Consolidation of Accounts

As per Section 129(3) of the Companies Act, 2013 (the Act) every company which has subsidiary (ies) are required to prepare consolidated financial statement of the Company. The consolidated financial statements are required to be prepared in the same manner as that of own.

For the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture.

This means the Company has to consolidate the accounts of associate company and/or joint venture also.

Let us discuss the subsidiary company in with reference to consolidation of accounts.

1. Subsidiary Company

Subsidiary Company in relation to any other company (that is to say the holding company), means a company in which the holding company— 

(i)      controls the composition of the Board of Directors;  or

(ii)  exercises or controls more than one-half of the total share capital either at its own or

       together with one or more of its subsidiary companies  [Sec-2(87)]

In common parlance, subsidiary company is a company in which more than half of its equity share capital is held by other company i.e, holding company.

2. Associate Company

Associate Company means in relation to another company, a company in which that other company has control of at least 20% of total share capital, or of business decisions under an agreement and includes a joint venture company. [Sec-2(6)]

It simple words, it means a company should hold 20% of total share capital in another company.

For the purpose of point (1) & (2):

1.                  Total share capital means paid up Equity Share Capital and convertible preference shares Rules 1(a)(r) of the Companies (Specification of definitions details) Rules, 2014

2.                 Control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner [Sec-2(27) of the Act]

Joint Venture

The term Joint Venture Company is not defined in the Companies Act.  In common parlance, joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity.

As per Accounting Standard (AS) 27, a JV is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control. And Joint control is the contractually agreed sharing of control over an economic activity.  Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.

In other words, in order to determine consolidation of accounts of JV is required or not, the test here is to check whether the company has control over other entity. For eg: if the X company has made investment in partnership firm or LLP but has not control in the firm or LLP, the accounts of firm or LLP will not be required to be consolidated. However, if the X Company has control i.e, power to govern, the accounts will be consolidated. 

 

Another important criterion is that the business decisions under an agreement. Control in terms of business decisions under an agreement would include a shareholders’ agreement or a joint venture agreement or affirmative vote which requires consent of both or all shareholders who are parties to the agreement.

Conclusion:

A company is required to consolidate the accounts of subsidiary, associate and JV or other entity in which the company has control.