10 August 2021
The query is: As per Companies Act if IND AS are made applicable to parent company then they are compulsorily applicable to subsidiary and associates also. But the criteria to decide whether a company is subsidiary/associate as per companies act is share holding, whereas as per IND AS 110 the criteria is wide which defines power & control. Now, if a company does not meet the criteria to become subsidiary/associate as per companies act but the same company comes under definition of subsidiary/associate as per the conditions in IND AS 110. Which will prevail then? Whether the said company has to maintain it's books as per IND AS? If not, whether it has to prepare its financial statements as per IND AS for the purpose of Consolidated Financial Statements of Parent company? Please help with appropriate references.
06 July 2024
Under the Companies Act, the criteria for determining subsidiary and associate companies primarily rely on shareholding percentages. However, under Ind AS 110 (Indian Accounting Standard 110), the criteria for determining control, joint control, and significant influence are broader and include factors beyond shareholding, such as governance rights and potential voting rights.
Here’s how these standards interact:
1. **Companies Act Criteria:** - As per the Companies Act, subsidiary and associate relationships are primarily determined based on shareholding thresholds (more than 50% for subsidiary and significant influence criteria for associate). - If a company does not meet the shareholding criteria under the Companies Act, it may not be considered a subsidiary or associate from a statutory perspective.
2. **Ind AS 110 Criteria:** - Ind AS 110 defines control, joint control, and significant influence more broadly, encompassing not only shareholding but also governance rights and potential voting rights. - If a company meets the criteria under Ind AS 110 to be considered a subsidiary or associate (even if it doesn't meet the Companies Act criteria), it should be accounted for as such under Ind AS.
3. **Application of Ind AS:** - If the parent company applies Ind AS (Indian Accounting Standards) for its standalone financial statements, it must also apply Ind AS for its consolidated financial statements, which include subsidiaries, associates, and joint ventures. - Therefore, if a company qualifies as a subsidiary or associate under Ind AS 110 but not under the Companies Act, the parent company would still consolidate its financial statements using Ind AS, which would include the financial statements of such entities based on the broader criteria of control and significant influence.
### Conclusion: Ind AS would prevail over the Companies Act criteria for the purposes of preparing consolidated financial statements. Therefore: - If a company meets the criteria of being a subsidiary or associate under Ind AS 110 (which includes broader criteria beyond shareholding), the parent company must consolidate its financial statements using Ind AS, even if the same company does not qualify as a subsidiary or associate under the Companies Act based on shareholding alone. - This ensures that the consolidated financial statements provide a true and fair view of the financial position and performance of the group, reflecting the economic substance of control and influence as per Ind AS guidelines.
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