Consolidation of accounts with Parent company with its associate &Associate company with its parents

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sashikanta chaudhury (Querist)
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21 May 2024 A Pvt. Ltd. holds a 25% shareholding in B Pvt. Ltd., making B Pvt. Ltd. an associate company of A Pvt. Ltd. Subsequently, B Pvt. Ltd. acquired a 30% shareholding in A Pvt. Ltd., thereby making A Pvt. Ltd. an associate company of B Pvt. Ltd. As per the provisions of the Companies Act 2013, there is no prohibition on the acquisition of shares by an associate company from its parent and vice versa. Considering this situation, my questions are:
Questions:
1. Are there any restrictions under the Companies Act 2013 regarding the consolidation of financial statements of A Pvt. Ltd. with B Pvt. Ltd. when both companies are considered associates of each other?
2. What are the requirements under the relevant accounting standards (AS/ Ind AS) for consolidating the financial statements of A Pvt. Ltd. and B Pvt. Ltd. & B Pvt. Ltd. With A Pvt. Ltd. when each holds a significant but non-controlling interest in the other?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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06 July 2024 In the scenario where A Pvt. Ltd. and B Pvt. Ltd. hold significant but non-controlling interests in each other, the consolidation of financial statements needs to adhere to both the Companies Act 2013 provisions and the applicable accounting standards (Ind AS or AS).

### 1. Restrictions under the Companies Act 2013:

Under the Companies Act 2013, there are no specific restrictions on the consolidation of financial statements when both companies are considered associates of each other. The Act primarily provides guidelines for preparing and presenting financial statements, including consolidation requirements for companies under its purview. As long as both companies meet the definition of associates (where one has significant influence over the other but does not control it), their financial statements can be consolidated if deemed necessary for a true and fair view.

### 2. Requirements under Accounting Standards:

#### a. Ind AS 28 - Investments in Associates:

Ind AS 28 provides guidance on how to account for investments in associates, including when an entity has significant influence but not control over another entity. Key points relevant to the scenario include:

- **Significant Influence:** A Pvt. Ltd. holding a 25% shareholding in B Pvt. Ltd. typically signifies significant influence, which is presumed when holding between 20% to 50% of the voting power.

- **Equity Method of Accounting:** Normally, under Ind AS, an investor (A Pvt. Ltd.) with significant influence over an associate (B Pvt. Ltd.) should account for its investment using the equity method. This involves initially recording the investment at cost and adjusting it periodically to reflect the investor's share of the associate's net assets and income or losses.

- **Consolidation Consideration:** Since both companies have significant but non-controlling interests in each other (A Pvt. Ltd. in B Pvt. Ltd. and vice versa), consolidation may not be mandatory but could be considered if management determines it necessary to provide a true and fair view of the financial position and performance of the group as a whole.

#### b. AS 23 - Accounting for Investments in Associates in Consolidated Financial Statements (for non-Ind AS entities):

For companies following Accounting Standards (AS) under the Companies Act 2013:

- AS 23 provides similar guidance to Ind AS 28 regarding the accounting treatment of investments in associates.
- The equity method is generally applied to account for investments in associates, ensuring that the investor reflects its share of the associate's net assets and results of operations in its financial statements.

### Conclusion:

1. **Restrictions:** There are no specific restrictions under the Companies Act 2013 that would prevent A Pvt. Ltd. and B Pvt. Ltd. from consolidating their financial statements if they both hold significant but non-controlling interests in each other.

2. **Accounting Requirements:** Both A Pvt. Ltd. and B Pvt. Ltd. would typically account for their investments in each other using the equity method under Ind AS 28 or AS 23. Consolidation of financial statements should be based on the management's assessment of the need to provide a true and fair view, considering the interrelationship and economic substance of their investments and operations.

In practice, consult with a qualified accountant or auditor to ensure compliance with specific accounting standards and regulatory requirements applicable to your jurisdiction and the Companies Act provisions relevant to your situation.