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Accounting for investments in associates.

Aravind.. (CA) (1262 Points)

11 September 2011

Good morning,

The company regarding which i have doubt is a private limited company. It has thirty percent shareholding in another private ltd company and thirty eight percent holding in a public limited company. All three companies prepare separate financial statements. So will the standard on associates get applied in this case? Should the profit or loss in the associates be accounted in the investor?
Please clarify me in this regard.
Thanks in advance.

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9 Replies

CA Siddhartha Bhardwaj (Proprietor at Siddhartha Bhardwaj & Associates Chartered Accountants) (33456 Points)
Replied 19 September 2011

AS 23 defines associate as an enterprises in which the investor has significant influence. Significant influence means the power to participate in the financial and operating decisions of the associate.

By merely holding more than 20% share in a company, the investor does not obtain significant influence. For the purpose of AS 29, significant influence can be identified by one or more of the following criteria:

a. Representation in the Board of Directors

b. Participation in the policy making body

c. Material transactions between investor and investee.

d. Inter-change of managerial personnel.

e. Provision of technical information.

If any of the above criteria is fulfilled only then the AS will be applicable. Merely by purchasing 20% or more shares by the investor, the investor & the investee do not become associates.

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shakuntala chhangani (FCA Course co-ordinator WIRC coaching centre) (2525 Points)
Replied 03 November 2011

Hi Arvind, As 23 applies ONLY if the investor prepares consolidated financial statements. In ur case, since the investor does not prepapre CFS (as per question, it does not have any subsidiary), as 23 will not be applicable and investment will be accounted for as per AS 30,31.32.

Regards, CA Shakuntala Chhangani

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 06 November 2011

I am assuming presence of significant influence by an investor in the investee company.

In terms of International Accounting Standards, equity method (recognising share of profit or losses) for accounting of associates is required in case of consolidated financial statements and not in separate financial statements. Thus, in such a case the investments are accounted either at cost or in accordance with IAS 39 i,e no share of profit or loss is recognised in books. I am sure that same treatment will be applicable in case of converged Indian AS.

Thanks

shakuntala chhangani (FCA Course co-ordinator WIRC coaching centre) (2525 Points)
Replied 06 November 2011

Hi Sachin, I agree u can presume the presence of significant influence and yes in that case, equity method need to be followed. But ONLY IN THE CASE INVESTOR PREPARES CONSOLIDATED FINANCIAL STATEMENTS AND NOT SEPARATE FINANCIAL STATEMENTS. the same line is mentioned by u also. In the given question, holding subsidiary co. relationship does not exist. it means that there will be no consolidated financial statements and hence no question of following AS 23. Pls refine me further by replying.

Regards, CA Shakuntala Chhangani

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 06 November 2011

Dear Shakuntala, as per my IFRS knowledge there are 3 types of financial statements:

1. Consolidated financial statements - It it prepared when a parent wants to prepare consolidated financial statements and it has at least 1 subsidiary and associate.

2. Economic interest financial statements - It it prepared when a parent wants to prepare consolidated financial statements (called as economic interest financial statements) when it has NO subsidiary but has got associate and JV investments. In this equity method can be applied for associate accounting.

3. Separate Financial statements - This is prepared when a parent takes exemption mentioned under IAS 27 after fulfilling conditions mentioned therein.

Now in the above question, the parent has no subsidiary so consolidated financial statements is not possible. Further, the question doesn’t say anything on the economic interest financial statement (may be Aravind is not aware of this concept).

However, I have a doubt that option to go for separate financial statements is available only when the parent satisfies all 4 conditions mentioned in IAS 28. If this case is considered under IFRS, then in no way a Private limited company can opt for separate financial statements as not allowed under IAS 28. Under IFRS he has to prepare economic interest financial statements and has to apply equity method of accounting.

I am not sure whether the same conditions are applicable under current Indian accounting standards or not. Could you please clarify the status of current Indian accounting standard in this regard?

Thanks

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shakuntala chhangani (FCA Course co-ordinator WIRC coaching centre) (2525 Points)
Replied 09 November 2011

Dear friend, concept of economic interest financial statement is not there in India till now. It recognises two financial statements : CFS and Individual financial statements. I m reproducing relevant paras of AS 23 to substantiate my answer given above :

1 Accounting Standard (AS) 23, ‘Accounting for Investments in Associates in

Consolidated Financial Statements’, issued by the Council of the Institute of

Chartered Accountants of India, comes into effect in respect of accounting

periods commencing on or after 1-4-2002. An enterprise that presents

consolidated financial statements should account for investments in associates

in the consolidated financial statements in accordance with this Standard.

2 The following is the text of the Accounting Standard.

Objective

The objective of this Statement is to set out principles and procedures for

recognising, in the consolidated financial statements, the effects of the

investments in associates on the financial position and operating results of a

group.

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2 It is clarified that AS 23 is mandatory if an enterprise presents consolidated financial

statements. In other words, if an enterprise presents consolidated financial

statements, it should account for investments in associates in the consolidated

financial statements in accordance with AS 23 from the date of its coming into

effect, i.e., 1-4-2002 (see ‘The Chartered Accountant’, July 2001, page 95).

Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a detailed

discussion on the implications of the mandatory status of an accounting standard.440 AS 23 (issued 2001)

Scope

1. This Statement should be applied in accounting for investments in

associates in the preparation and presentation of consolidated financial

statements by an investor.

2. This Statement does not deal with accounting for investments in

associates in the preparation and presentation of separate financial statements

by an investor.

next lines are not the part of AS 23. It is good that u have IFRS knowledge. u can give us relevant provisions of related IFRS also. It means CCI should capitalise u as an asset.

Regards, CA Shakuntala Chhangani

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 09 November 2011

Dear Shankuntala

Lots of thanks for updating me with the current indian accounting standard on associate accounting. Actually i am dealing purely with IFRS standards from last 10 years and therefore if u see all my answers are in line with the relevant international accounting standards. But going forward as and when the converged Ind AS will be applicable all the above provisions which i have discussed in my reply will be relevant.

If then if you require any further clarification then please let me know.

Regards

Sachin

shakuntala chhangani (FCA Course co-ordinator WIRC coaching centre) (2525 Points)
Replied 10 November 2011

Thanks a lot sir for the helping hand. I will surely revert back to u soon.

Regards, CA Shakuntala Chhangani

MADHU MITTAL (DIRECTOR) (192 Points)
Replied 05 November 2017

Respected CA Sakuntalaji and CA Sachinji,

I requires your guidance in present i.e. for fy. 31.03.2017 where as per company law 2013, s 129 in explanation Subsidiary includes associate also, please guide whether there is any change in your opinion since this thread is five year old,

Thanks with Regards waiting for your guidance