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ACCOUNTING STANDARD (AS) – 21CONSOLIDATED FINANCIAL STATEMENTS
APPLICABILITY
A parent enterprise is required to prepare consolidated financial statements of its group in addition to its separate financial statements.
Questions :
1. What is the meaning of parent enterprise ?
A. It is an enterprise having one or more subsidiary
2. How does one enterprise become as subsidiary in terms of AS21?
A. When one enterprise controls directly or indirectly more than 50% of a) Voting power, OR b) Composition of board of Directors / Governing body
Example of Indirect control :
A Ltd. Holds 80% shares in B Ltd. And 25% in C Ltd.
B Ltd. Holds 25.50% in C Ltd.
Thus, both B Ltd. And C Ltd. will be subsidiary of A Ltd.
3. What if one subsidiary has two parents ? One controlling voting power and other controlling composition of Board of Directors ?
A. Both the Holding enterprises should consolidate the financial statements of same subsidiary enterprise. (GC-16/2002)
4. What is the date from which consolidation will start ?
A. If an enterprise purchases shares 2 or more times, then the consolidated financial statements shall be prepared from the date on which holding-subsidiary relationship is ultimately established.
5. What if the parent and subsidiaries have different reporting dates ?
A. If reporting dates of parent and subsidiaries are different and it is not practical to prepare the financial statements of subsidiary of the same date as that of holding, then financial statements can be consolidated by making adjustments for significant transactions that occur between those dates.
6. What if the shares are held as Stock in trade?
A. It means that such shares are held with a view to their subsequent disposal in the near future. Thus, control will be considered as temporary and thus no consolidation required as the case will fall under the exceptions enumerated below (GC-17/2002)
Exceptions
1 When the control / investment is intended to be temporary – to be disposed in the near future.
2 The subsidiary operates under severe long-term restrictions and due to this, its ability to transfer the funds to parent is significantly affected.
Note : Dissimilar activities of parent and its subsidiaries cannot be the ground for non-consolidation. Also, the word used everywhere is “enterprise” and not “company”
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CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements are prepared / presented in the same format as that followed by the parent in the preparation of its separate financial statements
Consolidation Procedure
1) The financial statements should be added / combined on line by line basis by adding the like items of assets, liabilities, income and expense
2) Treatment of cost of investment of parent, corresponding equity of subsidiaries and resultant goodwill / capital reserve and minority interest (See detailed discussion later)
3) Full elimination of Intra-group balances and intra-group transactions and resulting unrealized profit.
4) Unrealised Losses : Unrealised losses from intra-group transactions should also be eliminated if recoverable amount is more than the cost of transactions. For eg. X Ltd. (Holding Co.) Sells goods costing Rs. 5 lacs to its subsidiary Y Ltd for 4 lacs, and on date of consolidation, the recoverable amount of those goods is Rs. 5.5 lacs, then unrealized loss of Rs. 1 lac should be eliminated by adding to stock and Consolidated P & L A/c respectively If, unrealized losses are on account of intra-group sales / purchase of assets, then in that case, recoverable amount shall have the meaning as described in accounting standard on “impairment of assets” (i.e. Net sale price or value in use, whichever is higher)
5) Tax Expense : Tax expense should not be recalculated and should be simply added for the purpose of consolidated financial statements
6) In case the company has an investment in associate, then such investments are to be shown as per “equity method” – [Refer AS – 23]
TREATMENT OF COST OF INVESTMENT OF PARENT, CORRESPONDING EQUITY OF SUBSIDIARIES AND RESULTANT GOODWILL / CAPITAL RESERVE AND MINORITY INTEREST :
While preparing consolidated financial accounts, following items should be eliminated 1) From Parent’s books : Cost of investment of parent in each subsidiary 2) From Subsidiaries books :
(a) Parent’s portion of equity [equity = Share capital (equity & preference) + Reserves and surplus as on date of acquisition on shares + profits/loss upto date of acquisition of shares]
(b) Minority interest in equity = Total equity – (a)
3) If (1) > (2)(a), then balance is shown as “Goodwill on consolidation” on asset side of balance sheet
4) If (2)(a) > (1), then balance is shown as “Capital reserve on consolidation” under the head Reserves and Surplus
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5) The minority share in the net profit shall be charged to Net profit and added to Minority Interest (vice versa for loss). Also, arrears of dividend whether declared or not) on cumulative preference shares held by minority should be charged to Net Profit Thus, Minority interest in Balance Sheet = (2)(b) + Minority share in Net Profit for the year +Arrears of preference dividend belonging to minority. Minority Interest is to be shown as separate item on the liability side of the Balance Sheet
6) Minority Interest is negative : Negative minority interest will not be shown in the balance sheet. It should be adjusted against majority interest. Subsequent losses should be first fully allocated to majority interest until minority share of losses previously absorbed by the majority has been recovered.
7) Successive purchase of shares : If the investment is purchased in two or three stages, then goodwill / capital reserve on consolidation should be determined on step by step basis. However, if small investments are made over a period of time, then the latest major investment, which resulted in control should be considered as date of purchase for all successive purchases and goodwill / capital reserve shall be calculated accordingly.
8) Disposal of Investment in a subsidiary : Amount received – Carrying amount of assets less liabilities as on date of disposal is recognized as profit / loss on disposal of investments in a subsidiary
OTHER DISCLOSURE REQUIREMENTS
a) List of all subsidiaries b) Proportion of Ownership interest c) Nature of ownership – i.e. whether direct control or control through subsidiaries d) Name of subsidiaries whose reporting dates are different e) The items in which different accounting policies have been followed by holding and
subsidiary. f) If consolidation of any subsidiary is not made on the basis of exceptions, then the facts and the reasons thereof
Following notes / disclosures are not required in consolidated financial statements as they do not have any effect on true and fair view of consolidated financial statements. 1) Source from which bonus shares are issued, eg., Capitalisation of profits or Reserves
or from Share Premium Account 2) SSI Debtors > 1 lacs outstanding for >30 days 3) List of investments 4) Quantative information in respect of raw materials consumed, opening/closing dtock
of goods produced/traded, purchases, licensed capacity, installed capacity, actual production 5) Computation of Net profit u/s 349 with relevant calculation of commission paid to
directors / managers 6) Value of Imports on CIF basis 7) Value of Exports on FOB basis 8) Expenditure in foreign currency 9) Earnings in foreign exchange 10) Value and percentage of imported and indigenous raw materials / spare parts /
components consumed
11) Dividend remitted in foreign currency
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ACCOUNTING STANDARD (AS) – 23ACCOUNTING FOR INVESTMENTS IN ASSOCIATES IN CONSOLIDATEDFINANCIAL STATEMENTS
APPLICABILITY
It is applicable for investments in associates to an investor, who prepares Consolidated financial statements
Associate :
It is an enterprise in which investor has Significant Influence and which is neither a subsidiary nor a joint venture of the investor.
Significant influence : It means power to participate in financial and operating decisions of the associate. Significant influence can be gained by a) Share Ownership : If one holds directly or indirectly 20% or more of voting power, then it
is assumed that he has significant influence. b) Statute c) Agreement
The presence of Significant influence can be identified by one or more of the foll. Criteria Representation in the Board of Directors Participation in policy making body Material transactions between investor and investee Inter-change of managerial personnel Provision of technical information
Note :
a) If, inspite of holding 20% or more of voting power, the investor does not have significant influence, then assumption of criteria of 20% of voting power is null and void. Vice versa is the case when significant influence can be clearly demonstrated.
b) Potential equity shares held by investor should not be taken into account for determining voting power. (GC/8/2002)
Exceptions :
1 When the investment is acquired and held exclusively with a view to its subsequent disposal in the near future.
2 The associates operates under severe long-term restrictions and due to this, its ability to transfer the funds to parent is significantly affected.
3 When investor has no significant influence or ceases the significant influence
4 When consolidated financial statements of investor is not made
Difference between “Control” and “Significant influence “ :
”Significant influence” means power to participate in the financial and operating decisions of the associate, whereas “Control” means power to govern the financial and operating policies of an associate
ACCOUNTING FOR INVESTMENTS
In consolidated financial statements, investment in associates should be accounted for as per “Equity Method”.
In the case of cessation of significant influence, the investment should be accounted as per AS 13 (Accounting for Investments) from the date of cessation. The carrying amount of the
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investment at that date should be regarded as cost thereafter in the consolidated financial statements.
Equity Method Accounting :
The following procedure should be followed. 1) Identify only (do not record accounting entry) for goodwill / capital reserve at the time of acquisition of investment.
2) Carrying amount is identified as follows
Cost of Investment in investor’s books
Add/Less : Goodwill / Capital reserve identified as in (1) above
Add/Less : Share of profits / (Loss) after the date of acquisition
Add/Less : Adjustments in carrying amount of due to changes in
Associate’s equity that have not been included in P & L A/c
(e.g. Revaluation of fixed assets due to forex fluctuations)
Add/Less : Unrealised losses / profits due to inter-co. transactions
Less : Dividends received from associates
Notes : a) Share in Profit / (loss) should be calculated only after adjusting dividend on cumulative preference dividend, whether declared or not. b) Unrealized losses should be eliminated only if recoverable amount is more than the transfer cost. For meaning of “Recoverable amount” – refer AS-28 (impairment of assets) Eg. :X Ltd. (a holding co.) owns 30% of shares of Y Ltd. X Ltd. had sold machinery costing 100000 to Y Ltd. for 80000. Thus, there is unrealized loss of 20000 for X Ltd. As per AS 23, unrealized loss should eliminated to the extent of 6000 (30% of 20000) only when recoverable amount is 100000 or more. c) If, there is permanent decrease in the value of investment in associate, the carrying amount should be reduced by the amount of such permanent reduction d) If the investor’s share of losses in associates equals / exceeds the carrying amount, further losses are not recognized and investment is reported at NIL value e) If reporting dates of investor and associates are different, then adjustments should be made for significant transactions that occur between those dates. f) “Proposed” dividend of associates should not be taken into consideration for calculation investor’s share of profits. (GC-6/2002) g) Adjustments in carrying amount of due to changes in associate’s equity that have not been included in P & L A/c should be directly adjusted in the carrying amount without routing it through consolidated P & L A/c (GC-/2002)
OTHER DISCLOSURE REQUIREMENTS
a) Description of associate including proportion of ownership b) Investments in associates accounted for using the equity method should be classified as long-term investment c) The items in which different accounting policies have been followed by holding and subsidiary, and if practicable, then suitable adjustments should be made d) Difference in reporting dates
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