A good exercise can be undertaken by the holding company is to prepare appropriate documentation to reconcile investor's cost of investment to investee's share capital for any investment-equtiy relationships within the Group.
The procdure appears to be straight forward, simple and non-complex on first thought. However, the reconciliation can turn into a complex procedure, due to:
- impairment been recorded for cost of investment
- difference exchange rate was used to translate the funding (i.e. investor used exchange rate A, while investee used exchange rate B)
- funding remitted / received is not recorded in appropriate account, etc
This recommended procedure is particularly useful for entities with significant number of subsidiaries. Discrepancies (between cost of investment and share capital) are usually expected for large group of entities.
This reconciliation excercise help to ensure that appropriate figures are recorded in respective source ledger, and ensure that appropriate elimination are done at group level.