Consolidation

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Sonal (Querist)
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19 January 2021 Hi All

'X' Company has share in 2 Companies Y and Z. In company Y 44% and in Z 23.81%. X also holds 40% of the borrowings of Company Z (Total borrowings of Z is 1.5 Crs. and X holds 60Lakhs out of that).
Are X, Y and Z are considered as associated enterprises? How consolidation of these enterprises will be done? Line to line or to show only share in profit of Y and Z?

Thanks in advance

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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06 July 2024 In the context of associated enterprises under accounting standards and corporate governance norms, whether X, Y, and Z are considered associated enterprises depends on several factors:

1. **Ownership and Control**: Associated enterprises are typically entities over which one entity (X in this case) has significant influence but not control or joint control. Significant influence is generally presumed when an entity holds between 20% to 50% of the voting power of another entity.

2. **Financial and Operational Relationships**: Besides ownership percentage, financial and operational relationships, such as significant intercompany transactions or dependence on each other's financial results, also play a role in determining associated enterprises.

Given the information provided:

- X holds 44% in Y and 23.81% in Z.
- X also holds 40% of the borrowings of Z (which amounts to 60 Lakhs out of Z's total borrowings of 1.5 Crores).

### Determining Associated Enterprises:

- **Y**: X holds 44% in Y. Generally, a shareholding of 20% to 50% indicates significant influence unless there are other factors suggesting otherwise.
- **Z**: X holds 23.81% in Z, which again could indicate significant influence depending on other relationships.

The 40% shareholding in Z's borrowings by X could indicate a significant financial relationship beyond equity ownership.

### Consolidation Approach:

1. **Financial Statements Consolidation**: If X is determined to have significant influence over Y and Z, it would typically prepare consolidated financial statements that include Y and Z's financials.

2. **Equity Method vs. Line-by-Line Consolidation**:
- **Equity Method**: If X has significant influence but not control over Y and Z, it would use the equity method to account for its investments in Y and Z. Under this method, X would recognize its share of Y and Z's profits or losses in its income statement.

- **Line-by-Line Consolidation**: If X has control over Y or Z (typically more than 50% ownership), it would consolidate Y's or Z's financial statements line-by-line with its own, combining all assets, liabilities, revenues, and expenses.

### Specific Considerations:

- **Intercompany Transactions**: Eliminate any transactions between X, Y, and Z to avoid double-counting.

- **Goodwill and Other Adjustments**: Consider goodwill or adjustments arising from the acquisition of shares in Y and Z, based on fair value assessments.

In conclusion, while X, Y, and Z may not be wholly-owned subsidiaries, they may still be considered associated enterprises based on the shareholding and other relationships. The consolidation approach (equity method vs. line-by-line) would depend on the level of influence X exercises over Y and Z. It's recommended to consult with a professional accountant or financial advisor for precise guidance tailored to the specific circumstances of X, Y, and Z.