orange color. The remaining is minority interest. So, minority interest will be shown separately. And this will be shown separately in the consolidated balance sheet. And we have to calculate this minority interest. Now, how to calculate all that? We'll discuss. I'm just going to show you the formula. See here, in this example, 20% is the minority interest. Right. So, how are you going to calculate minority interest? Just the formula. It's simple. See here, all you're going to be doing is, you will be taking their share, 20% of share capital of subsidiary. Because who are these people? Minority interest, they are owners only. Shareholders only. It's just that they are outsiders. Yeah, because 80% is owned by one company, that's our controlling interest, your parent's interest. Remaining is outsiders. Yeah, other people, other shareholders. But they are also the owners. So, what do the owners get? Owners get what? Capital and reserve and surplus. So, that's what minority interest is. Okay. That's what minority interest is. It's nothing other than that. Right. So, we have acquired 80% of share capital of this company. So, that's controlling interest. Remaining is minority interest. So, see here, 20% of share capital of subsidiary plus 20% of reserves and profits of subsidiary. That's what will come in minority interest. Because minority interests are just the owners. They are going to get only what? Share capital and profits and reserves. Right. That's all. That's all minority interest is. And it will be shown separately in the equity of the consolidated balance sheet. Okay. Right.

Now, let's move on. Now, let's understand the concept of net assets, which is very important in this chapter. See, it's really simple. It is the value of a company's assets after deducting its liabilities. Whatever assets you have in your company, just take that minus all the liabilities you have got. Net assets. So, net assets are nothing but just the equity portion of your company. So, how can we calculate net assets? See, you have two ways to calculate net assets. The first is asset minus liabilities approach. 1000 minus 700, you have got net assets of 300. Or what you can do is, you can use equity approach, where you will just pick up the equity portion from the balance sheet. And you have got net assets of 300. Yeah, the same answer will come from both the approaches. So, this is the calculation part. I think you have got this. But now you will ask, what is the significance of net asset? What does it show? See, net asset shows the owner's interest in the company. It shows the net worth of the company, intrinsic value of the company. For example, let's say today, let's say you want to liquidate the company, you want to shut down your company. So, what are you going to do? You are going to sell all the assets and pay off all the liabilities, isn't it? Yes. So, let's say you have sold off all the assets at the book value, just for an example, 1000. And then you paid off all the liabilities, because they have the first claim on your assets, right? So, you paid off all the liabilities. And then whatever money that is left after paying off the liabilities, whom does that money belong to? It belongs to the owners of the company, the equity shareholders, isn't it? So, that's what net assets is. The net worth of the company. Yeah, according to the asset-based valuation approach. So, what does it mean actually? It means that the owners have 300 claim on this company. Yeah, whenever anyone says that I own this company, that means he owns the net assets of that company. Because there will be some liabilities. So, the liability holders will have first claim. The second claim will be of the owner. Okay. So, net asset is the interest of the owners of the company. Right. The equity shareholders. So, it is the value of a company's assets after deducting its liabilities. Is that clear? Right.

Now, let's understand how is this connected with the consolidation. So, let's take this example to understand that. See here, we have these two companies and their respective balance sheets. And let's say this company has acquired 100% stake in this company. So, of course, this company has control over this company. And automatically, here we have holding and subsidiary relationship, or you can say parent and subsidiary relationship. So, on the reporting date, of course, this company will have to prepare consolidated financial statements. Both the separate financial statement needs to be combined as one and shown to the shareholders, right? So, before that, just see what is there in standalone financial statement. And then we'll talk about CFS. Okay. So, in standalone financial statement, we can see that in parent company, on the asset side, investment in subsidiary company, 15,000. What is this? This is the investment that parent company has made in its subsidiary. This is the cost of investment. Now, what does this actually means? It means that parent company owns net assets of that subsidiary company. What are net assets? The equity portion of the company, equity shares and reserves and surplus. Okay. So, if you can see properly, these two things are mirror of each other. 15,000 and here also, equity shares and reserves, 15,000. Yeah. So, here I have taken a simple example, 100% stake. That's why it's equal. So, now, what will happen if it is equal? When consolidated balance sheet will be prepared by the parent company, what the parent company has to do is, these two same things have to be cancelled out. See here, in consolidated financial statement, we eliminate parent company's investment in sub with net assets of sub that is owned by parent company. Both of these things will be cancelled out. Why? See here, let's understand that. Why eliminate parent company's investment in sub with net assets of sub that's because, see here, in consolidated financial statement, in this chapter, what do we do? We prepare financial statement of whole group. Okay. And we consider this group as a single economic entity. Only one company. We consider that. Only in this chapter. But in reality, what will happen? See, many companies are there, and all the companies are existing separately, right? They are operating separately. So, of course, there will be inter-company transaction. There will be intra-group transactions. You know, and because of that, some common things will appear in their financial statement. See here, for example, this company has made investment in its subsidiary. Yes. So, both of these companies are of one group only. Single economic entity. But still, there is common thing between them. Investment. And here, there is net assets. This investment is in what? In the net assets only. See, parent company owns the net asset of subsidiary. So, this is common thing. So, common thing has to be eliminated. In what? In group financial statement. Of course, it will be there in separate financial statement. But in the group, it's single economic entity. No, single economic entity cannot trade with itself. Can I sell this pen to myself and earn the profit? Can I do that? No, I cannot do that. Why? Because it's illogical, right? So, when we prepare the financial statement of group, it is considered to be a single economic entity. And whatever that common, you know, common transactions are there, all the effects of common transaction and the transaction itself needs to be cancelled. Okay. You cannot do trading with yourself. So, in CFS, consolidated financial statement, all effects of common transaction should be eliminated by each other. It is also called as elimination of intra-group transaction. Now, when we'll do the adjustment, we'll, you know, go in depth of this. There are many things. Bills receivables, bills payable, inventory, unrealized profit. Lots of things are there that you have to understand regarding this elimination of intra-group transaction. We'll see that later. But here, I wanted to explain you this one thing first. The first adjustment, you can say that investment in sub and the net asset that is owned by parent of subsidiary will be cancelled out. Okay.

So, see here, we will consolidate both of these balance sheet together. What we'll do? PPE, we have property, plant and equipment, 20,000 and 8,000, right? So, 20, holding, 8,000, subsidiary. That's equal to 28,000. Current assets also, land by land, we will add it up. Okay. We'll consolidate current assets, 5,000, current liabilities, 12,000. Just added up, 17,000. And then current liability is 7,000 and here you have 5,000. 7 plus 5, that's 12,000. You will consolidate H plus S. Or you can say P plus S. Yeah, parent plus subsidiary. That's what you're gonna do. But something there is special procedure that you have to follow. Now, here, for example, this common thing over here, investment in sub and this net asset that is owned by the parent company, which needs to be cancelled out because it's common, right? So, what you're going to do? You're going to just take the equity of the parent company, 33,000, yeah, reserves and surplus and the equity shares, fine, 30 plus 3, 33,000. But you will not take equity of subsidiary company, the net assets of subsidiary company, because it is owned by the parent. And here you have investment. Yeah. So, you will cancel it out. Okay. See here, we don't have investment in sub and neither do we have the equity of subsidiary over here. Okay. Here I've taken a simple example, 100% stake example, you know, we don't have minority interest. Okay. We'll talk about that later. Fine. And then, yes, one more thing you have to understand. See here, the first thing I said was, you have to cancel out investment in sub and in net assets of sub that is owned by the parent. That's the first thing. And then, second thing that you have to understand is that investment in sub will be replaced by the assets and liabilities of subsidiary. Yeah. See here, subsidiary's asset, subsidiary asset and subsidiary liability. So, investment in sub is no more. It's cancelled out. And it is replaced by assets and liabilities of subsidiary. And this is the technical meaning of consolidation. What is consolidation? Consolidation is replacing investment in sub of parent, yeah, by assets and liabilities of subsidiary company. Is that clear? That's what we do. That's the technical meaning of consolidation. Do you understand this? Yeah. Here, I'm just giving you an overview. I'm not getting into very much details regarding intra-group transactions and many adjustments. We'll see that later. Here, I wanted to explain you the basic concept properly. Okay. I want to give you a rough idea about how things will happen in this chapter. And then slowly, you will feel when you will see the adjustments, all these things are very simple. Okay. Right. So, this is the conclusion of this. And now, let's understand what is the cost of control. Yeah, let's understand that.

Now, see, cost of control is really simple. All we do over here is, on the date of acquisition, the day when we acquired the control of subsidiary, on that date, we compare the cost of investment with net assets of sub that is owned by the parent. Now, what is cost of investment? The price that we paid to acquire the control. Okay. We compare that price with the net assets of sub that is owned by the parent. Now, what are the net assets? The equity portion of the subsidiary that is owned by the parent. Now, in this net asset, equity shares will be included on the date of acquisition, including the bonus shares. And then preference shares that is owned by the parent. And also pre-acquisition profit. Now, we have yet to understand what is pre and post equity and profit. We'll get to that. Yeah, within a few minutes. But just understand these three things will be there: equity shares, preference shares, and pre-acquisition profits in this. Okay. So, you will compare these two things. And if cost of investment is more than net assets, then you have got goodwill, which you have to recognize as an asset. And if cost of investment is less than net assets, then you have got capital reserve, which you have to recognize. Okay.

So, now, there can be two scenarios. The first scenario is that to purchase a subsidiary of net a thousand crore. Let's say you have, you know, acquired that 100% stake for 1400 crores. You're paying more. If you're paying more, then that's a loss to you, isn't it? 400 extra you're paying. So, that means you are losing by it. And that you have to recognize as goodwill. Okay. See here, purchase consideration is 1400 crores. And net assets are 1000 crores. So, 400 extra you are paying. That's your goodwill. That's loss, which you have to recognize. Okay. Now, let's understand the logic behind this. It's very simple. For example, let's say, forget about the companies and everything. Let's say you want to purchase a small business in your city, in a prime location. Okay. So, here in Bangalore, let's say I want to purchase an MG Road, a small shop. So, how much do I have to pay? Let's say in that shop, the net asset is 10 lakh. So, can I purchase that small business for 10 lakh? Can I do that? No, I can't. I cannot do that. It's impossible. I might have to pay one crore to purchase that shop. Why? Because it's in a prime location. It's already established business. Yeah, in past, it has been earning profits. And there's a good chance that in future also, you'll be earning profit. So, why would that person sell his business to me for 10 lakh, just at the intrinsic value of his business? He will not. He will charge me at least one crore, two crores. Yeah. And why will I be ready to pay one crore for that business? Because I know if I purchase that business today, then in future, I'm gonna have the same profits which he has had in the past. Right. So, that's why there is a future benefit. And that's why we pay more to purchase and acquire the business. And that looks like a loss to us when we compare that. See, your net assets, 1000 crores. And we are acquiring it at 1400 crores, which looks like a loss to us. But actually, it's not a loss. Okay. Actually, there is a benefit because of that in future. So, that's why we capitalize it. Yeah, we recognize it as an asset, as a goodwill. And then in the following years, we test it for impairment. Clear? Right. So, that's the concept and the logic of goodwill. Fine.

And the second scenario is that let's say you have acquired the 100% stake for 800 crores. At less. If you're acquiring it at less, that means that you are gaining by it. You are gaining 200 crores, isn't it? 1000 crore net assets. And you are paying only 800 crore PCs, only 800 purchase consideration. So, if you are paying less, then you are gaining by it. And that gain has to be transferred to capital reserve. Because that's not an ordinary gain. It has to be transferred to capital reserve. And in accounting standard 21 language, in AS 21 language, we call these things as cost of control. Is that clear? Simple as that. Now, you have to be very clear. See, cost of investment and net assets of sub that is owned by the parent. Equity shares, which also includes bonus shares owned by the parent. Preference shares owned by the parent. And pre-acquisition profits. Now, we have to understand properly what is pre and post acquisition profit. Let's do that. Yeah.

So, let's take this example to understand what is pre and post acquisition profits. But before that, I wanted to tell you one important thing. See, we have to do this chapter from the point of view of holding company. You have to think, you are the holding company, and you are preparing consolidated financial statement. Because you all know who prepares consolidated financial statement? It is the parent company who prepares CFS. So, we always have to do this chapter from the point of view of the parent company. If you do that, if you have that point of view, then you will never be confused in this chapter. Okay. Fine. So, now, let's get back to this example. Now, let's say on first January 22, we have acquired 80% stake of this company. So, this company is our subsidiary because we have got control over it. And the remaining 20% part, which we did not acquire and it is not owned by us, that part became minority interest. The other shareholders, minority. Majority, we have got the majority, we have got the control. It's our subsidiary. Fine. Yes, we got that. Now, what is date of acquisition? See, date of acquisition is the date when we acquired the control of that company and made that company as our subsidiary. Is that clear? Yes. And then there are two more dates. First April 2031, the opening date of the year. And the closing date of the year, 31st March 2022, when holding company will prepare the consolidated financial statement. So, it's also called as date of consolidation. Clear? Yes. And then you also need to know about what is pre-acquisition period and post-acquisition period. Now, to say that, it's very simple. The period before date of acquisition and the period after the date of acquisition. Post acquisition. Yes. Pre-acquisition means what? Before acquisition. Post acquisition, after acquisition. But you have to understand the logic of this. Why are we separating this? First April, 24th January, nine months is pre. And from 4th January to 31st March, three months, just for example, it's post. Why are we separating it like that? From date of acquisition, we are considering date of acquisition as the borderline. Why? Why are we doing this? Because on date of acquisition, we got the control. So, in post-acquisition, only in this period, only we have got the control on that company. Before, we did not have control. So, it is very essential to have that borderline and differentiate these timelines because all the adjustments are dependent upon this. Okay. In analysis of profits. Okay. So, that's why we have to separate this. Here, there was no subsidiary. Here, only we have subsidiary. I'm talking from the point of view of parent. Maybe it was subsidiary of someone else before in pre-acquisition. But we are seeing from the current parent, from this point of view. So, that's why here, there was no subsidiary, no control. Here, there is control and there is subsidiary. That's the main logic behind this pre-acquisition and post-acquisition. Is that clear? Yes. We got what is pre-acquisition period and post-acquisition period. But now we have one small question. What if we acquire the subsidiary on the opening day of the year? What will happen then? Think logically. It's so simple. If you are acquiring on the opening day of the year, that means you, parent, are getting the control of that company on the first day itself. So, then the year starts, and the entire 12 months, you have control. Entire 12 months, you have the control. So, that entire 12 months would be post-acquisition period. The period in which you have control over that company. Isn't it? Yes. So, there is no pre-acquisition period. There is no borderline. Why? Because consolidated financial statement, or any financial statement for that matter, is prepared for year-on-year basis, isn't it? Yes. So, this entire year, there is control. So, entire period would be post-acquisition period. But of course, before that date, there was no control over that company. So, whatever the opening balances would have been there, that you have to consider separately. That would be of pre-acquisition. But whatever that will happen in this period, that would be post-acquisition, when company had the control. So, if you're acquiring any company on the opening day, then there will not be any pre-acquisition period. Entire thing will be post-acquisition period. Is that clear? Right.

Now, you have to understand properly what is pre and post acquisition profits. Yeah. So, let's take this example further and let's understand that. Now, here in this example, we have acquired 80% stake of this company. But what does it mean actually? 80% stake being acquired. 60%, 70%, 80%. What is the meaning of this? It means that you have acquired 80% of net assets of that company. Isn't it? We have seen this in the previous consolidation example also. I told you, this company, for example, let's say it had acquired 100% stake in this company. What is the meaning of this? In the standalone financial statement, will show 15,000 crore, just for example. We have paid 15,000 crore to acquire the net assets, 100% of net assets of this company. Yes, that's the meaning of this, isn't it? Yes. And then the cost of control. So, I told you that what do we do in cost of control? In cost of control, we calculate what is the cost of controlling that company. For how much did we acquire that company? And what did we get in that package? Yeah, what are the net assets we got on the date of acquisition? We compare these two things. And when we compare these two things, if what we paid is more than what we have got, then it's called goodwill. Yeah, that difference is called goodwill. And if we have paid less than what we have got, we have got more net assets, then we are gaining. And that's called capital reserve. Yes. This calculation we have to do. Cost of control. Why do we call it as cost of control? In AS 21 language, because it is the cost that we are incurring to control that company. The extra thing we are paying, goodwill. Yeah, like that. That's why we call it as cost of control. Fine.

So, now, here we are comparing two things: cost of investment, the purchase consideration, the amount we pay to acquire the control. And the net assets. Yeah, we calculate this also. What are the net assets of subsidiary that is owned by the parent? Yeah, what are the net assets that is there that we are purchasing? Isn't it? Now, here we are purchasing 80% stake. We are acquiring 80% stake. So, that means we are acquiring 80% of net assets of that company. So, first, we need to know what are the net assets on the date of acquisition. Total net assets. And then you have to calculate 80% of that and take it over here. 80% of those net assets of subsidiary. And then what we have paid for it? You compare those two things. Isn't it? So, the first objective is, calculate the net asset, the total net assets. And then take 80% of that. And then compare it to purchase consideration. And then we'll come to know whether it's goodwill or capital reserve. Yeah. So, this is our objective over here. So, what do we need to calculate? We need to calculate what are the total net assets of that subsidiary company. How can we do that? We need to use these two approaches. Asset minus liabilities approach. We'll get the net assets. Or we can use the equity approach, where we just take the share capital plus reserves and surplus. We have got net assets, isn't it? That's what we do. Because what are net assets? Just the equity portion of the company. Yeah, just the equity portion of the balance sheet is the net assets, isn't it? Yes. So, we have these two approaches. And we need to calculate net assets on the date of acquisition. Because that's the date when we calculate cost of control, goodwill, capital reserve. Yeah. So, can we use the first approach, asset minus liabilities? Here? No, we can't. Why? Because in the questions, what will happen is, they will not give you asset and liabilities detail over here. They will not give you asset and liabilities. If they will not give you asset and liabilities detail, how can you do asset minus liabilities? If you don't have the values of asset and liabilities on the date of acquisition, how can you use the first approach to calculate net assets? You can't. Simply, you can't. What you have to do is, you have to make use of equity approach. Share capital plus reserves and surplus. So, to do this also, they will mess you up. You will not have directly what is the equity on this date? What is the results and surplus on this date? No, they will not give you that. What you have to do is, some additional information will be given to you. And many adjustments. Yeah. With that, what you have to do is, you have to do analysis of profit. We call it. And with that, you will be able to calculate what are the net assets on the date of acquisition. Now, here, I'm just going to give you a glimpse of that. Not the actual working note here. Okay. Not the actual calculation. I'm just going to give you a glimpse of that, an overview of that, how it works. Yeah. Shall we see that?

So, see here, we have two information given over here. On the opening date and on the closing date. Yeah. Opening date, we have here profit and loss balance, 80,000. Now, this is all of subsidiary. Don't think of parent. Yeah. From the point of view of parent, you have to see. But these things, these balances are of subsidiary. Because what are we doing over here? Pre and post acquisition profit means whose profits? These are the profits of subsidiary, which are being, which are being differentiated. Yeah. Is that clear? Right. So, profit and loss, 80,000. Equity share capital, 10 lakh is given on the opening day of the year. And then the closing day of the year, they have given profit and loss of 2 lakh. Equity share capital of 10 lakh. So, here we have net assets of 10 lakh 80,000. And here we have net assets of 12 lakh. So, what has happened to net assets? Tell me. Net assets were 10 lakh. Sorry, 10 lakh 80,000. Sorry, 10 lakh 80,000. Can you see that? Yes. 10 lakh 80,000 minus. And then 12 lakh. Yeah. Minus 12 lakh. Let's see that. That's equal to how much? 1 lakh 20,000. So, 1 lakh 20,000 increase has happened. I have to get wrong. Yeah, I had to take it. What? 12 lakh minus 10 lakh 80,000. I took 10 lakh 80,000 minus 12 lakh. It's showing in minus. Yeah. Ignore that. So, 1 lakh 20,000 difference is coming. 1 lakh 20,000 increase is happening in net assets. What that increase is called? It is called growth in company. If net assets grows, then it's called your company has been grown. And how can there be a growth in your company? Increase in net assets. So, how can your net asset increase? The first reason is profit. If your profit increases, if you earn more profit, if you earn profit in the current year, then at the end of the year, you will have more net assets. Okay. See here, from 80,000 profit and loss balance has been increased to 2 lakh. So, 1 lakh 20,000, that difference is coming because of increase in profit. That's the first reason. The second reason could be inflow of new capital from the owners. If the equity share capital or any capital increases in your company, then your net assets increases. These two main reasons: profit or capital. But mostly capital would be constant. Okay. If we keep capital as constant, then the main reason for increasing net asset would be profit. Is that clear? So, here in this case, I have kept capital constant. Yeah. Equity share capital, 10 lakh. Equity share capital, 10 lakh. It's constant. No issue of capital, nothing. No buyback of capital, nothing. No bonus issue, nothing is there. Simple example I've taken just to make you understand the time adjustment and the splitting of profit. Okay. So, profit and loss was 80,000 balance over here on the opening date. The closing balance is how much? The closing balance is 2 lakh. Why has this happened? This has happened because of growth. 1 lakh 20,000 profit has been earned in the current year. In the current year. Yeah. In this entire period, we have borderline over here. We have pre-acquisition period. We have post-acquisition period over here. And in this entire year, 1 lakh 20,000 profit has been earned. So, what do we need to do? Think, think. See, the first assumption you need to know. The first assumption is that, see here, profits are earned evenly throughout the year. This is the assumption we use. Okay. Now, this can't be a true assumption because we have so many holidays throughout the year. Yeah. So, that's why this cannot be practical. But we make that assumption for the academic purpose. Okay. Profits are earned evenly throughout the year. That means every day we earn the profit. If you have earned, for example, let's say, just for example, 365 profit in a year. So, every day you have earned one rupee, one rupee, you earn profit. That's the assumption we are making over here. Okay. Keep that in mind. Right. So, what did I tell you? I told you that 1 lakh 20,000 profit has been earned in this period. Now, what we have to do is, we have to split that 1 lakh 20,000 profit into pre-acquisition period and post-acquisition period. What did I say? 1 lakh 20,000 profit has been earned in this period. That profit needs to be split in pre-acquisition period and post-acquisition period. Now, you'll ask me, why do we need to split it? See, the first objective was to calculate the net assets over here. What are the net assets on the date of acquisition? Isn't it? Yes. So, first, you need to have proper split between profits. Then only you'll be able to categorize what is the, what are the net assets on the date of acquisition. Yeah, here and then here. Okay. So, that's why we need to split it properly. And one more thing is that the profit which has been earned before the date of acquisition, that's called pre-acquisition profits. The profits which have been earned before the date of acquisition in pre-acquisition period is called pre-acquisition profit. The profits which have been earned after the date of acquisition, after getting the control, in post-acquisition period, those profits are called as post-acquisition profits. Pre-acquisition profit, post-acquisition profits. Is that clear? Right.

So, what did I say? Pre-acquisition profit. Shall we calculate what is pre-acquisition profit? Okay. So, see, this is date of acquisition. Before this, is there any profit? Yes, there is 80,000 profit over here, which is directly given on first April from the previous years. We have 80,000 profit of sub. Yes. This is entirely pre-acquisition profit. 80,000. This 80,000. Yeah. This 80,000 is there from previous years. Opening balance. So, this is entirely pre-acquisition profit. Okay. This is entirely pre-acquisition profit. And then there is something which has been earned in this nine months. There is something which has been earned in this nine months. We have to calculate that. And 80,000 plus that nine months profit would be entire pre-acquisition profit. Do you get the logic? 80,000 plus this nine months would be entirely what? Entirely pre-acquisition profit. So, we have to calculate that. So, keep this 80,000 aside. And then think about current year profit.

Which we need to split into this ratio into this time ratio, which is called as time adjustment. Now, most of the people get so scared by just, you know, hearing this time adjustment. It's simple. Time adjustment is nothing but just the time ratio. You will see this, how simple it is.

See, one lakh twenty thousand profit we have earned in the current year. So, one lakh twenty thousand profit, just split it in nine is to three. Shall we do that? See, I've already done this time adjustment. Nine is to three ratio, nine months and three months. Nine months in the pre-period and three months in the post-period. So, one lakh twenty thousand into nine by twelve. Shall we put that in the calculator? One lakh twenty thousand into nine months divided by twelve, the total months. That's equal to ninety thousand. Ninety thousand profit has been earned in this pre-acquisition period.

Now, why is it like this? Because of the exemption, because of the assumption, profits are earned evenly throughout the year. That one lakh twenty thousand has been earned evenly throughout the year. That assumption we have made, and based on that assumption, we can split it on the basis of time ratio. Clear, right? You got that? So, if ninety thousand is of pre-acquisition period, yeah, out of that one lakh twenty thousand, then the remaining is of post-acquisition period. Ninety thousand. You can do ninety thousand. See, one lakh twenty thousand is the current year profit. If ninety thousand is of pre-period, then the remaining is of post-period. Thirty thousand. Thirty thousand is of post-period. Clear? Yes, you got it, right? So, that's what I've done. Or you can use the ratio to calculate one lakh twenty thousand into three divided by twelve. That's thirty thousand. Fine. You got it? Yes.

So, we have got the split. Now, what split did we get? Now, we got the split that ninety thousand is pre-acquisition profit, and the remaining thirty thousand is post-acquisition profit. So, can we have net assets now on the date of acquisition? Of course, we can. See here, profit and loss opening is entirely free. Profit and loss opening is entirely pre. Eighty thousand. This is entirely free. And then nine months profit, that's also pre, before the date of acquisition. So, plus ninety thousand. And then equity share capital. See, what are we calculating over here? Did you forget? We are calculating net assets on the date of acquisition to calculate cost of control. Yes, to calculate cost of control, we need what are the net assets on the date of acquisition. But here, we need eighty percent owned by the parent. How much did the parent acquire? But first, let's calculate total and then we'll take eighty percent. Okay, first let's calculate total and then we'll take eighty percent.

So, equity share capital, ten lakh. Yeah, opening equity share capital, ten lakh was there. So, that is entirely pre-acquisition, isn't it? There has been no change. There has been no change. See here, it's same. One. It's constant. Opening and closing is same. So, the entire list free. Not profit, it's pre-acquisition net asset. Okay, equity share capital, ten lakh. Okay. So, add it up. Eighty thousand opening plus uh ninety thousand of that nine months which we just calculated after time adjustment. That's equal to one lakh seventy thousand. Plus equity share capital which was there from before the date of acquisition, ten lakh. Just add it up. That's equal to how much? That's equal to eleven lakh seventy thousand. So, eleven lakh seventy thousand are what? Pre-acquisition net assets. The total. The total.

Now, what you have to do? See, what are pre-acquisition net net assets? This is the equity part. This is the equity, right? This is the equity portion of the balance sheet. And who has the right to equity? Who has the right to net assets? The owners. The owners of the company. And who are the owners of the company? Owners of the company is the parent, eighty percent owner, and remaining twenty percent shareholders are there, other outsider shareholders. Simple logic is there. Simple logic. These are this is the equity portion of the balance sheet. And who has the right to this? The owners. Who are the owners? Owners, parent and minority interest. So, eighty percent of that will go to parent and twenty percent of that will go to minority interest. When you will calculate the minority interest, you will take this portion. Okay.

So, are you clear till here? Is it difficult for you to understand till here? It was simple. We splitted the profit. We calculated what was the profit. Equity share capital, we took on the rate of acquisition. There was no change in it. We got the pre-acquisition at assets. The owners have right to requisition that asset. So, it was distributed among them. Parent eighty percent and minority interest twenty percent. Now, what will happen to these? We'll talk about that. But just for a second, understand assumptions properly. Profits are earned evenly throughout the year. Okay, that's the first assumption. And this will help you while understanding the adjustment of abnormal loss also. Okay, we'll talk about that later in adjustments part. And then the second assumption is no movement in equity share capital. ESC unless the question specifies. Now, for example, I will explain you what is this C. For example, let's say in the question, in the proper full-fledged question, let's say the opening balance of equity share capital was not given ten lakh. Okay, it was not given. But the closing balance was given ten lakh. Sorry, I said ten lakh. It was not given. Okay, equity capital blank. It was blank. Here it is given ten lakh, ten lakh on the closing date. So, what are you going to do? When you will do analysis of profit, you have to do all these workings where you have to take the opening and the closing balance. Okay. So, when you do that, you have to consider that equity share capital was there on the opening date. Same, it was constant. Ten lakh, ten lakh. Even though the question is silent regarding that, still you have to consider there was no movement in equity capital. If the question is silent, no movement, nothing has been issued, nothing has been brought back. Okay, ten lakh, ten lakh, zero movement in between, zero changes in between. Okay, that's what the assumption you have to make. That's what ICI does. These are all ICI assumptions, not my assumptions. Okay. And then the third assumption. You understood that right regarding equity share capital? No, no movement. Equity share capital unless the question specifies. Then the third adjustment is also kind of same regarding general reserve. No movement in general reserve unless the question specifies. For example, here general reserve is not there. But let's say general reserve was given. Okay, general reserve blank. Nothing is being said on the opening date. In the closing date, they have given you general reserve fifty thousand. So, what are you going to do? The question is silent whether you know we have transferred something to generalization in the year. It's completely silent. The question is silent. Okay, just the closing balance of general reserve is fifty thousand is given. So, what you're going to do? You are going to consider there has been no movement in general reserve. General reserve was there from the beginning only. Fifty thousand. Even though the question is silent, you are going to make this assumption that general reserve fifty thousand, zero changes, fifty thousand, fifty thousand, fifty thousand, no change in general reserve. Okay. If the question is silent, if the question says something, then you have to consider that, of course. But here, as a silent question, you have to consider no movement in general reserve unless the question specifies. Clear, right? You got that? And then the fourth assumption is there will always be movement in profit and loss. Opposite to second and third assumption. In profit and loss, what will be considered? If profit and loss, nothing is given, the question is silent regarding the opening balance of profit and loss. Nothing is given, blank here. And let's say here it is two lakh. Yeah, two lakh. Then you are going to assume in the current year there has been change of two lakh. We have earned this two lakh entirely in the current year. Zero balance in profit and loss over here. You are going to consider. Okay, zero balance in the beginning and two lakh entirely has been earned in the current year. And then we have got here profit and loss of two lakh. Like that, you have to consider there will always be movement in profit and loss. But in general reserve and equity share capital, if the question is silent, no movement, constant, constant, constant, constant. Profit and loss, zero to the whatever it is there. Okay, like that, the entire change has happened. Like that, you have to consider. This is the most important part. Okay, you have to understand properly the exemptions. Fine.

So, now coming back to the net assets on the date of acquisition. So, we had calculated this. I told you eighty percent goes to parent and twenty percent minority interest. Fine. Minority interests are the other shareholders. So, when we will do the working note of minority interest, this will be added over there. This twenty percent. But this eighty percent of parent, what will happen to this? Understand. These are the net assets which were purchased by the parent. So, what you have to do? You have to take this into cost of control. See here, eleven lakh seventy thousand. Yeah, eleven lakh seventy thousand into zero point eighty. That's equal to nine lakh thirty six thousand. That is equal to nine lakh thirty six thousand. These are the net assets that were acquired by the that were acquired by whom? That were acquired by the parent company. Parent company purchased. Parent company purchased. Remember this. Parent company purchased these pre-acquisition profits and these all net assets. They purchased it. So, if they are purchasing it and they have paid money for it, then you have to cancel it off. Yeah, you have to knock it off against cost of investment. Yes, you have to knock it off. So, you will compare these two things. Yeah, nine lakh thirty six thousand and let's say the cost of investment is ten lakh. Yeah, nine thirty six we got, right? So, ten lakh is the cost of investment minus nine lakh thirty six net assets we acquired. So, we have paid more. Cost of investment is more. So, that's equal to sixty four thousand goodwill. The positive figure means goodwill. Negative figure means capital reserve. Okay, always use this formula only. Cost of investment minus net assets. Okay, that way positive means goodwill. Negative means capital reserve. Okay, so sixty four thousand extra we have paid. Kind of a loss to us. But there will be a benefit for that, and we are going to capitalize it and we'll test it for impairment in every year. Okay, so sixty four thousand goodwill we have. Okay, so that's the thing.

Now, why did we deducted this, you know, pre-acquisition profits and all from cost of investment? You'll be wondering that, yeah. See, that's because we have purchased those profits. When the subsidiary, the party which, you know, sold the net assets to us, they already knew in the books we have profits and they considered that while quoting us this price. While quoting the price, in that price, profits were already included. So, that's why when we purchased the net assets, we had paid a price for that. So, that's why the PC and the net assets have to be knocked off, and the difference, positive goodwill, negative capital reserve, that's the logic. Okay, you have to understand these things. Simple. You got this, right?

Now, let's discuss what will happen to that. Yeah, you already know now. So, see here, I'll just show you a deeper, you know, illustration. So, this thing happened DOA. We didn't have the financial statements on that date. So, we had to calculate net assets through the equity approach and we got eleven lakh seventy thousand. Yeah, eleven lakh seventy thousand. And this is called as pre-acquisition net assets, which we take to cost of control. Isn't it? What do we do with this? We first see the share of parent and minority interest. Okay, the share of parent is taken to cost of control. Okay, and twenty percent minority interest to minority interest working note. So, cost of investment in cost of control, I'm talking about cost of investment. Whatever purchase consideration we have paid minus net assets at DOA owned by the parent. That's the most important part. Okay, not just the total net assets owned by parent. Yeah, in only eighty, only that you have to take. Positive figure, goodwill. Negative figure, capital reserve. And pre-acquisition profit, that ninety thousand. It was included in this, isn't it? See, it was included in this. Ninety thousand. And in that, eighty thousand also. Eighty thousand, ninety thousand. Those are what? Pre-acquisition profit, right? It's completely included in this in the pre-acquisition net assets. And that's what we knocked off against the cost of investment and we got goodwill or capital reserve. You understood?

And what happened to the uh post-acquisition profit? Post-acquisition profit is like revenue profit. Earned profit. Understand why did we have this border line? Because here there was control. There is no control. If there is no control over here, whatever profit the subsidiary has earned and we have purchased it, that means we have paid a money for that. We have purchased those profit. So, we have to knock it against our purchase consideration. But these profits, these profits have been earned by the subsidiary through its operations when we had the control. Yeah, when we had the control. So, these are our profits. These are parent's profits because parent is controlling the subsidiary, isn't it? Yes. So, that's why these are revenue profits. Earned profits. And you cannot knock that against cost of investment. You cannot knock that off against cost of investment. You can't do that. What you have to do with post-acquisition profit? That thirty thousand which we have earned. It's earned profit. Revenue profit. It's not capital profit. Purchase profit. Okay, we cannot take it to reserves and surplus of the group. No, we can't do that. Why? Because we have purchased it. We have paid money for that. That's not true profit actually. This is the true profit, isn't it? The post-acquisition profit, isn't it? After getting the control, whatever the profit that has been earned by subsidiary, that is called post-acquisition profit. And of course, what do the owners get? Owners get what? Profit, right? From the business. So, that profit of course has to be shared by the owners of the business, owners of the company. Here. So, who are the owners of the company? Eighty percent parent, twenty percent minority interest. So, of course, you have to split that again into eighty percent into parent, twenty into minority interest. This will go to minority interest working note. See here, pre-acquisition also, post-acquisition also. Two net assets you will have. Yeah, these two things. You have to do split. Okay, splitting. You have to split eighty, twenty, eighty, twenty. Whatever the share is. Share might be different. Sixty, forty, like that. Yeah, seventy, thirty. It can be anything. So, what will happen to this parent share? Parent share will be treated as what? Normal earned profit. It will be taken to consolidated reserves and surplus. Okay, consolidated reserves and surplus. In that working note. So, parent's reserves and surplus. Okay, it will be like specifically. Profit and loss into profit and loss. General reserve into general reserve. Like that. It's not like entire reserves and surplus plus reserves and surplus. It's not like that. Okay, whatever the profit and loss balance is there, it will be added with profit and loss. Whatever general reserve balance of subsidiary is there, will be added with general reserve of parent. Like that. PL with PL, GR with GR. Like that. Is that clear? So, parent's reserves and surplus plus parent share of post-acquisition profit of subsidiary. That eighty percent. Thirty percent. See, thirty thousand. Thirty thousand into zero point eighty. Only twenty four thousand will be added. Let's say if parent results and suppliers are let's say fifty thousand. So, fifty thousand plus twenty four thousand. Okay, seventy, seventy four thousand will be the total. Like that. Okay. And then whatever minorities share is there, that will go to minorities working note. Okay, minority is working note. Clear? Did you get it? Yes. This is how you will have to do it. Okay, right.

So, yeah, I think you have got it now. Yeah, it's simple. Yeah, these are the. This is the concept. The entire concept of pre and post acquisition profit. Pre-acquisition profit of the purchase profit which we knock it off against the cost of investment and it gets adjusted into goodwill or capital reserve. And the post-acquisition profit is the earned profit which is consolidated in the group's reserves and surplus. And of everything, minority share will be taken into their own working note and it will be added up and the total will be taken too as a separate portion will be shown in the equity in the group's financial statement as minority interest. Okay, twenty, twenty of everything will be. Will see the working notes and you will feel this is so simple now. Here we have the four working notes that we have to prepare in almost each and every question of consolidation. So, you must understand the basic format of these working notes without adjustments and then slowly when you learn the adjustment, you will be able to fill those into these working notes properly. Okay, so the basic format without adjustment, it's very important because you need to know how they work and what's the logic behind this. Okay, so let's start. Let's understand one by one what are these working nodes and how do they work. Right, let's start with the analysis of profits of subsidiary and then slowly we'll move on to the cost of control, minority interest and consolidated reserves and surplus. Now, here we have the first working node, analysis of profit of subsidiary, or you can also call it as statement of an assets or analysis of net assets. Now, first, you need to understand what is the goal over here? What are we trying to do in this working node? So, you already know the main goal of this working node is we need to calculate what are the net assets on the date of acquisition. What are net assets on the rate of acquisition? The capital plus the pre-acquisition profits, isn't it? See here, the capital and the pre-acquisition profits, that will fetch us pre-acquisition net assets. That's our first objective. To find out the net assets on the date of acquisition. We call it as pre-acquisition net assets, right? So, that's the first column. We have pre-acquisition net assets. Date of acquisition, 1st January 2022. In this example. Yeah, in this example also, what date of acquisition was? 4th January 2012. That's the same date I have taken. Fine. That's the first objective. We need to calculate pre-acquisition net assets, yeah, on the date of acquisition. First January 2022. So, where will we get this? We will get this at last over here. Not here. Here. No, we will get this at last. Is that clear, right?

Second objective is we need to find out what are the post-acquisition profits. What are the profits the subsidiary company have earned in the post-acquisition period? In the post-acquisition period. So, for that also, we need another column. Yeah, post-acquisition column. General reserve. Whatever reserves are there, you have to take separate column for that. General reserve, profit and loss. And if there is any movement in capital, then you also need to take another column that is called equity share capital. Okay, right. So, the second objective is we need to calculate what are the profits in post-acquisition period. We call it as post-acquisition profit. Is that clear, right? And we'll get this at last here. See here, here we'll get that. Okay, that's the two main objective of preparing analysis of profit of subsidiary working note. Do you understand the objective of repairing this working node? What is what are the pre-acquisition assets and what are the post-acquisition profits? Only these two things. Fine. The fourth column is only for convenience, right?

So, now let's get into very much depth over here. See, it's very simple. What you're going to do? First, you are going to take in the beginning, the opening balances of all the net assets. Okay, opening balances of all the net assets. So, equity share capital, let's say, let's take the same example. Equity share capital, we had on the opening day. Opening day, ten lakh. So, you will take equity share capital, ten lakh. Is that clear, right? We got that. We will take opening balance over here. And then the closing balance was ten lakh. So, closing balance will come over here. Ten lakh, ten lakh. Date of consolidation. This is what this column is. Date of consolidation. The closing balance, 31st March 2022. Yeah, 31st March 2022, the date of date of consolidation. So, date of consolidation, net assets, ten lakh, ten lakh. So, there has been no movement in equity shared capital. Just for example, share capital is constant. It's same. So, you need not have to take any other column for equity share capital in post-acquisition period because there hasn't been any movement in capital. That's why there will not be any equity share capital column over here in post-acquisition period. Is that clear, right? So, we got this opening balance, closing balance. Same with the general reserve, profit and loss. See, profit and loss balance was eighty thousand and two lakh, right? Eighty thousand on the first day of the year, two lakh on the last day of the year, which we call it as date of consolidation. So, eighty thousand profit loss, eighty thousand, two lakh on the rate of consolidation. Now, what's the meaning of this? The meaning is that on the first day, profit and loss was eighty thousand. On the closing day, it's two lakh. That means the subsidiary company have earned how much? One lakh twenty thousand profit in this whole year. One lakh twenty thousand profit in this whole year. So, that one lakh twenty thousand profit will come. It will come in between here. One lakh twenty thousand. But tell me, is that one lakh twenty thousand entirely post-acquisition? Is that entirely post-acquisition? No. We have already done the calculation in the format. Yeah, in rough way, and we found out that only ninety thousand is of pre-acquisition and thirty thousand of post-acquisition. So, that means here we are taking one lakh twenty. So, that one twenty is not of post-acquisition. It is mixed actually. It is mixed. That one lakh twenty which we have taken, the movement in entire year, we have taken it in the beginning, right? So, that is of also pre-acquisition. Ninety thousand pre-acquisition, thirty thousand post-acquisition. We have done the calculation, isn't it? We have done the calculation and everything, yeah. So, what we have to do? We have to apply time adjustment, isn't it? We have taken the opening balances, closing balances, we found out the movement between those two. The movement in taken in this column. Yeah, but that movement happened in the entire year, not only in the post-acquisition. So, what you have to do? You have to apply time adjustment. Okay, right. You know time adjustment, right? Just using the time ratio, we'll just apportion that. Yeah, here you have taken one lakh twenty. So, what you have to do? Think logically. We know one lakh twenty is not of post-acquisition. Only thirty thousand is of post-acquisition, isn't it? We did the calculation. One lakh twenty thousand into three by twelve, three months over twelve, that's thirty thousand. Thirty thousand is only of post-acquisition. So, remaining ninety thousand is of pre-acquisition. So, what we have to do? Think logically. From this column, we have to subtract ninety thousand and that ninety thousand has to be added in the pre-acquisition column. Ninety thousand subtract and here ninety thousand add in the pre-acquisition. Then you have correctly apportioned or you have divided the profit and loss balance into post-acquisition and pre-acquisition. Did you understand? The entire movement was taken over here, which is not correct. But we have to do it. Yeah, we have to show it that way. And then you have to apply time adjustment. Minus ninety thousand, plus ninety thousand. So, here you only have thirty thousand. Then and here you have got plus ninety thousand. Yes, right? But before the time adjustment, there can be some other adjustment which you have to understand. I'm not gonna get into any adjustment right now. So, some adjustments might be there over here. Okay, we'll see that later while solving the problems. Yeah, the full-fledged problems. So, time adjustment, you understood. You will apply the time adjustment over here and then you will get the total. Okay, we'll add it up. You'll add it up and then you will have some more adjustments. Okay, some more adjustments after doing the time adjustments also. Okay, and then at last, after doing those adjustments, you will have the balances, the totals. Right, you'll not carry forward this column because this is just for the convenience. Opening balance, closing balance, what is the movement? Yeah, only for that this column is there to know the proper movement. Fine. So, you will get the totals over here. So, you have what at the last? You have pre-acquisition net assets on the date of acquisition. Yeah, that's what you have at last. So, of this, you have to divide it into the owners of the subsidiary company. Who are the owners of the subsidiary company? You all know. See, it will be the parent company. And if the subsidiary is not wholly owned subsidiary, if it's partly owned subsidiary, then whatever that remaining portion is there, that is not owned by the parent company will be minority interest. For example, eighty, twenty. So, of everything over here, you have to divide. Of everything, all the balances, you have to divide that. You have to divide into parent and minority interest. Parent, minority interest. Parent, minority interest. Eighty percent, twenty percent. Eighty percent, twenty percent. Eighty percent, twenty percent. Like that. Okay. So, that's what we have to do. Pre-acquisition net assets. Yeah, you got it over here. Eighty percent of parent will be taken away. It will be taken to cost of control. It will be taken to cost of control, isn't it? Shall we see what is cost of control? See here, cost of control. Cost of investment. Yeah, the purchase consideration you will take. And then minus net assets at DOA owned by the parent. Yeah, pre-acquisition net assets. That's the meaning of that. What will be included in that? Share capital. Yeah, peace share. Parent share. Pre-profits. Parent shares. So, this entire amount. Yeah, this share capital and pre-profits. Everything you will get it over here. Where you will get it? You will get it over here. For example, let's say ten lakh. Eighty percent of ten lakh, eight lakh. So, eight lakh entirely you will take. Yeah, it will be combined. Eight lakh. So, let's say the cost of investment is fifteen lakh. Fifteen lakh minus eight lakh, you will get the amount. Seven lakh, isn't it? Yes. So, now if this is positive, then that's called goodwill. If this is negative, then it's called capital reserve, isn't it? Yes, you all know that. We have already seen the cost of control calculation and everything, isn't it? Yes. And then what will happen? See, pre-acquisition net assets of the parent got adjusted in cost of control. It got adjusted in cost of control, goodwill or capital reserve, isn't it? So, this thing is over regarding parent share. What about the minority interest share? See, minority interest share is very simple. See, we are done with two working notes, right? Almost analysis of profit of subsidiary and cost of control. Then we have minority interest working. We have to calculate what's the share of minority interest in the subsidiary company. So, who are minority interests? They are the owners of the company only, right? The shareholders. So, they will get what? Shareholder funds. Yeah, share capital, reserves and surplus. That's what they will get. So, the calculation of minority interest is not difficult at all. See, it's very simple. Minority interest, whatever the share capital of subsidiary is there. So, minority share in that. Pre-profit is there. Subsidiary minority share in that. Post-profits of subsidiary. Minority share in that. Post general reserve. Minority share in that. Yeah, everything. Twenty percent, twenty percent, twenty percent of everything you will take and you will add it up. You will get minority interest, which will be shown in the equity of the consolidated balance sheet. But will be shown separately from the parent owned equity. Is that clear, right? So, how will you get these amounts? See, it's simple. From the pre-acquisition. Yeah, here minority interest you will get. Yeah, you see minority interest you will get. You will take that. Twenty. So, that would include share capital plus pre-profits. Okay, like that you will take it. And then general reserve, minority interest share. Here, minority interest share. Post general reserve. And then profit and loss, minority under share. You will take it. Post profits, minority interest share. Simple. You got it, yeah? You add it up. You got the minority interest. The whole amount which will be taken to the balance sheet, consolidated balance sheet. Is that clear, right? Now, if there is a loss over here, then you will take it into the profit and loss. But there's more adjustment to that. We'll see that later. Fine. Yes.

And then at last, we have the last working node, that is called consolidated reserves and surplus, which will be the total reserve and surplus of the group. Yes. So, how will it calculate that? See, simple. Consolidated general reserve of profit and loss account. Now, I've told you, you will not take the whole results and everything and, you know, amalgamated together. No, we're not gonna do that. General reserve, like parent general reserve with subsidiary general reserve, added up. Yeah, parents profit and loss plus subsidiary profit and loss, added up. Like that, you have to do. So, parent general reserve plus post general reserve. Only post, not pre. Pre is gone. Yeah, pre is entirely adjusted in the cost of control. So, pre thing is entirely gone off. Parent into the cost of control. Only the post. Yeah, this thing, general reserve. This is the post-acquisition, right? So, only that you are going to take it over here. Parent's general reserve plus post general reserve of subsidiary added up. Take it together to the balance sheet. Profit and loss of parent plus profit and loss of post profit and loss of subsidiary. And the only parent share. Okay, only the parent share. PP. Only the parent share. Or you can say holding share. Only that you have to take. Right? Because the minority interest share is taken over here. Right? It's adjusted. Only the parent share you have to take. Can add it up and then it will go to the consolidated reserves and surplus head. Okay, right. So, that's how you have to do it. Simple. Yeah. So, these are the four working notes that we have to prepare. Now, it's not difficult at all. If you're confused anything regarding this, then please comment down below. I think this is very simple. See, if you're confused in analysis of profit of subsidiary, see, let's just revise it once again. What we have to do? We have four columns over here. Main columns. Yeah, pre-acquisition net assets. Yeah, you will get this at last. Always remember this. Now, most of the people make this mistake. They think here they have to take the balances on the date of acquisition. No, you don't have to do that. See, what do you have to take in the first? You have to take the opening balances of the first day, the date of acquisition. That you will get at last. What are the net assets on the date of acquisition? That you will get at last. In the beginning, you have to take the opening balances. And in this column, the convenience column, here you have to take the closing balances. The movement between these two will come into the post-acquisition. This mega column. And then here there can also be equity share capital if there is any movement. So, general reserve and profit and loss. Yeah, that column also you're going to take. Or if there is any of these other reserve, that also you're going to consider over here. And then what you're going to do? And then you're going to take the movements over here. One lakh twenty thousand, as I said. And then take a total. Yeah, take a total of all of that. And then some adjustments might be there which you have to do, which we'll see separately. And then time adjustment. Now, time adjustment, I told you that in post-acquisition, the entire movement is taken. So, what we have to do? For example, one lakh twenty thousand was taken over here. If we consider this example, one lakh twenty thousand profit has been running the entire year. So, this entire thing has been taken into the post-acquisition. Why it's like that? See, it's because opening balances, closing balance is taken over here. So, where will the movement will go? That increase or decrease, it has to go into the middle, right? So, the entire thing will come in the middle. Okay, then what you have to do? You have to time a portion that using the time ratio, the months of pre and post acquisition period, you have to apply time adjustment. Yeah, as we did over here. Just use the right time ratio, nine to three or whatever the months are, and you will get the profits of pre and post. Pre-acquisition profits is ninety thousand. So, just subtract ninety thousand from the post-acquisition and add it up into the pre-acquisition. Yeah, that's called time apportionment. Time adjustment, right? So, once you do that, you have the correct profits in the correct period. Yeah, then do the total again. The adjustments might be there. And then add up. You will get the balances, the entire totals. And then make the share of that eighty percent, twenty percent, sixty percent, forty percent, whatever the percentages are. Fine. So, that's how you do analysis of profit of subsidiary. If you get this right, then cost of control is very simple. Cost of investment minus net assets owned by the parent on the date of acquisition. This thing, parent share. Yeah, pay and share. That you will do. Goodwill or capital reserve. If positive, goodwill. If negative, capital reserve. Minority interest, you know, twenty, twenty, twenty percent of everything you will take. Yeah, whatever the percentages of minority interest, that share you will take and you will get minority interest. The total which will be taken into the consolidated balance sheet. And then consolidated reserves and surplus. Very simple. Parent's reserves and surplus and subsidiary's reserves and surplus. Just added up. You have got consolidated reserves and surplus. Is that clear? Did you understand this? It's simple. Yeah. Yeah, it's really simple. Yes. So, that's it for this video. I think you have got the entire concept now. Now, in the next video, what we're going to do is we're going to see maybe one simple problem of these working notes and then we'll understand adjustments and everything. Okay, right. So, that's it for this video. See in the next video. Yeah, bye.