1.6       Query

Provision of losses of a subsidiary company in the

accounts of the holding company

A public sector corporation has several wholly owned subsidiaries. One of the subsidiaries incurred a loss of Rs. 12.24 lakhs in the year 1980-81. This loss was arrived at after offsetting the general reserve to the extent available. As per the accounts of subsidiaries, no other reserve was available to adjust this loss. The Comptroller and Auditor General of India desired that necessary provision for this loss may be made in the holding company’s accounts. The querist sought the opinion of the Committee regarding the legal and accounting practice for treatment of losses of subsidiaries in the accounts of the holding company. The querist also indicated that the subsidiary company’s shares were not quoted at any stock exchange and their face value only was shown in the holding company’s accounts under the head ‘Investments.’

                                              Opinion                                               April 1, 1982

 1. In the opinion of the Committee, there is no provision in the Companies Act, 1956, which requires a company to make a provision in its accounts for the losses sustained by its subsidiary. Such a provision would be required only if consolidated accounts are prepared or if the “equity method” of accounting is followed. Neither of these methods of accounting is required under the Companies Act.

2. Item (xiii) (b) of part II of Schedule VI to the Companies Act, 1956, requires the disclosure of “Provision for losses of subsidiary companies”. It may be said that these provisions are only concerned with the disclosure of various items in the profit and loss account and cannot be extended to mean that provisions would be made for all items shown therein. Compliance with this part only requires that if a provision is made in the accounts for the loss sustained by the subsidiary, that provision should be separately shown in the profit and loss account.

3. This view is supported by the provisions of Section 212 of the Companies Act which requires the accounts of a subsidiary to be attached to the accounts of the holding company along with a statement of the holding company’s interest in the subsidiary. Specifying therein the “net aggregate amount of the profits of the subsidiary after deducting its losses or vice-versa…….. so far as these profits are dealt with, or provision is made for those losses, in the company’s accounts” [Section 212(3) (c)].

4. Thus legally the company need not provide for the losses of its subsidiary. However, as a good accounting practice it would be advisable to take cognisance of the losses of a subsidiary to the extent the value of the investments is affected.