The investor presentation has a slide headed "consolidated revenue" with three bars: ₹2,000 crore, ₹2,450 crore, ₹2,900 crore. Underneath, in the way of these slides, the phrase "strengthened market position". Nothing on it is false. In the middle year the company paid ₹20 crore to raise a stake it had held for years from forty-nine per cent to fifty-one, and that purchase — two per cent of one company, for a sum smaller than its own quarterly advertising spend — accounts for the whole of the increase in both bars. Not because a business was acquired. Because a line in the accounting standards was crossed, and what is reported on one side of that line has almost nothing in common with what is reported on the other.
You have money in your brother's shop. If you handed it over and have no say in anything, you tell people "I have an investment in his shop". If you sit in the Sunday meeting where the prices and the purchases are decided, you say "we run it together". If you can dismiss the manager on a Tuesday without asking anybody, you say "it is my shop, and my brother has a share in it". The money you put in is identical in all three cases. The sentence changes because of what you are able to decide.
Accounting draws exactly those three sentences and demands a different set of books for each of them. An investment is carried at a value. A business run together contributes one line of profit. A business you can decide about is added to yours line by line, and the part belonging to the other holders is subtracted further down. Which sentence applies is a question about power, and the percentage is only the commonest evidence for it.
The three treatments, and the test that picks one
| What you hold | How the stake is reported | What the investee's revenue and borrowings do to your accounts |
|---|---|---|
| Neither influence nor control — an ordinary shareholding, typically below twenty per cent of the voting rights | At fair value. Movements go through profit, unless the company irrevocably elected at first recognition to route them through other comprehensive income, in which case they never reach the profit line at all | Nothing. Neither appears anywhere in your accounts. What can reach your profit statement is the dividend actually received and, on the fair-value-through-profit route only, the movement in the value of the stake itself — never a rupee of the investee's own revenue or a rupee of its interest cost |
| Significant influence — presumed at twenty per cent or more of the voting rights, and rebuttable in both directions on the facts | By the equity method: one line, your share of the investee's profit after the investee's own tax, and one line of carrying amount on the balance sheet | Nothing. No revenue, no assets, no borrowings, no interest cost. One line of profit is the entire trace |
| Control | Full consolidation: every line of the subsidiary added to yours, and the share belonging to the other shareholders then removed from profit and from equity | All of it. One hundred per cent of the revenue, the assets and the borrowings, whatever percentage of the shares you hold. One presentation exception: a subsidiary held for sale that is a separate major line of business is still consolidated, but its whole result is shown as a single post-tax line for discontinued operations rather than inside revenue |
Control, under Ind AS 110, has three elements that must all be present: power over the investee, exposure to variable returns from it, and the ability to use that power to affect those returns. Holding more than half the voting rights is the ordinary way of having all three, which is why the percentage works as a rule of thumb almost all of the time. It is not the definition, and the two cases where it parts company from the definition are the ones that move numbers.
- Control below a majority. A holder of forty per cent, where the remaining sixty is spread across thousands of holders who never vote, decides every resolution in practice and appoints the board. Ind AS 110 requires that to be assessed on the facts — the size of the holding relative to the dispersion of the rest of the register is explicitly relevant — and where it amounts to power, the investee is consolidated. This is de facto control, and it is why a company can consolidate an entity in which it holds well under half the shares.
- A majority without control. Where a subsidiary is admitted into the insolvency process its board is suspended and a resolution professional runs it, and the parent no longer has the power the definition requires. Indian parents have deconsolidated subsidiaries on precisely that basis. The effect on the group accounts is abrupt and cuts both ways: the subsidiary's revenue leaves, and so do its borrowings, in the same quarter.
- Joint control is its own category. A shareholders' agreement under which decisions about the relevant activities need the unanimous consent of two parties gives neither of them control, whatever the split of the shares. That is the subject of the next lesson.
- Potential voting rights count only when they are substantive. Convertible instruments and options over the investee's shares enter the assessment where the holder has the practical ability to exercise them when decisions about the relevant activities are taken, and no barrier prevents it. A right that cannot be exercised for four years is not power today, and a right whose exercise price makes exercise commercially absurd may not be either.
What crossing the line does to the numbers
Seeing it before the presentation does
- The statement of subsidiaries, associates and joint ventures attached to the consolidated accounts — Form AOC-1 — names every entity with its revenue, profit and net worth, and states which of the three categories it falls into. A change of category between two years is the event described in this lesson, and it is one line of a table.
- The basis of consolidation note, which states the date control was obtained or lost, and the reasoning where the conclusion does not follow from the percentage. Where a company consolidates an entity it holds 45% of, or does not consolidate one it holds 60% of, this is where the sentence explaining it sits.
- The announcement of the stake purchase itself, filed with the exchanges when the agreement is entered into. It gives the percentage and the consideration; the accounting consequence is not usually mentioned and is entirely predictable from those two figures.
- The quarter in which the consolidated revenue base jumps without a comparable jump in any operating disclosure — volumes, capacity, stores, order book. That mismatch is the signature, and it is visible from outside without any of the documents above.
A company holds 45% of another. The remaining 55% is spread across several thousand small shareholders who rarely vote, and the 45% holder appoints a majority of the board. Which treatment applies?
P ke paas S ka 49% tha. S: revenue ₹900 crore, profit ₹60 crore, karza ₹400 crore — aur P ki kitaab mein sirf ek line, 49% ka ₹29.4 crore. Phir P ne ₹20 crore mein 2% aur khareeda: 51%, yaani control. Agle poore saal revenue ₹2,000 se ₹2,900 crore (+45%), karza ₹500 se ₹900 crore (+80%) — poora ₹400 crore aaya, 51% wala hissa nahi, kyunki consolidation hisse mein nahi hoti. Aur jis saal control mila, purane 49% ki keemat dobara aanki gayi: kitaab mein ₹380 crore, naye daam se ₹490 crore — ₹110 crore ka profit, ek rupya cash nahi. Asli badlav kya hua? S ke profit mein 2%, yaani ₹1.2 crore saal ka. Baaki sab presentation hai.
- Three treatments — fair value, the equity method, full consolidation — and the boundary between the last two is control, not a percentage.
- Consolidation is never proportionate: all of a subsidiary's revenue and borrowings come in whatever the stake, with the other holders' share removed lower down.
- Control can exist below a majority and can be absent above one, and the basis of consolidation note is where the reasoning sits.
- Crossing from the equity method into consolidation lifts reported revenue and debt with no change in the business, and produces growth in two consecutive years from one event.
- Obtaining control remeasures the stake already held to fair value, and losing it remeasures what is retained — both put a non-cash gain in the profit statement.
Mark it done to track your progress through the curriculum.