Consolidation of Subsidiary under Liquidation

Facts of the Case:
ABC ltd. (“Parent”) has a wholly owned subsidiary B Ltd.

Every year the Financial Statements of B Ltd. are taken into account for the purpose of preparation of Consolidated Financial Statements (CFS) of the Parent company.

During the Financial Year (2017-18), a petition was filed by the creditors in High Court against B Ltd. as on 1 January 2018.

Thereafter, on 1 May 2018 the High court passed an order to liquidate B Ltd. and liquidator for the same was appointed. However, the Liquidation is still in process till the finalisation of accounts.

Issue/Query:
Whether the Financial Statements of B ltd. should be consolidated in the CFS of the Parent for the Year ending 31 March 2018 or not considering the event occurring after the BS date as per Ind AS 10?

Response:
The financial statements of B Ltd. shall be consolidated in the consolidated financial statements of the Parent for the year ending 31 March 2018.

Basis for Response:
1. Paragraph 5 of Ind AS 110 Consolidated Financial Statements states as under:
“An investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether it is a parent by assessing whether it controls the investee.”

Therefore, ABC Limited shall determine whether it is a parent by assessing whether it controls B Ltd.

2. Paragraph 7 of Ind AS 110 states as under:
“Thus, an investor controls an investee if and only if the investor has all of the following:
a. Power over the investee;
b. Exposure, or rights, to variable returns from its involvement with the investee; and
c. The ability to use its power over the investee to affect the amount of the investor’s returns.”

3. The querist has submitted that the creditors filed petition for liquidation on 1 January 2018. The High Court appointed liquidator on 1 May 2018. Thus, in absence of further details on rights and obligation of the company on filing of petition for liquidation by creditors, it is assumed that, till the appointment of liquidator, the company had the ability to use its power over the investee to affect the amount of the investor’s returns. Therefore, ABC Ltd. controls B Ltd. as on 31 March 2018.

4. Paragraph 20 of Ind AS 110 states as under:
“Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee.”
Therefore, ABC shall consolidate B Ltd. till the appointment of liquidator which is the date of losing control over B Ltd. by ABC Ltd.

5. Accordingly, ABC Ltd. is a parent of B Ltd. as on 31 March 2018 and shall consolidate B Ltd. in its consolidated financial statements for the year ended on 31 March 2018.