Transcription
Hello, hello everyone. I am Vasisht from Share Academy and we are discussing the topic 'Simplified Consolidation'. Please watch the video and convert it, then solve this illustration, one of the series material. But before this video, please make sure you have watched the free videos of the chapter 'Verification of Consolidation', which is important. You must have seen 'Minimum Consolidation' in the first video. In this, we discussed the difference between amalgamation and consolidation, and discussed about control, how one company controls another, and what is control. And here, consolidated financial statements are prepared. Many questions might interest you, or not interest you, and it might be difficult for you. For example, 'Net Assets', what is this? Net assets is nothing but total assets minus outside liabilities, or rather, it's share capital plus reserves and surplus. An example to make you understand what consolidated financial statements are. For preparing consolidated statements, all common things are eliminated. From the parent company, the holding company and the subsidiary company, common things are eliminated. For example, if there is an investment in a subsidiary, that investment will be eliminated. Again, the loan given by the subsidiary to the holding company, because they are both one, you will eliminate both those things. Why? Because they are both one. If they are both one, then what is the logic behind cancellation? It's a group, a single economic entity, so we should cancel all common transactions between the parent and subsidiary. And all these aspects are known as intra-group transactions. And I told you about 'Cost of Control'. Cost of investment versus consideration is compared with the net assets of the subsidiary on the date of acquisition. And if the cost of investment is more, it will be called 'Goodwill'. If it is less, it will be called 'Capital Reserve'. We will discuss this in very much detail regarding 'Pre' and 'Post'.
What is this? What is the significance of this? And why is it separated into two categories? The dividing line is the date of acquisition. Pre-acquisition profit means the profit that the company earned before the date of acquisition. And post-acquisition profit means the profit that has been earned after this dividing line, the post-acquisition profit. Yes, control, he got control. And pre-acquisition profit is adjusted with goodwill or capital reserve. And here, post-acquisition profit, for this, will be consolidated in reserves and surplus. Right? So, for this, you have to watch the video till the end properly. And we do the working notes for almost each and every question. Here, statement of net assets, or rather, net assets of subsidiary, then working notes for cost of control, whether it is goodwill or capital reserve, and minority interest, and consolidated reserves and surplus. We will discuss the format in more detail. I have given an example over this example in the working notes to make you understand how to do this. And also, everybody calls for ledger treatment of net assets of subsidiary, and here, cost of control, and minority interest, consolidated general reserve and profit and loss, consolidated. Simply, it is for you to understand. Why? We cannot tell you. You have to watch the previous interactions. We are not revising here. Here, I have just given a glimpse of what I have done. Okay? So, if you don't know the basic concepts, please go back and watch the previous videos of 'Consolidation'. And let's understand the question. Why are we doing this?
Now, here, for each case, determine which case minority interest at acquisition and consolidation is, and capital reserve or goodwill is, and the amount of holding company's profit in the consolidated balance sheet, assuming holding company's own profit and loss account is two lakh in each case. This is the requirement you have to fulfill based on this information. Based on this information, this table, you have to fill it. Let's see. In this table, we have been given four cases of consolidation. Yes, we are the holding company. So, in this one, we have acquired 90% in this company called 'A Company'. Okay? And cost of investment versus consideration was 1,50,000. And the acquisition happened on 1st January 2018. Now, you have to see if the acquisition is happening on the opening date, or in the middle of the year, or on the closing date. You should not like, time adjustment. This happened only in the middle. We make some, somewhere in between, here. We only have to use time adjustment. Yes. So, here, the acquisition is on 1st January 2018. And the consolidation date, the closing date, we are consolidating on 31st December 2018. 31st December is the closing date. The opening date is 1st January. So, if the opening date is 1st January, that means there is no acquisition on the opening date. Special effects, same, no time adjustment. I had explained to you previously that this entire year's period before acquisition is pre-acquisition period. Point of control, and company acquisition is the thing that divides consolidation and acquisition. So, the entire year will be pre-acquisition period. No post-acquisition. That means, the entire period before acquisition period, till you get the control, that time, past 12 months, and in that period, you have to calculate the pre-acquisition profit. This table shows 72,000 in detail. Here, control versus acquisition for every minute, you can see. Please give the benefit and not possible. So, what is this? Net assets on the date of acquisition directly, but you need to calculate here. Here, acquisition has happened. You cannot take opening balances, movements. But here, pre-acquisition profit, you have to calculate.
And what is this? 1,50,000. Net assets on the date of acquisition, you have to calculate. Simple. And acquisition on 1st January 2018. And consolidation on 31st December 2018. So, the entire year's profit will be post-acquisition profit. Yes. So, in this case, the subsidiary company's net assets are 1,60,000. And the holding company's share is 90%. Minority interest means the part of the net assets that is not owned by the holding company, that is 10%. So, what do we do here? We have to calculate minority interest and capital reserve at acquisition on 1st January 2018. How much net asset value was owned? Yes, you have to demand and share. And we also have to calculate net assets at consolidation. How to do it? Simple. Just add post-acquisition movements. You will get minority interest at consolidation. This is important. And cost of control, goodwill or capital reserve. Here, you will compare the cost of investment with the net assets on the date of acquisition. You have to compare cost of investment minus net assets on the date of acquisition. In this, you will compute cost of investment minus net assets on the date of acquisition. You will get capital reserve or goodwill. And the amount of holding company's profit in the consolidated balance sheet, assuming holding company's own profit and loss account is two lakh. We have to assume holding company's profit is two lakh. And you have to take share of profit and loss of subsidiary in the consolidated reserves and surplus. Okay? So, you will see, parent's profit and loss two lakh plus post-acquisition profit and loss of subsidiary. And take only the holding company's share, only parent company's. Okay? This is what we have to do.
To prepare these working notes: cost of control, minority interest, and this. First, we have to do the first working note: statement of net assets. We have to calculate what is the acquisition movement here. All these are for taking notes of each and every case. Case A, Case B, Case C, Case D. These are four different examples, completely separate. Okay? You have to do them separately. You must take columns while doing the solution. And rest, here. Let's see the solution. Let's see. Here, how you can create minority interest, capital reserve, and consolidated surplus in each of these cases. Case A, Case B, Case C, Case D. Now, here, the solution is already prepared. Everything to save time. So, this is page number three. And you will be given the share of holding company and minority interest in the post-acquisition. This is page number three. And cost of control, capital reserve. This is page number three. And consolidated surplus. This is page number three. So, let's see.
Here, net assets on the date of acquisition. What we have tied on the date of acquisition, we have to take the opening balance of the opening balance for opening. Okay? What is this question? In this question, the acquisition is on 1st January. What we can directly, at times, everybody will take this unique identification and go on the date of acquisition directly. So, what we have done, what were the movements of pre-acquisition? You have to use the entire, but here, directly net assets on the date of acquisition. So, whatever movement of assets has happened after, you have applied directly in the middle. Okay? Okay? The, the, the, the acquisition and share of holding company, minority interest in reserves and surplus. Let's see. Directly, subsidiary company's net assets are one lakh share capital plus profit and loss 50,000. So, pre-acquisition, simple, one lakh plus 50,000. Okay? And closing date, see, share capital has not changed. It's same, one lakh, one lakh. This is on 1st January 2018, acquisition. This is on consolidation, one lakh, one lakh. This is share capital on the date of consolidation. While profit and loss has been increased from 50,000 at acquisition to 70,000 at consolidation. The closing of subsidiary company has earned 20,000. So, there is a movement in profit and loss of 20,000. This movement, the subsidiary company's profit has earned. I told you, this pre-acquisition, the entire current year's profit will be post-acquisition period. Not pre-acquisition. No time adjustment. So, 20,000 is in the post-acquisition period. The company, the holding company, has the control. The entire profit, entire profit, is post-acquisition profit. So, the entire profit 20,000 is post-acquisition profit. This is the balance sheet. Pre-acquisition, post-acquisition. This is the balance sheet. So, 1,50,000 opening, and 20,000 movement. So, 1,70,000 opening. In this, you have to show among the holding company. This one, what is 1,50,000? It's nothing but 1,50,000 plus 20,000. Yes. So, holding company's share is 90%. You have share 90%. You are wishing. I told you, holding company's share. Holding company. So, 90% is holding company's share. And the remaining is minority interest. The portion of net assets that is not owned by the minority interest. Yes. So, this is in a portion. The simple 1,50,000 plus 20,000. So, 1,70,000. 90% for holding, 10% for minority. This is what we have done. Pre-acquisition net assets are divided 90% and 10%. And post-acquisition profit is divided into 90% and 10%. 90% for holding, 10% for minority. This is what we do with all companies.
Let's see Case B. Case B is also regarding this. Case B, 85% acquisition. And share capital, here, see, one lakh. And reserves and surplus 30,000 on the date of acquisition. With only pre-acquisition. No post-acquisition. And opening date. So, this will be shown in time adjustment. It's exactly 1,30,000. You will close it directly. Yes. And the entire movement will be post-acquisition period. There is no pre-acquisition period. And often, it does not happen. See, on consolidation, see, Case B, one lakh, there has been no change in capital. But the profit has been decreased. 30,000 profit and loss on the opening date, acquisition. 1st January there. And at consolidation, 20,000. So, profit and loss balance has been decreased by 10,000. So, 10,000 loss has been incurred. So, it means the capital of the entire current year's loss. So, owner's share, loss of profit and loss, that happened. So, here, holding and minority, this is divided between them. And what is post-acquisition loss? In the post-acquisition, it's 10,000. So, one lakh and 30,000 is pre-acquisition profit. And post-acquisition loss. No pre-acquisition period. The entire period, the period when the company, the holding company, had the control, is post-acquisition period. You have to use the respective percentages and just divide. Okay? No big deal. So, 1,30,000. And 1,20,000 minus 1,30,000. So, 10,000. This is minority interest in the acquisition. Acquisition 98,000. Here, you have to take. Yes.
Let's see Case C. In Case C, 60% acquisition. Here, what is the capital of the subsidiary? 1,50,000. And reserves and surplus 60,000. No, no. In both, there is no movement in post-acquisition period. There is no profit, no loss. Okay? So, here, you have to do the thing. You will not appear in the. You can see here, 50,000. Pre-acquisition. So, pre-acquisition and assets in total 50,000. Among the holding company and minority, so 60% and 40%. Yes. So, 50,000 minus 0. So, 50,000. This is minority interest at acquisition. And benefit in 240. The company where required. And 60% is wholly owned subsidiary. What part of subsidiary? Wholly owned subsidiary in Case D. So, acquisition, net assets 50,000 on the date of acquisition. Here, pre-acquisition net assets 50,000. No change in net assets. In for loop, in C, 70,000 acquisition. Since acquisition, we have earned 20,000 profit, which is closing balance 50,000. Here, closing balance minus 40,000. So, 10,000 movement. So, 10,000 profit. And it will be post-acquisition profit. So, 20,000 acquisition net assets, post-acquisition profit. So, they have to share among holding and minority. In Case D, in Case D, there is no interest. It's a wholly owned subsidiary. Holding company owns 100% in the subsidiary. There is no minority interest in this. So, no minority interest. This is simple. How to do minority interest? If it's share, share capital, after this, see, how to do subsidiary. Subsidiary, subsidiary, post-acquisition.
We have minutes of profit. Yes. Acquisition, one lakh. Share of pre-acquisition net assets. Share of pre-acquisition profit. That is minority interest. Yes. Simple. Now, we have to do the last thing. That is the consolidation surplus. Yes. Let's see. It's simple. In Case A, Case B, Case C, Case D, in the same way, we have to do. See, you have to find the amount of holding company's profit in the consolidated balance sheet, assuming holding company's own profit and loss is two lakh. So, what we do in the last working note, in consolidated P&L account, yes, this consolidation surplus. We add the holding company's profit and loss and the holding company's share of subsidiary's profit and loss. We add these two things together. You get consolidated net profit and loss, profit and loss of the group, left together. So, what we have to do? Post and holding, holding company two lakh, two lakh, two lakh in each. Or we can say, they have to look into this. So, follow and share of post-acquisition profit of subsidiary. You have already stated in the first working note. You see, what is the share of post-acquisition profit of holding company? So, the holding company's share in post-acquisition profit is 18,000. There is no profit, no loss in 100. So, 18,000 is added. Okay? 18,000. So, two lakh plus 18,000. Yes. Now, you understand why you have to prepare the first working note. It's all connected to the first working note. Yes. You have to calculate the acquisition and post-acquisition. You have to pick these from the first working note. So, 18,000. Yes. Yes. No.
So, two lakh plus 18,000. So, we will have minus 7,000. In Case B, two lakh minus 7,000. In Case C, two lakh. This is post-acquisition profit. Was taken to post-acquisition profit. You consolidate its reserves and surplus. You have to understand properly what you do with pre-acquisition and post-acquisition. Pre-acquisition net assets are adjusted in cost of control for holding company's share. Simple. So, you get goodwill or capital reserve. Post-acquisition is consolidated. So, you understand it. Yes. Simple. You have to take post-acquisition profit in acquisition net assets against goodwill or capital reserve. Post-acquisition loss is consolidated. So, the balance is prepared. Yes. Okay? So, this is the full video. I hope you understood how to do these working notes. It's still a very simple example. It's not enough to make you understand how to do this in the traffic. I will take more time in consolidation. So, this is just a simple example. I am taking an illustration, a model illustration. So, that's all for this video. See you in the next video. Bye-bye.