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S. Murlidharan

While presenting a consolidated balance-sheet, not deducting minority interest straightaway would be misleading, says S. Murlidharan

FROM times immemorial, providing for minority interest in the consolidated balance-sheet has been de rigueur so much so that it would be heretical to question this hoary practice that has hitherto remained unchallenged. Textbooks and accounting bodies alike take line-by-line consolidation and its concomitant, minority interest, as axiomatic and sacrosanct that they do not even contemplate the possibility of an alternative to this accounting treatment. Leave alone a dyed-in-the-wool accountant, even a tyro would give a pat reply with contemptuous ease if he were challenged by a seemingly pointless and inane question: What would be the consolidated figure of fixed assets if the parent has Rs 600 crore by way of fixed assets in its balance-sheet and its 51 per cent subsidiary, Rs 500 crore? Without batting an eyelid he would say Rs 1,100 crore and he would add for good measure that on the liability side — in the minority interest account — credit must be given for Rs 245 crore, the figure attributable to the remaining shareholders in the subsidiary on account of their ownership of 49 per cent of the fixed assets. This is what the IASC asks one to do. And this is what AS-21, issued by the ICAI, exhorts one to do if he volunteers to furnish consolidated accounts.

Will it not be conducive to transparency and intelligibility, the cornerstones of any accounting tenet, if in the above example, fixed assets figured in the consolidated balance-sheet at Rs 855 crore, that is, after deducting the minority interest straightaway? Isn't it misleading, if not fraudulent, to claim something as one's own when it is otherwise, and in a manner of double-take disown later on what is not one's own?

Accounts are meant as much for the novice as it is for the cognoscente. At first flush, the former is bound to be swept off his feet by the larger-than-real size of the fixed assets of a combined entity. And should the subsidiary be endowed with a lot of sinews, the danger is pro tanto greater.

Let us say, RI has assets of Rs 10,000 crore whereas its 51 per cent subsidiary RP has assets worth a staggering Rs 20,000 crore. In the consolidated balance-sheet, RI would be able to show combined assets of Rs 30,000 crore, whereas in truth it ought to have laid claim only to Rs 20,200 crore.

That the exaggeration on the assets side would be neutralised by the credit to the minority interest can be likened to the fatuous argument that the thief stole all right but returned the booty pronto and, thus, was not guilty.

The short point therefore is: Instead of consolidating line-by-line, ignoring the minority interest and neutralising the exaggeration, as it were, through minority interest account, why not consolidate after providing for minority interest in a transparent manner upfront.

There is one more reason why, in India, resort to minority interest on the liability side of the balance-sheet could be misleading.

The Indian accounting standard, unlike that of its American counterpart, does not consider a company as subsidiary only if the parent owns more than 50 per cent of its equity — control over composition of the board of directors also creates such relationship. It is well known that often in India companies are controlled with as little as 26 per cent stake.

The danger of exaggeration discussed above is all the more in the case of a 26 per cent subsidiary rather than in a 51 per cent one. More fundamentally, how can persons owning 74 per cent of the equity be branded as minority interest?

On the contrary, despite the stranglehold on the composition of the board of directors, the parent, in fact, represents the minority interest.

The AS-21 does not talk about the role of the auditor of the parent company vis-à-vis the consolidated balance-sheet.

Perhaps, it has glossed over the issue because there is no compulsion to present consolidated accounts. Nevertheless, it ought to have called upon the parent's auditor to report on the consolidated accounts as well.

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