Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements

Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements · Complied AI

(b)

control of the composition of the board of directors in the case of a company or of the composition of

the corresponding governing body in case of any other enterprise so as to obtain economic benefits from

its activities.

3.4 A subsidiary is an enterprise that is controlled by another

enterprise (known as the parent).

3.5 A parent is an enterprise that has one or more

subsidiaries.

3.6 A group is a parent and all its subsidiaries.

3.7 Consolidated financial statements are the

financial statements of a group presented as those of a single enterprise.

3.8 The equity method is a method of accounting

whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising

at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post

acquisition change in the investor’s share of net assets of the investee. The consolidated

statement of profit and loss reflects the investor’s share of the results of operations of the

investee.

3.9 Equity is the residual interest in the

assets of an enterprise after deducting all its liabilities.

4 For the purpose of this Standard significant influence does not

extend to power to govern the financial and/or operating policies of an enterprise. Significant influence may be

gained by share ownership, statute or agreement. As regards share ownership, if an investor holds, directly or

indirectly through subsidiary(ies), 20% or more of the voting power of the investee, it is presumed that the

investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely,

if the investor holds, directly or indirectly through subsidiary(ies), less than 20% of the voting power of the

investee, it is presumed that the investor does not have significant influence, unless such influence can be

clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an

investor from having significant influence.

Explanation

Explanation:

In considering the share ownership, the potential equity shares of the investees held by the investor are not taken

into account for determining the voting power of the investor.

5 The existence of significant influence by an investor is usually evidenced in one or more of the following ways:

(b)

the associate operates under severe long-term restrictions that significantly impair its ability to

transfer funds to the investor.

Investments in such associates should be accounted for in accordance with Accounting Standard (AS) 13, Accounting for

Investments . The reasons for not applying the equity method in accounting for investments in an

associate should be disclosed in the consolidated financial statements.

Explanation

Explanation:

The period of time, which is considered as near future for the purposes of this Standard, primarily

depends on the facts and circumstances of each case. However, ordinarily, the meaning of the words ‘near

future’ is considered as not more than twelve months from acquisition of relevant investments unless a

longer period can be justified on the basis of facts and circumstances of the case. The intention with regard to

disposal of the relevant investment is considered at the time of acquisition of the investment. Accordingly, if

the relevant investment is acquired without an intention to its subsequent disposal in near future, and

subsequently, it is decided to dispose off the investment, such an investment is not excluded from application

of the equity method, until the investment is actually disposed off. Conversely, if the relevant investment is

acquired with an intention to its subsequent disposal in near future, however, due to some valid reasons, it

could not be disposed off within that period, the same will continue to be excluded from application of the

equity method, provided there is no change in the intention.

8 Recognition of income on the basis of distributions received may not be an adequate measure of the income earned by

an investor on an investment in an associate because the distributions received may bear little relationship to

the performance of the associate. As the investor has significant influence over the associate, the investor has

a measure of responsibility for the associate’s performance and, as a result, the return on its

investment. The investor accounts for this stewardship by extending the scope of its consolidated financial

statements to include its share of results of such an associate and so provides an analysis of earnings and

investment from which more useful ratios can be calculated. As a result, application of the equity method in

consolidated financial statements provides more informative reporting of the net assets and net income of the

investor.

9 An investor should discontinue the use of the equity method from the date that:

(b)

the use of the equity method is no longer appropriate because the associate operates under severe

long-term restrictions that significantly impair its ability to transfer funds to the investor.

From the date of discontinuing the use of the equity method, investments in such associates should be

accounted for in accordance with Accounting

Standard (AS) 13, Accounting for Investments . For this purpose, the carrying amount of the

investment at that date should be regarded as cost thereafter.

Application of the Equity Method

10 Many of the procedures appropriate for the application of the equity method are similar to the consolidation

procedures set out in Accounting Standard

(AS)

21, Consolidated Financial Statements . Furthermore, the broad concepts underlying the

consolidation procedures used in the acquisition of a subsidiary are adopted on the acquisition of an investment

in an associate.

11 An investment in an associate is accounted for under the equity method from the date on which it falls within the

definition of an associate. On acquisition of the investment any difference between the cost of acquisition and

the investor’s share of the equity of the associate is described as goodwill or capital reserve, as the

case may be.

12 Goodwill/capital reserve arising on the acquisition of an associate

by an investor should be included in the carrying amount of investment in the associate but should be disclosed

separately.

13 In using equity method for accounting for investment in an associate, unrealised profits and losses

resulting from transactions between the investor (or its consolidated subsidiaries) and the associate should be

eliminated to the extent of the investor’s interest in the associate. Unrealised losses should not be

eliminated if and to the extent the cost of the transferred asset cannot be recovered.

14 The most recent available financial statements of the associate are used by the investor in applying the equity

method; they are usually drawn up to the same date as the financial statements of the investor. When the

reporting dates of the investor and the associate are different, the associate often prepares, for the use of

the investor, statements as at the same date as the financial statements of the investor. When it is

impracticable to do this, financial statements drawn up to a different reporting date may be used. The

consistency principle requires that the length of the reporting periods, and any difference in the reporting

dates, are consistent from period to period.

15 When financial statements with a different reporting date are used, adjustments are made for the effects of any

significant events or transactions between the investor (or its consolidated subsidiaries) and the associate

that occur between the date of the associate’s financial statements and the date of the investor’s

consolidated financial statements.

16 The investor usually prepares consolidated financial statements using uniform accounting policies for the like

transactions and events in similar circumstances. In case an associate uses accounting policies other than those

adopted for the consolidated financial statements for like transactions and events in similar circumstances,

appropriate adjustments are made to the associate’s financial statements when they are used by the

investor in applying the equity method. If it is not practicable to do so, that fact is disclosed along with a

brief description of the differences between the accounting policies.

17 If an associate has outstanding cumulative preference shares held outside the group, the investor computes its

share of profits or losses after adjusting for the preference dividends whether or not the dividends have been

declared.

18 If, under the equity method, an investor’s share of losses of an associate equals or exceeds the carrying

amount of the investment, the investor ordinarily discontinues recognising its share of further losses and the

investment is reported at nil value. Additional losses are provided for to the extent that the investor has

incurred obligations or made payments on behalf of the associate to satisfy obligations of the associate that

the investor has guaranteed or to which the investor is otherwise committed. If the associate subsequently

reports profits, the investor resumes including its share of those profits only after its share of the profits

equals the share of net losses that have not been recognised.

19 Where an associate presents consolidated financial statements, the results and net assets to be taken into account

are those reported in that associate’s consolidated financial statements.

20 The carrying amount of investment in an associate should be reduced to recognise a decline, other

than temporary, in the value of the investment, such reduction being determined and made for each investment

individually.

Contingencies

21 In accordance with Accounting Standard (AS) 4,

Contingencies and Events Occurring After the Balance Sheet Date 5 , the investor

discloses in the consolidated financial

statements:

(b)

those contingencies that arise because the investor is severally liable for the liabilities of the

associate.

Disclosure

22 In addition to the disclosures required by paragraphs 7

and 12 , an appropriate listing and description of associates

including the proportion of ownership interest and, if different, the proportion of voting power held should be

disclosed in the consolidated financial statements.

23 Investments in associates accounted for using the equity method should be classified as long-term

investments and disclosed separately in the consolidated balance sheet. The investor’s share of the

profits or losses of such investments should be disclosed separately in the consolidated statement of profit and

loss. The investor’s share of any extraordinary or prior period items should also be separately disclosed.

24 The name(s) of the associate(s) of which reporting date(s) is/are different from that of the

financial statements of an investor and the differences in reporting dates should be disclosed in the

consolidated financial statements.

25 In case an associate uses accounting policies other than those adopted for the consolidated

financial statements for like transactions and events in similar circumstances and it is not practicable to make

appropriate adjustments to the associate’s financial statements, the fact should be disclosed along with a

brief description of the differences in the accounting policies.

Transitional Provisions 6

26 On the first occasion when investment in an associate is accounted for in consolidated financial

statements in accordance with this Standard the carrying amount of investment in the associate should be brought

to the amount that would have resulted had the equity method of accounting been followed as per this Standard

since the acquisition of the associate. The corresponding adjustment in this regard should be made in the

retained earnings in the consolidated financial statements.

Footnotes

* The Standard was earlier notified as part of Companies

(Accounting Standards) Rules, 2006, under Companies Act, 1956. The Standard has been notified as part of