Accounts Notes: VALUATION OF SHARES

Equity Shares:

 Net Assets Method
 Earnings Yield Method
 Dividend Yield Method
 Fair Value

Net Assets Method:

o Net Assets / No of Equity shares outstanding
o Value of Partly paid up shares = Value of Fully paid up as above – Unpaid call per share
o Net assets = Capital Employed as calculated in Goodwill + Non Trade Investments + Calls in arrears + Goodwill as per valuation
o No of shares outstanding if there are different face values then Net assets shall be divided by whole paid up capital and then multiplied by appropriate paid up capitals of different face values
o In case of value of share, dividends may be excluded to give ex-dividend value, alternatively dividends may be included as part of net assets to give cum-dividend value.

Earnings Yield Method: (FOR LARGE BLOCK)

o (Earnings Yield Rate/NRR) x Paid up value of Share
o Earnings Yield rate = (Earnings may be average available to equity / Total Equity) x 100
o Normal rate of return is adjusted to 0.5% increased or decreased according to situations if not satisfied.
o While determining EYR the transfer to reserves if any shall be considered it means that the profits otherwise available for payment of dividend i.e divisible profits shall be taken into account.
o In case of yield valuation it is always cum-dividend value.

Dividends Yield Method: (FOR SMALL BLOCK)

o (Dividend Yield Rate/NRR) x Paid up value of Share
o Dividends Yield rate = Dividend rate may be average

Fair Value Method: (FOR CONTROLLING INTEREST)

Average of Net Assets Value and Earnings Yield Value.

Preference Shares are valued on Dividend Yield method.

NOTES :

 Capital Gearing Ratio = (Long term debts + Preference Capital) / Equity shareholder funds. High capital gearing ratio more risky.
 High Interest dividend coverage ratio less risky.
 Whenever Problem asks something about performance of a company we have to calculate some ratio based on the data given.
 Investments in Subsidiaries is always trade investments
 Opening Networth + Adjusted PAT = Closing Net worth

CONSOLIDATION (AS -21)

 Holding Company: A company which controls is holding.

 Subsidiary Company: A company which is been controlled is subsidiary.

 X is a holding of Y, Y is holding of Z, then Z is sub subsidiary of X.

 Time period difference of presentation of financial statements is 6 months for holding and subsidiary companies.

 Methods of Presentation of Investment of Subsidiary in B/S of Holding Company:

 Cost Method : This is followed as per Indian Accounting standard. Here Pre acquisition dividend is reduced from cost of investment, whereas post acquisition dividend shown as revenue profits. It is always long term investment shown @ cost as per AS 13.

 Equity Method: Here share of profit is accounted notionally by giving debit to Investment and credit to Profit and Loss account. And whenever dividends are received Investment account is credited as we have already accounted for profit.

 Dates of Acquisition are very important in Holding Company accounts.

PROCESS OF CONSOLIDATION

 The equity of subsidiary company will not be shown in consolidated balance sheet as it is and shall be eliminated fully.

 The investments held by holding companies in subsidiary companies shall be eliminated fully in the consolidated balance sheet. Conceptually in the balance sheet of holding company the investments are replaced by the net assets of subsidiary companies.

 When all the shares of subsidiary company are not held by holding companies there arises a question of minority shareholders. Therefore minority interest shall be computed and presented separately as last item in liabilities side of balance sheet.

Calculation of Minority interest:

Proportionate share in paid up share capital xxx
Add/Less: Proportionate share in the profits/lossess of subsidiary
Company xxx

Minority Interest xxx

In case the proportionate loss attributable to minority shareholders in subsidiary company exceeds share capital, there arises a debit balance. To the extent collectable from minority shareholders under obligation it will be shown on assets side of balance sheet. The balance shall be adjusted to majority interest. When the profits earned in later periods by subsidiary company it will be absorbed fully by majority till the earlier losses are set off.

 When the amount of investment is in excess of proportionate equity it is referred to as goodwill. When the amount of investment is less than the proportionate equity the result is known as capital reserve. It will be calculated as under.

 Pre-acquisition profits:

For the purpose of calculation of goodwill/capital reserve the profits of subsidiary company shall be classified between pre acquisition and post acquisition period. The following is the procedure:

 Ascertain the date of acquisition. Usually it is not a problem. However when the shares are acquired, the date on which the company has become holding company for the first time is date of acquisition. When there are numerous number of dates go by practical date.

 Ascertain the profits as on the above date. This may be given in the problem. However when the date of acquisition is not coinciding with the beginning or the end of the year and profit figures are not available exactly on the date of acquisition, we should take the profits on previous reporting date. For the balance period the profits may be classified on time ratio basis , assuming that profits ate earned evenly throughout the year.

 There could be some appropriations between the date of acquisition and balance sheet date. The likely appropriations are capitalization of profits i.e. bonus shares and dividends.

 The proper adjustment has to be done for bonus shares. The adjustment is effect the profits from which these are issued and increase the number of shares held by holding company and minority shareholders.

 In case of dividend the profits of that particular year for which dividends are paid shall be effected as far as holding company is concerned any dividends received for the pre-acquisition period shall be credited to investment account and post acquisition shall be credited to profit and loss account.

 Having ascertained the pre-acquisition portion of profits a comparison will be made with balance sheet figures. Any changes there on shall be taken as post acquisition.

 There will be some more adjustments to be affected during analysis of profits. They are

a. Revaluation of fixed assets: Usually the revaluation takes place on the date of acquisition. Therefore revaluation profit/loss shall be taken as pre-acquisition. However any depreciation after that revaluation shall be taken as post-acquisition.

b. Rectification of Errors: According to period adjustment shall be made.

c. Abnormal Events/transactions : According to period adjustment shall be made

d. Proposed dividends for current year : It shall be adjusted to the current year profits. In case a portion of current year profit taken as pre-acquisition the dividends also shall be treated like that proportionately.

 The following is the methodology in presenting consolidated balance sheet.

A minimum of 4 working notes shall be prepared as follows:

 Analysis of profits of subsidiary company
 Calculation of goodwill/capital reserve.
 Calculation of minority interest.
 Consolidated profits and reserves

While consolidating balance sheet items of balance sheet are to be consolidated on line by line basis i.e. likewise items of balance sheet are to be shown together. Any inter company owings/transactions shall be eliminated fully.

 Consolidation of Profits/Reserves:

 Take the amount of profits and reserves from the holding company balance sheet
 Add share of holding company in post acquisition profits in subsidiary company.
 The following are the likely adjustments:
a. Pre-acquisition dividends wrongly credited, if any shall be deducted.
b. Unrealized profit on stock shall be deducted
c. Unrealized profit on transfer of fixed assets shall be deducted.
d. Proposed dividend of holding company for current year, if any shall be deducted.

Notes:

 To cross verify consolidated balance sheet total please total all the balance sheets of holding subsidiary and make adjustments of assets side only i.e. removal of investments in subsidiaries addition of goodwill and removal of inter company etc.
 To cross verify group profits = Total Profits – Pre-Acquisition – Minority Profits

 Consolidation of Profit and Loss account:
For this purpose all revenue items are to be considered by line by line basis by adjusting inter-company transactions. All inter-company transactions shall be eliminated fully. Any unrealized profit in stock of goods shall be adjusted. It is also necessary to eliminate share of holding company in proposed dividend of subsidiary. It is also necessary to eliminate Minority interest profit in group profits.

To summarize following procedure may be adopted:
1. Provide 1 column each for Holding and subsidiary, 1 column to show adjustments and 1 column to show consolidated figures.
2. Inter-company transactions have to be eliminated by incorporating in adjustments column appropriately.
3. Find out profit of each company and consolidate in the normal way.
4. Provide for the following:
a) Stock reserve if any.
b) Pre acquisition profit transfer to cost of control.
c) Minority interest.

 Revenue of the subsidiary company shall be restated in case the different accounting policies are followed by subsidiary and holding company.

 Different Reporting Dates:
A situation will arise in which reporting dates of holding and subsidiary companies are different. In that situation subsidiary company often prepare, for consolidation purpose financial statement as at same date holding company prepares. When such statements cannot be prepared financial statements drawn upon different date may be used provided the difference is not more than 6 months. However adjustments shall be made for the effects of any significant event or intra-group transactions that occur between the date.