Consolidation and the group

A listed Indian company is rarely one business. It is a parent with subsidiaries, associates and joint ventures, and the accounts come in two versions: standalone for the legal entity, and consolidated for the group.

The consolidated accounts are the ones that describe the business. Knowing why — and why the standalone ones still matter — is this chapter.

Control is the test, not ownership

Ind AS 110 establishes control as the basis for deciding which entities are consolidated.

ICAI states the principle: an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

All three elements must be present:

1. Power over the investee — existing rights giving the current ability to direct the relevant activities, meaning the activities that significantly affect returns.
2. Exposure, or rights, to variable returns from the involvement.
3. The ability to use that power to affect those returns.

51% is a rule of thumb, not the rule. Control can exist below a majority — through contractual arrangements, dispersed other shareholders, or rights over the board. It can also be absent above one, where another party directs the relevant activities. The standard asks who actually decides.

That is why the list of subsidiaries in the notes sometimes contains entities with surprising shareholdings in both directions.

The three relationships

Relationship	Test	Treatment
Subsidiary	Control	Consolidate line by line
Associate	Significant influence	Equity method — one line
Joint venture	Joint control	Usually equity method

Consolidation adds the subsidiary's assets, liabilities, revenue and expenses to the parent's, line by line, and then eliminates everything internal. The equity method does not: it shows the investment as a single asset and the share of profit as a single line.

The difference is large. A consolidated subsidiary brings its full revenue and its full debt into the group accounts; an equity-method associate brings neither.

Eliminations, and why they are the point

Consolidation is not addition. Transactions within the group must be removed, because a group cannot trade with itself:

• Intra-group sales and the corresponding purchases
• Intra-group receivables and payables
• Unrealised profit on inventory still held inside the group
• The parent's investment against the subsidiary's equity

Without elimination, a group could manufacture revenue by selling between its own companies. The eliminations are what make consolidated revenue mean something, and they are the mechanism that stops circular trading flattering the top line.

Minority interest

If the parent owns 70% of a subsidiary, consolidation still brings in 100% of that subsidiary's assets, liabilities and results — because the parent controls all of it.

The 30% belonging to others is then shown separately as non-controlling interest, in equity on the balance sheet and as a deduction in arriving at profit attributable to owners of the parent.

The practical consequence: consolidated revenue and consolidated debt include the whole of a part-owned subsidiary, while the profit attributable to you does not. A group with many part-owned subsidiaries looks larger relative to its shareholders' claim than a wholly owned one does.

Why standalone still matters

Two reasons, and the second is the one most people miss.

Dividends are paid by the legal entity whose shares you own, out of its own distributable profits. A group earning well through subsidiaries that do not pay dividends up to the parent may have a parent with little to distribute. The standalone accounts are where that is visible.

Debt sits in a specific entity. Group leverage can look manageable while the borrowing is concentrated somewhere with no cash flows of its own.

So: consolidated to judge the business, standalone to judge the dividend and the structure.

The point

Control, not shareholding, decides consolidation — power over the relevant activities, exposure to variable returns, and the ability to use the one to affect the other. Subsidiaries consolidate line by line with intra-group transactions eliminated, which is what stops a group inventing revenue by trading with itself; associates get one line under the equity method. A part-owned subsidiary is consolidated in full with the rest shown as non-controlling interest, and dividends still depend on the standalone entity.