Loss of Control

When a parent loses control, the investee no longer meets the definition of subsidiary, and so it is no longer consolidated.

Where a parent loses control over a subsidiary, the investment will be accounted for under AS 13 Accounting for Investments from the date of loss of control, provided that the investor does not retain significant influence (in which case the investment will be accounted for under AS 23).

Control Exists when Parent Company has either:

  • The ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise. For example, A Ltd. holds 75% shares in B Ltd., then B Ltd. is subsidiary of A Ltd., in other words A Ltd. is the parent company.
  • If A Ltd. is holding 25% shares in C Ltd., then there is no holding-subsidiary relationship between them. But if along with A Ltd., B Ltd. also holds 30% shares in C Ltd., then A Ltd. holding in C Ltd. is 55%, though indirectly, and A Ltd. is parent company of both B Ltd. and C Ltd.

Or control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from subsidiary company’s activities.

Point to be noted here is that, the control over composition of board or governing body is for economic benefit. If any company is controlling the composition of governing body of gratuity trust, provident fund trust etc., since the objective is not the economic benefit and therefore it will not be included in consolidated financial statement.

An enterprise is considered to control the composition of the board of directors or governing body of a company, if it has the power, without the consent or concurrence of any other person, to appoint or remove all or a majority of directors of that company or members of the body.

If A Ltd. is proved to be a subsidiary company of B Ltd. by virtue of point (a) and also a subsidiary of C Ltd. as per point (b), then the problem arises that which company is liable to prepare Consolidated Financial Statement taking A Ltd. as its subsidiary. For this purpose ASI – 24 explains that both B Ltd. and C Ltd. will prepare such Consolidated Financial Statement, group being constituted of themselves and A Ltd.

In addition to the above points, one should also consider the following points:

Determination of control in any company or organization, does not depend only on the share in capital, many a times even when the share in capital is less than 50% but it is still considered the parent-subsidiary relationship as the voting power granted under special circumstances is more than 50%.

For example, ICICI Bank advanced loan of 40 crores to A Ltd., whose share capital is 10 crores only. As per the loan agreement, in case company defaults to repay the principal or to pay the interest on due date three times, ICICI Bank will have right to participate in the decision making of the company and this right will come to an end with the repayment of the loan amount with all its interest. On happening of the event, ICICI Bank got the voting right in the company meetings (Board and AGM) and as its advances to company is 80% of shares plus advances, bank carry 80% voting right and there exists a parent-subsidiary relationship, where A Ltd. is subsidiary of ICICI Bank.

Control is said to come into existence from the date when the conditions of such control are satisfied. If company does have control over the function of another company but consolidated financial statement is not prepared for the reason that there is restriction of impairing the resources then later, on removal of such restriction control will be said to come into existence but not from the date of such removal but from the date when such investments led to control.

Circumstances for Consolidated Financial Statements
Consolidation Procedures

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