Consolidation Accounting in India: Complete Group Reporting Guide

Introduction: Seeing the Complete Picture

The Mehta Group had five companies—a parent company and four subsidiaries spread across manufacturing, trading, real estate, and services. Each subsidiary showed healthy profits. The promoter, Mr. Mehta, was pleased.

Then an investment banker reviewing the group for funding asked a simple question: “Where are your consolidated financial statements?”

When the consolidated statements were finally prepared, inter-company transactions that had inflated individual profits were eliminated. The group’s actual profit was 40% lower than the sum of individual profits. Two subsidiaries that looked profitable were actually draining cash from the profitable ones.

“Consolidation showed us reality,” Mr. Mehta admits. “We were fooling ourselves with individual statements.”

What is Consolidation?

Definition

Consolidation is the process of combining financial statements of a parent company and its subsidiaries to present the financial position of the entire group as if it were a single economic entity.

Why Consolidate?

1. Complete picture – Shows group’s total resources and obligations
2. Eliminate inter-company transactions – Remove artificial profits
3. Regulatory requirement – Mandatory for listed companies
4. Investor decision-making – Shows true economic position
5. Credit assessment – Banks evaluate group strength

Regulatory Framework

Companies Act, 2013:

• Section 129(3) requires companies with subsidiaries to prepare consolidated financial statements

Ind AS 110 (Consolidated Financial Statements):

• Defines control and consolidation procedures
• Applicable to Ind AS companies

Schedule III:

• Prescribes format for consolidated financial statements

Understanding Control

What is Control?

Under Ind AS 110, an investor controls an investee when:

1. Power over investee – Ability to direct relevant activities
2. Exposure to variable returns – Rights to or exposure to variable returns
3. Ability to use power – To affect the amount of returns

Power Indicators

• Voting rights (majority ownership)
• Contractual arrangements
• De facto control (even with less than 50%)
• Potential voting rights

Examples of Control

Types of Investments

Subsidiaries

Definition: Entity controlled by another entity (parent)

Accounting: Full consolidation (line-by-line)

Associates

Definition: Entity over which investor has significant influence (typically 20-50%)

Accounting: Equity method

Joint Ventures

Definition: Arrangement where parties have joint control

Accounting: Equity method (for joint ventures) or proportionate consolidation option eliminated under Ind AS

Consolidation Procedures

Step-by-Step Process

Step 1: Align Accounting Policies

• Use uniform accounting policies
• Adjust for differences before consolidation

Step 2: Align Reporting Dates

• Ideally same reporting date
• Maximum gap: 3 months

Step 3: Eliminate Investment in Subsidiary

• Remove parent’s investment
• Remove subsidiary’s equity at acquisition

Step 4: Calculate Goodwill/Bargain Purchase

• Compare consideration with net assets acquired

Step 5: Eliminate Inter-company Transactions

• Receivables/payables
• Sales/purchases
• Dividends
• Unrealized profits

Step 6: Calculate Non-Controlling Interest (NCI)

• Minority shareholders’ share

Step 7: Prepare Consolidated Statements

• Combine line-by-line
• Show NCI separately

Goodwill Calculation

Formula

Goodwill = Consideration Paid + NCI at Fair Value - Fair Value of Net Assets Acquired

Example

Parent Co. acquires 80% of Subsidiary Co. for ₹100 lakhs.

Subsidiary’s Position at Acquisition:

Goodwill Calculation:

Alternative Method (NCI at Proportionate Share):

Goodwill Accounting

Initial Recognition:

Goodwill A/c                  Dr.    28,75,000
Various Assets                Dr.    [at FV]
    To Various Liabilities              [at FV]
    To Investment in Subsidiary         1,00,00,000
    To Non-Controlling Interest          23,75,000

Subsequent Treatment:

• Not amortized
• Annual impairment testing required
• Write down if impaired

Non-Controlling Interest (NCI)

What is NCI?

The portion of equity in a subsidiary not attributable to the parent company. Also called minority interest.

NCI Calculation at Acquisition

Method 1: Fair Value Method NCI = Fair value of NCI shares

Method 2: Proportionate Share Method NCI = NCI % × Fair value of net assets

NCI at Reporting Date

NCI at acquisition + NCI share of post-acquisition profits - NCI share of dividends

Example

Presentation

• Shown separately in consolidated balance sheet (within equity)
• Profit attributable to NCI shown separately in P&L

Eliminating Inter-Company Transactions

Types of Eliminations

1. Inter-company Sales/Purchases

Parent sells goods worth ₹50 lakhs to subsidiary.

Elimination:

Revenue A/c                   Dr.    50,00,000
    To Cost of Sales A/c                     50,00,000

2. Inter-company Receivables/Payables

Parent has ₹20 lakhs receivable from subsidiary.

Elimination:

Accounts Payable (Subsidiary) Dr.    20,00,000
    To Accounts Receivable (Parent)          20,00,000

3. Inter-company Dividends

Subsidiary pays ₹10 lakhs dividend; Parent receives ₹8 lakhs (80%).

Elimination:

Dividend Income (Parent)      Dr.    8,00,000
    To Dividend Paid (Subsidiary)            8,00,000

4. Unrealized Profit in Inventory

Parent sells goods to subsidiary at ₹30 lakhs (cost ₹24 lakhs). ₹10 lakhs inventory remains unsold at year-end.

Unrealized profit: (30-24)/30 × 10 = ₹2 lakhs

Elimination:

Cost of Sales A/c             Dr.    2,00,000
    To Inventory A/c                         2,00,000

5. Unrealized Profit in Fixed Assets

Parent sells machine to subsidiary at ₹15 lakhs (WDV ₹12 lakhs).

Profit: ₹3 lakhs

Elimination:

Gain on Sale A/c              Dr.    3,00,000
    To Fixed Assets A/c                      3,00,000

Also adjust depreciation for subsequent periods.

Practical Consolidation Example

Given Information

Parent Ltd (P) owns 75% of Subsidiary Ltd (S)

Individual Balance Sheets:

Additional Information:

1. P acquired S when S’s reserves were ₹25 lakhs
2. Fair value = Book value at acquisition
3. Inter-company: S owes P ₹10 lakhs
4. S’s inventory includes goods purchased from P for ₹8 lakhs (cost to P: ₹6 lakhs)

Consolidation Workings

Working 1: Net Assets of S

Post-acquisition Reserves: ₹90 - ₹75 = ₹15 lakhs

Working 2: Goodwill

Working 3: NCI

Working 4: Group Reserves

Working 5: Unrealized Profit

Profit in inventory = ₹8 - ₹6 = ₹2 lakhs P’s share (as seller) = 75% × ₹2 = ₹1.50 lakhs (or full ₹2 if eliminating fully from P)

Consolidated Balance Sheet

Note: Small rounding difference to be adjusted

Equity Method for Associates

When to Use

For investments where investor has significant influence (typically 20-50%) but not control.

How It Works

Initial Recognition: Investment at cost

Subsequent Measurement: Investment ± Investor’s share of associate’s profit/loss ± Other adjustments

Example

P Ltd acquires 30% of A Ltd for ₹40 lakhs. Year 1: A Ltd makes profit of ₹20 lakhs

Year 1 Entry:

Investment in Associate       Dr.    6,00,000
    To Share of Profit from Associate        6,00,000
(30% of ₹20 lakhs)

Investment at Year 1 End: ₹46 lakhs

Special Considerations

Mid-Year Acquisitions

Pro-rate subsidiary’s profits:

• Pre-acquisition: Add to net assets for goodwill calculation
• Post-acquisition: Include in consolidated P&L

Step Acquisitions

When control is acquired in stages:

• Re-measure previously held interest at fair value
• Recognize any gain/loss in P&L

Disposal of Subsidiary

• De-consolidate from disposal date
• Recognize any gain/loss in P&L
• Any retained interest measured at fair value

Foreign Subsidiaries

• Translate using appropriate exchange rates
• Assets/liabilities: Closing rate
• Income/expenses: Average rate or transaction date rate
• Exchange differences: Other Comprehensive Income

Disclosure Requirements

Required Disclosures

1. Nature of relationship with subsidiaries
2. Reasons for control even without majority ownership
3. NCI information – profit/loss, accumulated NCI
4. Significant restrictions on access to assets
5. Changes in ownership during the period
6. Unconsolidated structured entities

Segment Reporting

Listed companies must also provide segment-wise information under Ind AS 108.

Common Consolidation Errors

Error 1: Incomplete Eliminations

Problem: Not eliminating all inter-company transactions

Solution: Maintain inter-company transaction tracker

Error 2: Wrong Goodwill Calculation

Problem: Using book values instead of fair values

Solution: Always fair value net assets at acquisition

Error 3: Ignoring Unrealized Profits

Problem: Not eliminating profits in group inventory/assets

Solution: Track inter-company sales and margins

Error 4: NCI Calculation Errors

Problem: Inconsistent NCI treatment

Solution: Choose method and apply consistently

Error 5: Pre/Post Acquisition Split

Problem: Including pre-acquisition profits in group reserves

Solution: Date-wise analysis for mid-year acquisitions

Key Takeaways

1. Consolidation shows economic reality of the group
2. Control determines consolidation – not just ownership percentage
3. Goodwill = Consideration - Fair value of net assets
4. NCI represents minority shareholders in subsidiary
5. Eliminate all inter-company transactions and unrealized profits
6. Associates use equity method – not full consolidation
7. Disclosure is extensive – transparency is key

Disclaimer

This article is for educational purposes only and does not constitute professional accounting advice. Consolidation accounting involves complex judgments. Consult a qualified Chartered Accountant for preparing consolidated financial statements.

Consolidation Checklist

Pre-Consolidation:

• Identify all subsidiaries (control assessment)
• Align accounting policies
• Align reporting dates
• Identify inter-company transactions

Consolidation Process:

• Calculate goodwill at acquisition
• Calculate NCI at acquisition
• Add line-by-line (assets, liabilities, income, expenses)
• Eliminate investment against subsidiary’s equity
• Eliminate inter-company receivables/payables
• Eliminate inter-company sales/purchases
• Eliminate unrealized profits
• Calculate group reserves
• Calculate NCI at balance sheet date

Post-Consolidation:

• Verify total assets = total liabilities + equity
• Check reasonableness of ratios
• Prepare required disclosures
• Get audit/review as required

Consolidation transforms a collection of legal entities into one economic story—mastering it reveals truths that individual statements hide.