12 June 2023
Company 'A' is having 28% investment in Company 'B'. Company 'B' is also to be considered while consolidating Company 'A's financial statement? Please advise.
06 July 2024
Yes, when Company 'A' holds a significant but non-controlling interest (like 28%) in Company 'B', Company 'B' is generally considered an associate of Company 'A'. According to accounting standards (such as Ind AS 28 or AS 23), associates are entities over which the investor has significant influence but not control.
Here’s how Company 'A' should approach the consolidation and reporting of Company 'B' in its financial statements:
1. **Treatment of Associates:** - **Equity Method:** Generally, when Company 'A' has significant influence over Company 'B' (usually deemed to exist when holding between 20% to 50% of voting rights), it typically uses the equity method of accounting for investments in associates. - **Under Equity Method:** Company 'A' initially records its investment in Company 'B' at cost and subsequently adjusts the carrying amount of the investment to reflect its share of Company 'B's post-acquisition profits or losses and other comprehensive income.
2. **Consolidation Requirements:** - Company 'A' should prepare consolidated financial statements that include its own financial information and the financial information of Company 'B' using the equity method. - In the consolidated financial statements of Company 'A', the investment in Company 'B' is reported as a single line item on the balance sheet, and the share of Company 'B's profits or losses is included in the consolidated income statement.
3. **Disclosure:** - Disclosures in the financial statements should include: - Nature of the relationship between Company 'A' and Company 'B'. - Amount of investment in Company 'B' and the method of accounting applied (equity method). - Summarized financial information of Company 'B' if material to understand the impact on Company 'A's financial statements.
### Conclusion: Company 'B' is indeed considered in the consolidation of Company 'A's financial statements due to its significant influence as an associate. Using the equity method ensures that the financial statements of Company 'A' reflect the economic reality of its investments and relationships with associated entities like Company 'B'. This method also provides transparency and clarity to stakeholders regarding the overall financial performance and position of Company 'A'.
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