Thursday, September 22, 2016

What Are Standalone and Consolidated Financial Statements?

In an advanced and globalised economic and financial world of today, it is quite common for large corporations to have many subsidiaries. When one company owns more than 51% of equity share capital in another company, the latter becomes the subsidiary of the former. The former company is called the parent or holding company. It is quite possible that the parent may hold 100% equity of its subsidiary, when it is called a 100% Subsidiary.

Both the holding and subsidiary have their own businesses and draw-up their own financial statements. The financial statements of the holding company, where the shares in the subsidiary are shown as long term investments and the dividend received as other income, are called standalone financial statements as they merely focus on it’s own, independent business activities.

Example:

Standalone Profit and Loss Account for the Year Ended 31st March 2016
Rs. In Crores
Holding Co. Pvt. Ltd.
100% Subsidiary Co. Pvt. Ltd.
Revenues:


Sales Revenue
5250
1250
Other Income
50
Dividend Received from Subsidiary Co. Pvt. Ltd.
220
0
Total Revenue
5470
1300
 Expenses:


Materials Consumed
4230
630
Other Expenses
176
40
Total Expenses
4406
670



Profit Before Tax
1064
630
Corporate Income Tax
436
164
Profit After Tax
628
466
Dividend
0
220
 Balance carried forward to the Balance Sheet
628
246

Standalone Balance Sheet as on 31st March 2016

Rs. In Crores
Holding Co. Pvt. Ltd.
100% Subsidiary Co. Pvt. Ltd.
Liabilities:


Equity Capital
1000

Reserves and Surplus
720
246
Long Term Borrowings
0
0
Current Liabilities & Provisions
80
44
Total Liabilities
1800
560
 Assets:


Fixed Assets (Net Block)
830
330
Long Term Investments in Subsidiary Co. Pvt. Ltd.
270
0
Current Assets
700
230
Total Assets
1800
560

The law also requires the the parent company to consolidate or merge, item by item, all components of the financial statements of the holding and subsidiary companies into a single financial statement, which is called the ‘Consolidated Financial Statement’. While preparing the consolidated financial statements, in the profit and loss account the dividend paid and received sums are knocked off. Similarly in the balance sheet the long-term investment in the subsidiary is knocked of against the share capital of the subsidiary. The final ‘Consolidated Financial Statements will appear as follows:

Profit and Loss Account for the Year Ended 31st March 2016
Standalone Holding Co. Pvt. Ltd.
Standalone 100% Subsidiary Co. Pvt. Ltd.
Consolidated Holding Co. Pvt. Ltd.
Rs. In Crores



Revenues:



Sales Revenue
5250
1250
6500
Other Income

50
50
Dividend Received from Subsidiary Co. Pvt. Ltd.
220
0
0
Total Revenue
5470
1300
6550
 Expenses:



Materials Consumed
4230
630
4860
Other Expenses
176
40
216
Total Expenses
4406
670
5076



0
Profit Before Tax
1064
630
1474
Corporate Income Tax
436
164
600
Profit After Tax
628
466
874
Dividend
0
220
0
Balance carried forward to the Balance Sheet
628
246
874

Please observe how the dividends paid and received are knocked off during consolidation.

Balance Sheet 31st March 2016
Standalone Holding Co. Pvt. Ltd.
Standalone 100% Subsidiary Co. Pvt. Ltd.
Consolidated Holding Co. Pvt. Ltd.
Rs. In Crores



Liabilities:



Equity Capital
1000
270
1000
Reserves and Surplus
720
246
966
Long Term Borrowings
0
0

Current Liabilities & Provisions
80
44
124
Total Liabilities
1800
560
2090
 Assets:



Fixed Assets (Net Block)
830
330
1160
Long Term Investments in Subsidiary Co. Pvt. Ltd.
270
0
0
Current Assets
700
230
930
Total Assets
1800
560
2090

Please note how the equity capital of the subsidiary Rs.270 crores is set off against long-term investments in the holding company.

Conclusion:


Standalone financial statements reflect the affairs of the holding and subsidiary companies on an independent or standalone basis while the consolidated financial statements merge the figures and carryout necessary adjustments to present the whole and consolidated picture.

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