Accounting for Associates in Consolidated Financial Statements

Applicability & Nature

            Applicable        :           01-04-2002

            Nature              :           Mandatory*

*Mandatory: AS – 23 is applicable only if consolidated financial statements have been prepared as per AS – 21.

In the separate books of investor accounting for associates should be carried as per the provisions of AS – 13. On the basis of above explanation it can be said that AS – 23 can be applied only if application of AS – 21 exists.

Meaning of Associate

            Any Enterprise can be classified as an associate if investor is having significant influence in the enterprise.

Meaning of Significant Influence

            Significant influence is the power to participate in the operating & financial decisions of the enterprise but not to control these decisions.

Example of Participation

<!--[if !supportLists]-->(a)                <!--[endif]-->Representation of Board of Directors

<!--[if !supportLists]-->(b)               <!--[endif]-->Voting Rights

<!--[if !supportLists]-->(c)                <!--[endif]-->Interchange of Technical Information

<!--[if !supportLists]-->(d)               <!--[endif]-->Interchange of Managerial Personnel

Note:    In normal situation if any investor is having 20% to 50% voting power of any other enterprise then it will be assumed that the other enterprise is an associate of the investor.

            If any investor is having 20% to 50% share with out power of participation then definition of Associate & Application of AS – 23 should not be made.

Accounting of Associate

Step1: Initial recording should be made on cost basis, identify goodwill / capital reserve on the same date.

(As per AS disclosure of investment in associates should be made in CFS at cost at the time of purchase of Investment but share in equity & goodwill / capital reserve should also be made disclosed in CFS on the same date)

Example: A Ltd purchased 40% share of B Ltd on 1-1-99. Cost of investment is of Rs 10,00,000. Following position is available as on 1-1-99:-

                                    Equity Share Capital                 2500000

                                    P&L A/c                                    400000

                                    General Reserve                         200000

                                    Capital Reserve                          300000

                                    Revaluation Reserve                   100000

                                                                                    3500000

Disclose Investment in CFS on the date of Investment.

Sol:

W.N.1             Calculation of Goodwill / Capital Reserve

                        Cost of Investment                                1000000

            Less:    Share in Equity (3500000 x 40%)         1400000

                                                                                    (400000)

CFS (A Ltd + B Ltd)

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	Investment in B Ltd Share in Equity                   1400000 Less: Capital Reserve         (400000)    1000000

Example: With the help of same example disclose investment in CFS assuming that cost of Investment is of Rs. 1600000

Sol:

W.N.1             Calculation of Goodwill / Capital Reserve

                        Cost of Investment                                1600000

            Less:    Share in Equity (3500000 x 40%)         1400000

                        Goodwill                                                200000

CFS (A Ltd + B Ltd)

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	Investment in B Ltd Share in Equity                   1400000 Add: Goodwill                      200000    1600000

Step2: Adjust post acquisition changes in cost of investment by post acquisition profits or losses. (In case of post profit value of investment will be increased in the asset side & revaluation reserve should be created in liabilities side. If situation is in loss then value of investment should be reduced and amount of reduction should be adjusted first against revaluation reserve & in the absence of revaluation reserve Consolidated P&L A/c should be used.)

Example:          D.O.A              1-1-99

                        COI (30%)                  200000

                        Position of Associate

                        Equity Share Capital                 200000

                        Reserve                                    400000

During 99 Associate has earned a profit of Rs 80000. Disclose investment in CFS as on 31-12-99.

Sol:                                                                       CFS

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Investment Revaluation Reserve          24000	Investment in Associate Share in Equity                   180000 Add: Goodwill                      20000 Add: Increase in Equity        24000      224000 (80000 x 30%)

Example: Same above example. Assuming Loss during 99 of Rs 80000.

Sol:                                                                       CFS

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Consolidated P&L A/c Less: Loss due to reduction             (24000)	Investment in Associate Share in Equity                   180000 Add: Goodwill                      20000 Less: Decrease in Equity     (24000)      176000 (80000 x 30%)

Step3: Actual distribution received should be deducted out of share in equity. (If any associate has proposed any dividend during the period then amount of proposed dividend should be ignored.)

Example:          D.O.A                          1-1-2004

                        COI                             500000

                        % of Investment            40%

                        Position of Associate

                        Equity Share Capital                 1000000

                        Reserve & Surplus                      800000

During 04 the associate company has earned a profit of Rs 5 Lakh out of which Rs 2 Lakh have been proposed / paid.

Sol:

 CFS (Proposed)

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Investment Revaluation Reserve       200000	Investment in B Ltd Share in Equity                   720000 Less: Capital Reserve        (220000) Add: Increase in Equity      200000        700000 (500000 x 40%)

CFS (Paid)

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Investment Revaluation Reserve       120000	Investment in B Ltd Share in Equity                   720000 Less: Capital Reserve        (220000) Add: Increase in Equity      120000        620000 (300000 x 40%)

Important Points

<!--[if !supportLists]-->(1)               <!--[endif]-->If any associate company is having losses then investor party can recognize share in losses to the extent of cost of Investment.

If any loss is higher than cost of investment then such loss can’t be written off out of Consolidated P&L A/c.

<!--[if !supportLists]-->(2)               <!--[endif]-->If any associate is having preference share capital then share in equity should be calculated only after providing preference dividend.

<!--[if !supportLists]-->(3)               <!--[endif]-->If any associate company is having different accounting policies which are not used by the investor party in the preparation of CFS then it is the responsibility of associate company to provide required amounts to the investor for consolidation purpose otherwise reasons should be disclosed.

<!--[if !supportLists]-->(4)               <!--[endif]-->Accounting period of associate company & investor party should be same for the purpose of consolidation. If in case period are different, it is the responsibility of associate company to provide required information to the investor otherwise reasons should be disclosed.

<!--[if !supportLists]-->(5)               <!--[endif]-->Investment in Associate should be long term investment otherwise application of AS – 23 is not required.

Disclosures

<!--[if !supportLists]-->(1)               <!--[endif]-->Classify Investment as long term investments.

<!--[if !supportLists]-->(2)               <!--[endif]-->Accounting period & accounting policies should be disclosed.

�lr� ��ompletion of intangible the enterprise should be able to use or sell intangible.

Future economic benefit should be measured by suitable assumption.

Financial Resources should be proper to complete the asset.

There will be proper system to record the cost during development phase.

lB's� ��nore'>(3)               <!--[endif]-->Journal Entries

(i)         Cash/Bank/Grant Receivable                Dr

                                    To Govt Grant

(ii)        Grant A/c                                             Dr

                                    To Deferred Grant A/c (It is transferred to reserve &surplus)

(iii)       Deferred Grant A/c                               Dr

                                    To P&L A/c

Refund of Grant:

                        Deferred Grant A/c (O/s Bal)                Dr

                        P&L A/c (which is already used)           Dr

                                                To Cash/Bank/Grant Receivable

Note: At the time of refund of grant total benefit should be reversed in the current period in total irrespective the effect of these transaction on current year profits.

Disclosure:

<!--[if !supportLists]-->(i)      <!--[endif]-->Accounting policy should be disclosed separately in relation to classification of nature of grant.

<!--[if !supportLists]-->(ii)    <!--[endif]-->If any refund has been made during the period then amount of refund should be also disclosed.

Difference between AS/IAS/US GAAP:

            If any grant is related to promoter’s contributions then accounting of such grant should be made as capital profits as per as-12. The same grant should be recognized as revenue profits as per other statements. Revenue profits should be recognized on deferred basis as per management intention.