Holding companies

Originally posted by : commstudies
	Can someone please explain to me the concept of 'Unrealised Profits' in Holding Companies along with an example?

    Suppose 'H' is the Holding company and 'S' is the susidiary. Suppose 'H' has 80% control over S. During the year, S has sold goods costing Rs.10,000 to H at a profit of 10%.Obviously H will record these goods at Rs.11000.These goods remain unsold at the year end.Then what happens..??These goods remain included in stock of H Ltd on the date of consolidation.In this situation AS-21 says that this profit of Rs.1000 [i.e. 10% of Rs.10,000] is required to be eliminated while preparing the Consolidated Balance Sheet hereinafter referred to as 'CBS'.The logic behind this elimination you know...??This is unrealised profit.And profits arising out of Inter-company transactions are not eligible to appear in the CBS as per AS-21.So this profit is to be eliminated while preparing CBS.Tell me one thing...? Can you make profit by selling something to your brother,sister or any other family member..?Nai na...!Why....??Becoz money goes OUT from ur fathers and comes INSIDE ur pocket...!!!When S sells these goods to H,S records a profit of Rs.1000 which is still included in the UNSOLD stock of H Ltd. Isn't it..!! So deduct this unrealised profit from Consolidated Profit & Loss account while preparing CBS. But wait...!!! How much unrealised profit will u deduct from Con.P & L A\c..?? Rs.1000...??..NO.....!!!! Then...??? Only Rs.800 will be deducted from CPL bcoz H has only 80% control over S. Balance unrealised profit of Rs.200 will be deducted from MINORITY INTEREST. I hope u will understand it..

Thanks Shekhar.very very well explained. that's exactly what i was looking for.very helpful indeed. Your explanation was way better than the explanation given in my book (which happens to be a totally crap one). Thanks again.

Suppose hemang ne icai ke 90% share acquire kiye and then hemang sold some goods to icai for rs. 10000 on 20% on cost. out of such goods 50% are unsold. So on consolidate 50% stock unsold and usme jo hemang ne profit add kiya he icai ko sell ke time vo 50% ka jitna hota he vo consolidate bs me stock mese and holding company ke p and l mese deduct karne ka. Samaj aaya easy language me ?? Itna long likhne ki kya jarurat thi yaar.

Are u a final level student...?i am shekhar bhalotia.i m doing ca final.i can also be contacted on 09681249743.when will u appear for finals..?keep in touch

Simple & Sweet..Ur answer is really superb Shekhar..This is how one should explain things. 

 

@ Hemang Shah

Try to appreciate when someone does something good. It doesnt matter whether the answer is short or long. What matters is that the other person understands what u are saying.  

I have a problem regarding debentures holding by the subsidiary company and its outstanding interest thereon.

what is the exact treatment as i am following girish ahuja's book full of crap(mistakes)...