Imagine Sharma Group Ltd. owns 75% of Rohan Industries Ltd. Both file separate tax returns and have separate bank accounts — but for their investors, the real picture only emerges when you stitch the two together into one report. That stitching is Consolidation, governed by AS 21 – Consolidated Financial Statements under the ICAI curriculum.
The company that controls (holds >50% voting power) is the Holding Company. The one controlled is the Subsidiary. When you consolidate, you add their assets, liabilities, income, and expenses line-by-line — but you also need to handle three critical adjustments that are exam staples.
First: Cost of Control. When Sharma Group paid ₹4,20,000 for 75% of Rohan Industries, it was buying into Rohan's net assets. The difference between what it paid and its proportionate share of net assets at acquisition is either Goodwill on Consolidation (paid more → asset, shown in Consolidated Balance Sheet) or Capital Reserve (paid less → reserve). This calculation always uses net assets at the date of acquisition — not current figures.
Second: Minority Interest (MI). The remaining 25% shareholders of Rohan Industries are outsiders from the group's perspective — called the Minority. Their stake in the entire net assets of the subsidiary (capital + all reserves including post-acquisition) is shown as Minority Interest on the liabilities side of the Consolidated Balance Sheet. Don't mix up: MI is calculated on total net assets, not just paid-up capital.
Third: Pre- vs Post-Acquisition Profits. Profits earned by the subsidiary before Sharma Group acquired it are capital profits — they reduce the cost of control calculation and are not available for dividend. Profits earned after acquisition are revenue profits — they flow into the Consolidated P&L. This distinction is asked frequently as a 4-mark question; getting the acquisition date right is everything.
One more adjustment: if the holding company sells goods to the subsidiary (or vice versa) and those goods are still unsold, the group hasn't truly realised that profit yet. Eliminate unrealised inter-company profits from both Consolidated P&L and closing inventory. This is a common 2-mark adjustment in exam problems.