AS 23 – Accounting for Investments in Associates in Consolidated Financial Statements

Objecitve: The objective of this statement is to determine principles and procedures for recognising the effects of the investments in associates on the financial position and operating results of a group.

Applicability: This statement is applicable for accounting periods commencing on or after 1st April, 2002 in accounting for investments in associates in the preparation and presentation of consolidated financial statements by an investor.

Definitions

• Associate: An associate 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: It is the power to participate in the financial and/or operating policy decisions of the investee but not control over those policies.
• Control:
1. The ownership, directly or indirectly through subsidiary (ies), of more than one-half of the voting power of an enterprise, or
2. Control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.
• Subsidiary: is an enterprise that is controlled by another enterprise (known as the parent).
• Parent: is an enterprise that has one or more subsidiaries.
• Group: is a parent and all its subsidiaries.
• Consolidated Financial Statements: are the financial statements of a group presented as those of a single enterprise.
• Equity Method: a method of accounting whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee. The consolidated statement of profit and loss reflects the investor’s share of the results of operations of the investee.
• Equity: the residual interest in the assets of an enterprise after deducting all its liabilities.

Explanation: The existence of significant influence is determined by any of the following ways -

1. significant transactions being concluded between the investor and the investee,
2. investee representing for the board of directors,
3. interchange of managerial personnel,
4. involving in policy-making decisions, and
5. provision of essential technical information.

Accounting

The application of many procedures and methods are similar as set out in AS-21.

1. An investment in an associate is accounted for under the equity method from the date on which it falls within the definition of an associate.
2. The financial statements of the investor and the associate are drawn for the same period.

The following are the important points that are to be noted in this regard:

1. Goodwill or the capital reserve arising on the acquisition of an associate by an investor should be included in the carrying amount of investment in the associate but has to be disclosed separately.
2. The unrealised profits and losses resulting from transactions between the investor and the associate should be discarded to the extent of the investor’s interest in the associate. However the unrealised losses should not be eliminated if the cost of the transferred asset cannot be recovered.
3. The carrying amount of investment in an associate should be reduced to recognise the value of the investment and such reduction has to be made in respect of each investment.

Accounting for Investments under Equity Method

The investments are recorded at cost giving consideration to goodwill or capital reserve as the case may be, arising at the time of acquisition and the carrying amount is increased or decreased to recognise the investor’s share of the profits or losses of the investee after the date of acquisition.

However, the equity method followed by the investor should be discontinued from that date:

1. where it retains its investment wholly or partially and looses significant influence in an associate, or
2. where the equity method is no longer appropriate.

For this purpose, the carrying amount of the investment at that date should be regarded as cost thereafter.

Circumstances where Equity Method is Inapplicable

1. Where the investments are acquired and held with a sole intention of being disposed in the near future, or
2. Where the associate operates under long-term restrictions which hinders its ability to transfer the funds to the investor.

It needs to be mentioned that investments in associates are to be accounted in compliance with AS 13 - Accounting for Investments and where the equity method is not applied for accounting the investments in associates, the same has to be disclosed in the consolidated financial statements.

Disclosures

1. A list of all the associates with description including the proportion of ownership interest.
2. Where the equity method is adopted for accounting for investments, they should be classified as long-term investments and disclosed separately in the consolidated balance sheet and the investor’s share of the profits or losses of such investments should be disclosed separately in the consolidated statement of profit and loss. The investor’s share of any extraordinary or prior period items should also be separately disclosed.
3. Where the reporting date of the associate is different from that of the financial statements of an investor, the names of such associates should be disclosed in the consolidated financial statements.
4. In case an associate uses accounting policies other than those adopted for the consolidated financial statements, the fact should be disclosed along with a brief description of the differences in the accounting policies.
5. The following relating to contingencies should be disclosed:
1. share of the contingencies and capital commitments of an associate for which it is contingently liable, and
2. those contingencies that arise because the investor is severally liable for the liabilities of the associate.

Transitional Provisions: When the investment in an associate is accounted for the first time in consolidated financial statements, the carrying amount of investment in the associate should be brought to the amount that would have resulted if the equity method of accounting was followed since the acquisition of the associate. The corresponding adjustment in this regard should be made in the retained earnings in the consolidated financial statements.