Statements
of Accounting Standards (AS 21)
Consolidated Financial Statements
(In this Accounting Standard, the
standard portions have been set in bold italic type. These should
be read in the context of the background material which has been
set in normal type, and in the context of the ‘Preface to the Statements
of Accounting Standards'.)
Accounting Standard (AS) 21, ‘Consolidated
Financial Statements’, issued by the Council of the Institute of
Chartered Accountants of India, comes into effect in respect of
accounting periods commencing on or after 1-4-2001. An enterprise
that presents consolidated financial statements should prepare and
present these statements in accordance with this Standard. The following
is the text of the Accounting Standard.
Objective
The objective of this Statement is to
lay down principles and procedures for preparation and presentation
of consolidated financial statements. Consolidated financial statements
are presented by a parent (also known as holding enterprise) to
provide financial information about the economic activities of its
group. These statements are intended to present financial information
about a parent and its subsidiary(ies) as a single economic entity
to show the economic resources controlled by the group, the obligations
of the group and results the group achieves with its resources.
Scope
1. This Statement should be applied
in the preparation and presentation of consolidated financial statements
for a group of enterprises under the control of a parent.
2. This Statement should also be applied in accounting for investments
in subsidiaries in the separate financial statements of a parent.
3.In the preparation of consolidated
financial statements, other Accounting Standards also apply in the
same manner as they apply to the separate financial statements.
4.This Statement does not deal with:
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methods of accounting for amalgamations and
their effects on consolidation, including goodwill arising on
amalgamation (see AS 14, Accounting for Amalgamations);
-
accounting for investments in associates
(at present governed by AS 13, Accounting for Investments);
and
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accounting for investments in joint ventures
(at present governed by AS 13, Accounting for Investments).
Definitions
5. For the purpose of this Statement,
the following terms are used with the meanings specified:
Control:
(a) the ownership, directly
or indirectly through subsidiary(ies), of more than one-half of
the voting power of an enterprise; or
1. Attention is specifically drawn to
paragraph 4.3 of the Preface, according to which accounting standards
are intended to apply only to material items.
2. A separate accounting standard on 'Accounting for Investments
in Associates', which is being formulated, will specify the requirements
relating to accounting for investments in associates.
3. A separate accounting standard on 'Financial Reporting of Interests
in Joint Ventures ', which is being formulated, will specify the
requirements relating to accounting for investments in joint ventures.
(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.
A subsidiary is
an enterprise that is controlled by another enterprise (known as
the parent).
A parent is an enterprise that has one or more subsidiaries.
A group is a parent and all its subsidiaries.
Consolidated financial statements are the financial statements
of a group presented as those of a single enterprise.
Equity is the residual interest in the assets of an enterprise
after deducting all its liabilities.
Minority interest is that part of the net results of operations
and of the net assets of a subsidiary attributable to interests
which are not owned, directly or indirectly through subsidiary(ies),
by the parent.
6. Consolidated financial statements
normally include consolidated balance sheet, consolidated statement
of profit and loss, and notes, other statements and explanatory
material that form an integral part thereof. Consolidated cash flow
statement is presented in case a parent presents its own cash flow
statement. The consolidated financial statements are presented,
to the extent possible, in the same format as that adopted by the
parent for its separate financial statements.
Presentation of Consolidated
Financial Statements
7. A parent which presents consolidated
financial statements should present these statements in addition
to its separate financial statements.
8. Users of the financial statements
of a parent are usually concerned with, and need to be informed
about, the financial position and results of operations of not only
the enterprise itself but also of the group as a whole. This need
is served by providing the users -
-
separate financial statements of the parent;
and
-
consolidated financial statements,
which present financial information about the group as that
of a single enterprise without regard to the legal boundaries
of the separate legal entities.
Scope of Consolidated Financial Statements
9. A parent which presents consolidated
financial statements should consolidate all subsidiaries, domestic
as well as foreign, other than those referred to in paragraph 11.
10. The consolidated financial statements
are prepared on the basis of financial statements of parent and
all enterprises that are controlled by the parent, other than those
subsidiaries excluded for the reasons set out in paragraph 11. Control
exists when the parent owns, directly or indirectly through subsidiary(ies),
more than one-half of the voting power of an enterprise. Control
also exists when an enterprise controls the composition of the board
of directors (in the case of a company) or of the corresponding
governing body (in case of an enterprise not being a company) so
as to obtain economic benefits from its activities. An enterprise
may control the composition of the governing bodies of entities
such as gratuity trust, provident fund trust etc. Since the objective
of control over such entities is not to obtain economic benefits
from their activities, these are not considered for the purpose
of preparation of consolidated financial statements. For the purpose
of this Statement, an enterprise is considered to control the composition
of:
(i) the board of directors of a company, if it has the power, without
the consent or concurrence of any other person, to appoint or remove
all or a majority of directors of that company. An enterprise is
deemed to have the power to appoint a director, if any of the following
conditions is satisfied:
-
a person cannot be appointed as director
without the exercise in his favour by that enterprise of such
a power as aforesaid; or
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a person’s appointment as director follows
necessarily from his appointment to a position held by him in
that enterprise; or
-
the director is nominated by that enterprise
or a subsidiary thereof.
(ii) the governing body of an enterprise
that is not a company, if it has the power, without the consent
or the concurrence of any other person, to appoint or remove all
or a majority of members of the governing body of that other enterprise.
An enterprise is deemed to have the power to appoint a member, if
any of the following conditions is satisfied:
-
a person cannot be appointed as member of
the governing body without the exercise in his favour by that
other enterprise of such a power as aforesaid; or
-
a person’s appointment as member of the governing
body follows necessarily from his appointment to a position
held by him in that other enterprise; or
-
the member of the governing body is nominated
by that other enterprise.
11. A subsidiary should
be excluded from consolidation when:
(a) control is intended
to be temporary because the subsidiary is acquired and held exclusively
with a view to its subsequent disposal in the near future; or
(b) it operates under severe long-term restrictions which significantly
impair its ability to transfer funds to the parent.
In consolidated financial statements,
investments in such subsidiaries should be accounted for in accordance
with Accounting Standard (AS) 13, Accounting for Investments. The
reasons for not consolidating a subsidiary should be disclosed in
the consolidated financial statements.
12. Exclusion of a subsidiary from consolidation
on the ground that its business activities are dissimilar from those
of the other enterprises within the group is not justified because
better information is provided by consolidating such subsidiaries
and disclosing additional information in the consolidated financial
statements about the different business activities of subsidiaries.
For example, the disclosures required by Accounting Standard (AS)
17, Segment Reporting, help to explain the significance of different
business activities within the group.
Consolidation Procedures
13. In preparing consolidated
financial statements, the financial statements of the parent and
its subsidiaries should be combined on a line by line basis by adding
together like items of assets, liabilities, income and expenses.
In order that the consolidated financial statements present financial
information about the group as that of a single enterprise, the
following steps should be taken:
(a) the cost to the parent
of its investment in each subsidiary and the parent's portion
of equity of each subsidiary, at the date on which investment
in each subsidiary is made, should be eliminated;
(b) any excess of the cost to the parent of its investment in
a subsidiary over the parent's portion of equity of the subsidiary,
at the date on which investment in the subsidiary is made, should
be described as goodwill to be recognised as an asset in the consolidated
financial statements;
(c) when the cost to the parent of its investment in a subsidiary
is less than the parent's portion of equity of the subsidiary,
at the date on which investment in the subsidiary is made, the
difference should be treated as a capital reserve in the consolidated
financial statements;
(d) minority interests in the net income of consolidated subsidiaries
for the reporting period should be identified and adjusted against
the income of the group in order to arrive at the net income attributable
to the owners of the parent; and
(e) minority interests in the net assets of consolidated subsidiaries
should be identified and presented in the consolidated balance
sheet separately from liabilities and the equity of the parent's
shareholders. Minority interests in the net assets consist of:
-
the amount of equity attributable
to minorities at the date on which investment in a subsidiary
is made; and
-
the minorities' share of movements
in equity since the date the parent-subsidiary relationship
came in existence.
Where the carrying amount
of the investment in the subsidiary is different from its cost,
the carrying amount is considered for the purpose of above computations.
14. The parent's portion of equity in
a subsidiary, at the date on which investment is made, is determined
on the basis of information contained in the financial statements
of the subsidiary as on the date of investment. However, if the
financial statements of a subsidiary, as on the date of investment,
are not available and if it is impracticable to draw the financial
statements of the subsidiary as on that date, financial statements
of the subsidiary for the immediately preceding period are used
as a basis for consolidation. Adjustments are made to these financial
statements for the effects of significant transactions or other
events that occur between the date of such financial statements
and the date of investment in the subsidiary.
15. If an enterprise makes two or more investments in another enterprise
at different dates and eventually obtains control of the other enterprise,
the consolidated financial statements are presented only from the
date on which holding-subsidiary relationship comes in existence.
If two or more investments are made over a period of time, the equity
of the subsidiary at the date of investment, for the purposes of
paragraph 13 above, is generally determined on a step-by-step basis;
however, if small investments are made over a period of time and
then an investment is made that results in control, the date of
the latest investment, as a practicable measure, may be considered
as the date of investment.
16. Intragroup balances and intragroup transactions and resulting
unrealised profits should be eliminated in full. Unrealised losses
resulting from intragroup transactions should also be eliminated
unless cost cannot be recovered.
17. Intragroup balances and intragroup transactions, including sales,
expenses and dividends, are eliminated in full. Unrealised profits
resulting from intragroup transactions that are included in the
carrying amount of assets, such as inventory and fixed assets, are
eliminated in full. Unrealised losses resulting from intragroup
transactions that are deducted in arriving at the carrying amount
of assets are also eliminated unless cost cannot be recovered.
18. The financial statements used in the consolidation should
be drawn up to the same reporting date. If it is not practicable
to draw up the financial statements of one or more subsidiaries
to such date and, accordingly, those financial statements are drawn
up to different reporting dates, adjustments should be made for
the effects of significant transactions or other events that occur
between those dates and the date of the parent's financial statements.
In any case, the difference between reporting dates should not be
more than six months.
19. The financial statements of the parent and its subsidiaries
used in the preparation of the consolidated financial statements
are usually drawn up to the same date. When the reporting dates
are different, the subsidiary often prepares, for consolidation
purposes, statements as at the same date as that of the parent.
When it is impracticable to do this, financial statements drawn
up to different reporting dates may be used provided the difference
in reporting dates is not more than six months. The consistency
principle requires that the length of the reporting periods and
any difference in the reporting dates should be the same from period
to period
20. Consolidated financial statements should be prepared using
uniform accounting policies for like transactions and other events
in similar circumstances. If it is not practicable to use uniform
accounting policies in preparing the consolidated financial statements,
that fact should be disclosed together with the proportions of the
items in the consolidated financial statements to which the different
accounting policies have been applied.
21. If a member of the group uses accounting policies other than
those adopted in the consolidated financial statements for like
transactions and events in similar circumstances, appropriate adjustments
are made to its financial statements when they are used in preparing
the consolidated financial statements.
22. The results of operations of a subsidiary are included in the
consolidated financial statements as from the date on which parent-subsidiary
relationship came in existence. The results of operations of a subsidiary
with which parent-subsidiary relationship ceases to exist are included
in the consolidated statement of profit and loss until the date
of cessation of the relationship. The difference between the proceeds
from the disposal of investment in a subsidiary and the carrying
amount of its assets less liabilities as of the date of disposal
is recognised in the consolidated statement of profit and loss as
the profit or loss on the disposal of the investment in the subsidiary.
In order to ensure the comparability of the financial statements
from one accounting period to the next, supplementary information
is often provided about the effect of the acquisition and disposal
of subsidiaries on the financial position at the reporting date
and the results for the reporting period and on the corresponding
amounts for the preceding period.
23. An investment in an enterprise should be accounted for
in accordance with Accounting Standard (AS) 13, Accounting for Investments,
from the date that the enterprise ceases to be a subsidiary and
does not become an associate.
24. The carrying amount of the investment at the date that it ceases
to be a subsidiary is regarded as cost thereafter.
25. Minority interests should be presented in the consolidated
balance sheet separately from liabilities and the equity of the
parent's shareholders. Minority interests in the income of the group
should also be separately presented.
26. The losses applicable to the minority in a consolidated subsidiary
may exceed the minority interest in the equity of the subsidiary.
The excess, and any further losses applicable to the minority, are
adjusted against the majority interest except to the extent that
the minority has a binding obligation to, and is able to, make good
the losses. If the subsidiary subsequently reports profits, all
such profits are allocated to the majority interest until the minority's
share of losses previously absorbed by the majority has been recovered.
27. If a subsidiary has outstanding cumulative preference shares
which are held outside the group, the parent computes its share
of profits or losses after adjusting for the subsidiary’s preference
dividends, whether or not dividends have been declared.
Accounting for Investments
in Subsidiaries in a Parent's Separate Financial Statements
28. In a parent's separate
financial statements, investments in subsidiaries should be accounted
for in accordance with Accounting Standard (AS) 13, Accounting for
Investments.
Disclosure
29. In addition to disclosures
required by paragraph 11 and 20, following disclosures should be
made:
(a) in consolidated financial
statements a list of all subsidiaries including the name, country
of incorporation or residence, proportion of ownership interest
and, if different, proportion of voting power held;
(b) in consolidated financial statements, where applicable:
-
the nature of the relationship between
the parent and a subsidiary, if the parent does not own, directly
or indirectly through subsidiaries, more than one-half of the
voting power of the subsidiary;
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the effect of the acquisition and disposal
of subsidiaries on the financial position at the reporting date,
the results for the reporting period and on the corresponding
amounts for the preceding period; and
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the names of the subsidiary(ies) of
which reporting date(s) is/are different from that of the parent
and the difference in reporting dates.
A separate accounting standard on 'Accounting
for Investments in Associates ', which is being formulated, will
define the term ‘associate’ and specify the requirements relating
to accounting for investments in associates. Until the aforesaid
accounting standard comes into effect, AS 13 would continue to apply.
Tran`sitional Provisions
30. On the first occasion
that consolidated financial statements are presented, comparative
figures for the previous period need not be presented. In all subsequent
years full comparative figures for the previous period should be
presented in the consolidated financial statements.
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