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Statements of Accounting
Standards (AS 23)
Accounting for Investments in
Associates in Consolidated Financial Statements
(In this Accounting Standard,
the standard portions have been set in bold italic
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) 23,
‘Accounting for Investments in Associates in 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 1-4-2002.
An enterprise that presents consolidated financial statements
should account for investments in associates in the consolidated
financial statements in accordance with this Standard. The
following is the text of the Accounting Standard.
Objective
The objective of this Statement
is to set out principles and procedures for recognising,
in the consolidated financial statements, the effects of
the investments in associates on the financial position
and operating results of a group.
Scope
1. This Statement should
be applied in accounting for investments in associates in
the preparation and presentation of consolidated financial
statements by an investor.
2. This Statement does not deal
with accounting for investments in associates in the preparation
and presentation of separate financial statements by an
investor.
Definitions
3. For the purpose of
this Statement, the following terms are used with the meanings
specified:
An associate
is an enterprise in which the investor has significant
influence and which is neither a subsidiary nor a joint
venture3 of the investor.
Significant
influence is the power to participate in the financial
and/or operating policy decisions of the investee but not
control over those policies.
Control:
(a) The ownership,
directly or indirectly through subsidiary(ies), of more
than one-half of the voting power of an enterprise; or
(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.
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.
Equity is
the residual interest in the assets of an enterprise after
deducting all its liabilities.
4. For the purpose of this Statement,
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.
5. The existence of significant
influence by an investor is usually evidenced in one or
more of the following ways:
(a)Representation on the board
of directors or corresponding governing body of the investee;
(b)participation in policy
making processes;
(c)material transactions between
the investor and the investee;
(d)interchange of managerial
personnel; or
(e)provision of essential technical
information.
6. Under the equity method,
the investment is initially recorded at cost, identifying
any goodwill/capital reserve arising at the time of acquisition
and the carrying amount is increased or decreased to recognise
the investor’s share of the profits or losses of the investee
after the date of acquisition. Distributions received from
an investee reduce the carrying amount of the investment.
Adjustments to the carrying amount may also be necessary
for alterations in the investor’s proportionate interest
in the investee arising from changes in the investee’s equity
that have not been included in the statement of profit and
loss. Such changes include those arising from the revaluation
of fixed assets and investments, from foreign exchange translation
differences and from the adjustment of differences arising
on amalgamations.
Accounting for Investments
- Equity Method
7. An investment in an
associate should be accounted for in consolidated financial
statements under the equity method except when:
(a) the investment
is acquired and held exclusively with a view to its subsequent
disposal in the near future; or
(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.
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:
(a)it ceases to
have significant influence in an associate but retains,
either in whole or in part, its investment; or
(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.
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, the investor discloses in the consolidated
financial statements:
(a)its share of the contingencies
and capital commitments of an associate for which it is
also contingently liable; and
(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 paragraph 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
26. On the first
occasion when investment in an associate is accounted for
in consolidated financial statements in accordance with
this Statement, 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 Statement since the acquisition of the associate.
The corresponding adjustment in this regard should be made
in the retained earnings in the consolidated financial statements.
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 Accounting Standard (AS) 13,
‘Accounting for Investments’, is applicable for accounting
for investments in associates in the separate financial
statements of an investor.
3 A separate accounting standard
on ‘Financial Reporting of Interests in Joint Ventures’,
which is being formulated, will define the term ‘joint venture’
and specify the requirements relating to accounting for
investments in joint ventures.
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