Advanced Accounting · AS 21 Consolidated Financial Statements

Consolidation Procedure and Cost of Control under AS 21

Updated 4 October 2026 · Fact-checked

Consolidation under AS 21 adds the parent's and subsidiary's items line by line, eliminates intra-group balances and unrealised profits, and shows minority interest separately. Cost of control is the parent's investment cost minus its share of the subsidiary's equity at acquisition. A positive figure is goodwill; a negative figure is capital reserve.

Understand Consolidation Procedure and Cost of Control

A parent company and its subsidiaries are separate legal entities, but AS 21 asks you to present them as one economic unit. The consolidated financial statements show what the group owns and owes to outsiders. So anything the group owes to itself must disappear.

Line-by-line consolidation means you add assets, liabilities, income and expenses of the parent and subsidiary item by item. Then you remove the parent's investment in the subsidiary against the parent's share of the subsidiary's equity. You also remove intra-group balances such as inter-company debtors and creditors, loans, and inter-company sales and purchases.

Cost of control arises when you set the investment against the parent's share of the subsidiary's equity on the date of acquisition. Equity here means share capital plus all reserves and profits at that date. If the investment cost is higher, the difference is goodwill. If it is lower, the difference is capital reserve. Only the balance on the date of acquisition counts. Profits earned after that date are post-acquisition profits.

The part of the subsidiary's net assets that belongs to outsiders is minority interest. Under AS 21 it is the minority's share of the subsidiary's net assets at the balance sheet date. In practice it is the minority's share of share capital plus its share of all reserves and profits, both pre- and post-acquisition, after any adjustments for unrealised profit. It is shown separately from the parent's shareholders' funds.

The parent's share of post-acquisition profits and reserves goes into consolidated reserves. The parent's share of pre-acquisition profits goes into cost of control. This split is the heart of every consolidated balance sheet question.

Unrealised profit on stock depends on the direction of the sale:

Upstream (subsidiary sold to parent): remove the unrealised profit from the subsidiary's profits. The reduction is shared between the parent and the minority, so it lowers both consolidated reserves and minority interest in the holding ratio.
Downstream (parent sold to subsidiary): deduct the whole unrealised profit from the parent's reserves. The minority is not affected.

Key rules to remember

Parent's share of subsidiary's equity at acquisition: Parent % × (Share capital + Reserves and profits on the date of acquisition); Use the balances on the date of acquisition, adjusted for any fair value or revaluation if the question gives it.
Cost of control: Cost of investment − Parent's share of subsidiary's equity at acquisition; Positive = goodwill. Negative = capital reserve.
Minority interest: Minority % × (Share capital + All reserves and profits at balance sheet date, after deducting unrealised profit on upstream stock); Includes the minority's share of both pre- and post-acquisition profits. Downstream unrealised profit does not change minority interest.
Post-acquisition profit of subsidiary: Reserves and profits at balance sheet date − Reserves and profits at acquisition; Parent's share goes to consolidated reserves; minority's share goes to minority interest.
Consolidated reserves: Parent's own reserves − Downstream unrealised profit (in full) + Parent % × (Subsidiary's post-acquisition profits − Upstream unrealised profit); Upstream profit is shared between parent and minority. Downstream profit is borne wholly by the parent. Capital reserve on consolidation is shown separately from revenue reserves.
Elimination of intra-group balances: Inter-company debtors = Inter-company creditors; both removed in full; Remove in full even if the subsidiary is not wholly owned. Adjust for cash or stock in transit first.

How to solve Consolidation Procedure and Cost of Control questions

Use this order for any consolidated balance sheet question. Do the working notes first and the balance sheet last.

1Find the holding percentage of the parent and the minority percentage. Note the date of acquisition.
2Prepare the subsidiary's equity at the date of acquisition: share capital plus reserves and profits. Work out its post-acquisition profits as the balance sheet date figure minus the acquisition date figure.
3Make adjustments given in the question first, such as proposed dividend, stock in transit, cash in transit, and unrecorded items. Correct the subsidiary's reserves for them.
4Compute cost of control: investment cost minus the parent's share of equity at acquisition. Label it goodwill or capital reserve.
5Compute minority interest: minority % of share capital plus all reserves and profits at the balance sheet date, after deducting any upstream unrealised profit.
6Compute consolidated reserves: parent's reserves plus the parent's share of the subsidiary's post-acquisition profits. Deduct downstream unrealised profit in full from the parent's reserves. Deduct upstream unrealised profit from the subsidiary's profits first, so the parent bears only its share.
7Eliminate intra-group balances such as debtors, creditors, loans and bills, then add the remaining assets and liabilities line by line.
8Check that total assets equal total liabilities including minority interest. If not, a working note is wrong.

Quickest way: Four working notes, then add across

When to use it: Use this for any consolidated balance sheet question when time is short. It covers both the MCQ and written formats.

Write four headings: Cost of control, Minority interest, Consolidated reserves, and Eliminations.
Fill each with one line of arithmetic. Then add parent and subsidiary figures across, eliminate, and insert the four results.
Show every working note in the answer. Step marks are given for each, even if the final balance sheet has a small slip.
For MCQs, find the one figure asked. If it asks for goodwill, compute only the cost of control. Do not build the whole balance sheet.
In MCQs, check the sign first. If investment is less than the share of equity, the answer must be capital reserve. This removes two options quickly.

Common mistakes in Consolidation Procedure and Cost of Control

Using the balance sheet date reserves of the subsidiary to compute cost of control.
Students take the balances from the given balance sheet without noting the acquisition date.
Fix: Cost of control always uses the reserves on the date of acquisition. Only post-acquisition profit goes to consolidated reserves.
Giving the minority only its share of share capital and post-acquisition profit.
Students confuse the minority's treatment with the parent's.
Fix: Minority interest is the minority % of the whole equity at the balance sheet date, including pre-acquisition reserves.
Eliminating only the parent's share of an intra-group balance in a partly-owned subsidiary.
Students scale everything by holding percentage, as in proportionate consolidation.
Fix: Under line-by-line consolidation, eliminate intra-group debtors, creditors and loans in full.
Forgetting to adjust for stock or cash in transit before consolidating.
The adjustment is hidden in a note at the end of the question.
Fix: Read all notes first. Add the in-transit item to the receiving company and reduce the balance of the sending company.
Treating a negative cost of control as goodwill, or mixing up the sign.
Students subtract in the wrong order.
Fix: Always compute investment minus share of equity. A negative answer is capital reserve and sits under reserves.
Leaving the subsidiary's proposed dividend or bonus issue out of the reserves workings.
Students treat these as post-balance-sheet notes only.
Fix: Reduce the subsidiary's profits by any dividend already provided. Treat a bonus issue out of pre-acquisition reserves as a transfer within equity, not a new profit.
Deducting unrealised profit on stock wholly from the parent's reserves in every case.
Students ignore who sold the stock.
Fix: Check the direction. Downstream profit (parent to subsidiary) comes off the parent's reserves in full. Upstream profit (subsidiary to parent) comes off the subsidiary's profits and is shared between parent and minority.

Worked examples

Example 1

H Ltd acquired 80% of the equity shares of S Ltd on 1 April for ₹5,00,000. On that date S Ltd had share capital of ₹4,00,000 and reserves of ₹1,50,000. At 31 March, S Ltd's reserves were ₹2,50,000. H Ltd's own reserves at 31 March were ₹3,00,000. Compute goodwill or capital reserve, minority interest and consolidated reserves.

Show the solution

Equity of S Ltd at acquisition = 4,00,000 + 1,50,000 = ₹5,50,000.
Parent's share = 80% × 5,50,000 = ₹4,40,000.
Cost of control = 5,00,000 − 4,40,000 = ₹60,000. This is goodwill, as the cost is higher.
Equity of S Ltd at balance sheet date = 4,00,000 + 2,50,000 = ₹6,50,000.
Minority interest = 20% × 6,50,000 = ₹1,30,000.
Post-acquisition profit = 2,50,000 − 1,50,000 = ₹1,00,000. H Ltd's share = 80% × 1,00,000 = ₹80,000.
Consolidated reserves = 3,00,000 + 80,000 = ₹3,80,000.

Answer: Goodwill ₹60,000; minority interest ₹1,30,000; consolidated reserves ₹3,80,000.

Example 2

P Ltd holds 75% of S Ltd, acquired on the date when S Ltd had share capital ₹2,00,000 and a profit and loss balance of ₹80,000. P Ltd paid ₹1,95,000. At the balance sheet date, S Ltd owes P Ltd ₹30,000 on account of goods purchased, and P Ltd's debtors include this amount. P Ltd's total debtors are ₹1,10,000 and S Ltd's total creditors are ₹70,000. S Ltd has debtors of ₹40,000 (none from P Ltd) and P Ltd has creditors of ₹25,000 (none to S Ltd). Compute the cost of control and the consolidated debtors and creditors.

Show the solution

Equity of S Ltd at acquisition = 2,00,000 + 80,000 = ₹2,80,000.
Parent's share = 75% × 2,80,000 = ₹2,10,000.
Cost of control = 1,95,000 − 2,10,000 = −₹15,000. The investment is lower, so this is capital reserve of ₹15,000.
The intra-group balance of ₹30,000 is eliminated in full from both debtors and creditors.
Consolidated debtors = (P Ltd 1,10,000 + S Ltd 40,000) − 30,000 = 1,50,000 − 30,000 = ₹1,20,000.
Consolidated creditors = (S Ltd 70,000 + P Ltd 25,000) − 30,000 = 95,000 − 30,000 = ₹65,000.

Answer: Capital reserve ₹15,000; consolidated debtors ₹1,20,000; consolidated creditors ₹65,000.

Exam tips

Write the four working notes in a fixed order every time. Examiners award marks for each note separately.
Check the date of acquisition and the balance sheet date before writing any number. Most errors start here.
In MCQs, test the sign of cost of control first. That narrows the options before any long calculation.
Read the notes at the bottom of the question before starting. Dividends, stock in transit and revaluations change the reserves used.
For unrealised profit on stock, first ask who sold to whom. Upstream is shared with the minority; downstream is not.
Close the answer by checking that assets equal liabilities including minority interest.

Practice questions from AS 21 Consolidated Financial Statements

Consolidation Procedure and Cost of Control in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Consolidation Procedure and Cost of Control: frequently asked questions

What is the difference between goodwill and capital reserve in consolidation?

Both come from cost of control. If the parent paid more than its share of the subsidiary's equity at acquisition, the difference is goodwill. If it paid less, the difference is capital reserve.

Why is minority interest calculated on the balance sheet date figures?

Minority shareholders own a share of the subsidiary's net assets as they stand now. So minority interest includes their share of both pre- and post-acquisition profits.

Do I eliminate intra-group balances fully if the subsidiary is not wholly owned?

Yes. Line-by-line consolidation adds all assets and liabilities of the subsidiary in full, so the intra-group balances must also be eliminated in full.

Where do pre-acquisition profits of the subsidiary go?

The parent's share of pre-acquisition profits reduces the cost of control. They are not part of consolidated reserves.

Who bears unrealised profit on stock in consolidation?

It depends on who sold the stock. If the subsidiary sold to the parent (upstream), the profit is removed from the subsidiary's profits and shared between parent and minority. If the parent sold to the subsidiary (downstream), the parent's reserves bear all of it.