Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements

Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements

· Consolidation is applicable to all associates including foreign associates. The statement deals with accounting of associates in the preparation and presentation of CFS.

· Associates is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.

· Significant influence (ordinarily having 20% or more of the voting power) is termed as power to participate in the financial/operating policy decisions but does not have control over such policies. The potential equity shares held by the investee should not be taken into account for determining the voting power of the investor. (ASI-18).

· Investment in associates is accounted in CFS as per equity method. The equity method is not applicable where the investment is acquired for temporary period (AS 18), i.e. intention at the time of investing is to dispose the relevant investment in the ‘near future’ or where associates operate under severe long-term restrictions. In these circumstances, the investment should be recognised as per AS 13. The use of equity method to be discontinued from the date when investor ceases to have significant influence in an associate.

· Provision for proposed dividend made by the associate in its financial statements, should not be considered for the computation of the investor’s share of the results of operations of the associate (ASI-16).

· Goodwill / Capital Reserve on the acquisition of an associate should be separately disclosed under carrying amount of investments.

· Under the equity method, unrealised profit/losses resulting from the transaction between investor and associates should be eliminated to the extent of investor’s interest in the associates. However unrealised losses should not be eliminated if cost of the assets cannot be recovered.

· If associate has outstanding preference shares held outside the group, preference dividends whether declared or not to be adjusted in arriving at the investors share of profit or loss.

· If investor’s share of losses of an associate equals or exceeds the carrying amount of the investment, the investor will discontinue its share of loss and will show its investment at nil value.

· Where an associate presents consolidated financial statement, the results and net assets of the associate’s CFS should be taken into account.

· The carrying amount of investment in associates, on an individual basis, should be reduced to recognize permanent decline in the value of investment.

· Listing and description of associates including proportion of ownership interest and proportion of voting power should be disclosed in CFS.

· The investor’s share of profits or losses and any extra- ordinary or prior period items should be disclosed separately in CFS Profit and Loss A/c.

· If reporting dates or accounting policies of associates are different from that of financial statement of investor then the difference should be reported in the CFS.

On the first occasion when investment in an associate is accounted for in CFS, the carrying amount of investment in the associate should be adjusted by using equity method, from the date of acquisition, with the corresponding adjustment to the retained earnings in CFS.