Practical Guide to Consolidation of Accounts “The more you learn, you learn that you still have lot to learn” Vivek Agarwal

CA Vivek Agarwal [email protected] www.vivekonline.com I 2 CFS requirement under Companies Act, 2013

CA Vivek Agarwal [email protected] www.vivekonline.com I Did you know ?

❑Before Companies Act 2013, only listed company was required to do Consolidation. AS 21 says that if a company is required to do consolidation then consolidation is required to be done as per criteria set up in AS 21.

❑Earlier only listed companies was required to do consolidation as listing agreement required the same but with companies act 2013, sec 129 has defined financial statement to include CFS.

CA Vivek Agarwal [email protected] www.vivekonline.com I 4 Consolidation requirement under Companies Act, 2013 (‘Act, 2013’)

Section 129 (3) read with Rule 6 of the Companies (Accounts) Rules, 2014 (Rules) provides manner of consolidation of financial statements of subsidiaries pursuant to Schedule III of the Act, 2013 and the applicable Accounting Standards.

Also explanation to Section 129 (3) clearly states that for the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture but that is not envisaged by the Accounting Standard.

Therefore, as per Section 129 of the Act, 2013 read with rules thereof, consolidation of financial statement is required in case a company is having subsidiary or associate or joint-venture company.

In this regard, MCA had come with notification no. G.S.R 723 (E) dated October 14, 2014 and introduced the Companies (Accounts) Amendment Rules, 2014. As per the rule the consolidation requirement was exempted for a company not having subsidiaries but having associates or joint ventures (‘JVs’). However, the said exemption was only for the financial year 2014-15. Accordingly, such companies come within the purview of consolidation from FY 15-16 onwards.

CA Vivek Agarwal [email protected] www.vivekonline.com I 5 AS 21 : Consolidation of Accounts

CA Vivek Agarwal [email protected] www.vivekonline.com I 6 CA Vivek Agarwal [email protected] www.vivekonline.com I 7 CA Vivek Agarwal [email protected] www.vivekonline.com I 8 Types of Interest in other entities

Subsidiary Interest Associate Interest Joint Arrangement Investment Interest

Ownership >=50% 20%-49% Joint <20%

Accounting Standards AS 21 AS 23 AS 27 AS 13

Ind AS Ind AS 110 Ind AS 28 Ind AS 28 Ind AS 112

Joint Venture = At Cost for Long Term, Cost Control = Significant Influence = Accounting Treatment Proportionate or Market Value for Current Consolidation Equity Method Consolidation Investment

CA Vivek Agarwal [email protected] www.vivekonline.com I 9 Definition - Scope

Preparation and presentation of Consolidated Financial Statements for a group of enterprises under the control of a parent.

Accounting for investment in subsidiaries in the separate financial statement of a parent.

CA Vivek Agarwal [email protected] www.vivekonline.com I 10 Definition of Control

When one entity

Directly or indirectly through subsidiary, owns Control more than 50% of the voting power.

OR

Has power to control the composition of Board of Directors of another company for economic benefits. Subsidiaries

CA Vivek Agarwal [email protected] www.vivekonline.com I 11 Definition – Minority Interest

It is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent.

In other words, it is that portion of results and net assets which are not owned by the Holding Company

CA Vivek Agarwal [email protected] www.vivekonline.com I 12 Consolidate Financial Statements (CFS) – Contents

Consolidated Balance Sheet

Consolidated Statement of Profit and Loss

Consolidated Cash Flow Statement (in case parent company presents the same)

Notes thereon.

CA Vivek Agarwal [email protected] www.vivekonline.com I 13 AS 21 Consolidated Financial Statements

Presentation as per Schedule III ❑ The CFS prepared in the same format as that of Separate Financial Statements, i.e, Schedule III of Companies Act 2013

Exclusion of Subsidiaries from Consolidation The Holding Company shall consolidate the financial statements of all the subsidiaries, domestic or foreign other than :

❑ Temporary Investment - When the shares are held in subsidiary company for disposal in near future. ❑ Severe Restriction -Where there are long term restrictions on fund transfer from subsidiary to parent Company

Different financial year of Subsidiary It will prepare an additional set of financial statement in accordance with financial year of holding

CA Vivek Agarwal [email protected] www.vivekonline.com I 14 Consolidation Procedure : Goodwill Computation

At the date of acquisition

Any excess of the cost to the parent of its investment in a subsidiary over the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, should be described as goodwill to be recognised as an asset in the consolidated financial statements

Cost to parent > Parent’s portion of Equity = Goodwill

When the cost to the parent of its investment in a subsidiary is less than the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference should be treated as a capital reserve in the consolidated financial statements

Cost to parent < Parent’s portion of Equity = Capital Reserve

CA Vivek Agarwal [email protected] www.vivekonline.com I 15 Consolidation Procedure : Minority Interest Computation

Minority interests in the net income of consolidated subsidiaries for the reporting period should be identified and adjusted against the income of the group in order to arrive at the net income attributable to the owners of the parent; and

Minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated balance sheet separately from liabilities and the equity of the parent’s shareholders.

Example Suppose company B is having Net worth of Rs 10 lac, company A purchases 75% of share of company B, then remaning 25% i.e. Rs 2.5 lacs becomes minority interest.

CA Vivek Agarwal [email protected] www.vivekonline.com I 16 Consolidation Procedure : BS & P&L Consolidation

All assets, liabilities, income and expenses should be consolidated on line by line basis.

Line by line basis – combine assets, liabilities, income and expenses

Intra-group transactions and balances ➢ Profits and losses on transactions between group members should be eliminated ➢ Profits which are reflected in the value of assets to be included in the consolidation should be eliminated Uniformity of accounting policies ➢ Uniform accounting policies should be used for all entities included in the consolidation for like transactions and other events in similar circumstances If there is mid year acquisition then the mid year opening balance sheet as on date of acquisition is required.

CA Vivek Agarwal [email protected] www.vivekonline.com I 17 Key consolidation issues

❑ Preference share Capital : The Portion held by us is cancelled against investment. Difference will be goodwill. The portion held by outsiders shown as minority interest. Alternatively it can be shown as a capital.

❑ Debenture : The portion held by us is cancelled against investment and the difference is goodwill. The portion held by outsiders is shown as liability.

❑ Cumulative Preference Share : Provide the preference dividend in CFS, whether declared or not

Losses reported by subsidiary & share of loss of minority exceeds their interest Losses should be given to them only to the extend of their interest. Any further losses should be absorbed by majority. But when subsidiary reports profit, thereafter we should recover share of profit as well as the losses of minority absorbed by us.

Transitional provision No comparison required in first year.

CA Vivek Agarwal [email protected] www.vivekonline.com I 18 Key consolidation issues

❑ As far as possible the financial statements for all entities included in the consolidation should be prepared for the same period and to the same date

❑ Appropriate adjustments should be made to information prepared to an earlier date

❑ Financial statements over three months before the group’s reporting date should not be used

❑ De-consolidation on date of ceasing to meet definitions of subsidiary

CA Vivek Agarwal [email protected] www.vivekonline.com I 19 Example of Def.-“Control”

CA Vivek Agarwal [email protected] www.vivekonline.com I 20 Example of Def.-“Control”

CA Vivek Agarwal [email protected] www.vivekonline.com I 21 Steps To Consolidate

❑ Treatment of Proposed Dividend and Dividend received

❑ Distributions received to be reduced from carrying amount of investment

❑ Share in profits of associate is considered without considering proposed dividend

❑ Adjustments to the carrying amount of Investment arising from changes in equity that that have not been included in the statement of profit and loss.

❑ Such changes include those arising from the revaluation of fixed assets and investments, from foreign exchange translation differences and from the adjustment of differences arising on amalgamations.

❑ Adjustments to the carrying amount of investment in an investee arising from changes in the investee’s equity that have not been included in the statement of profit and loss of the investee are directly made in the carrying amount of investment without routing it through the consolidated statement of profit and loss. The corresponding debit/credit is made in the relevant head of the equity interest in the consolidated balance sheet.

CA Vivek Agarwal [email protected] www.vivekonline.com I 22 Disclosures…

❑ List of all subsidiaries including name, country of incorporation, proportion of ownership interest and, if different, the proportion of voting power held ❑ Under the Companies Act, 2013: – To comply with Instructions given for preparation of balance sheet and statement of profit and loss in Schedule III – ❑ Entity-wise “amount of net-assets” and % of the same w.r.t. consolidated net assets – ❑ Entity-wise “amount of share in profit & loss and % of the same w.r.t. consolidated profit & loss – ❑ The above details to be further bifurcated into parent, subsidiary, joint –venture and also into Indian and Foreign ❑ Effect of acquisition and disposal of subsidiaries on the financial position at the reporting date, the results for the reporting period and on the corresponding amounts for the preceding period ❑ Names of the subsidiaries of which the reporting dates are different from that of the parent and the difference in reporting dates ❑ Nature of relationship between parent and subsidiary, if parent does not own one-half of the voting power

CA Vivek Agarwal [email protected] www.vivekonline.com I 23 Sale of Subsidiary

➢ Consolidation process to be followed till the date parent subsidiary relationship ceases to exist ➢ Recognition of difference between sale proceeds and Equity on the date of disposal in the consolidated profit and loss account and Capital Reserve / Goodwill to be reversed

CA Vivek Agarwal [email protected] www.vivekonline.com I 24 AS-23 – Accounting for Investment of Associates in CFS

CA Vivek Agarwal [email protected] www.vivekonline.com I AS-23 – Accounting for Investment of Associates in CFS

Significant influence may be exercised in several ways:

❑ Representation on the Board of directors ❑ Participation in policy making process ❑ Material intercompany transactions ❑ Interchange of managerial personnel ❑ Share ownership - 20 % or more

Definition as per Companies Act 2013:

Associate company, in relation to another company, means a company in which the other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.”

“Significant influence means control of at least 20% of total share capital, or of business decisions under an agreement.”

CA Vivek Agarwal [email protected] www.vivekonline.com I 26 AS-23 – Accounting for Investment of Associates in CFS Consolidation method: Equity method – ❑ Under the Equity Method - investment is initially recorded at cost, identifying any goodwill / capital reserve 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 ❑ Elimination of unrealised profit / loss to the extent of investor’s interest Exclusion from CFS / Cessation : same as AS 21

Adjustments of carrying amount ❑ Adjustments to the carrying amount of investment in an associate arising from changes in the associate’s equity that have not been included in the statement of profit or loss should be directly adjusted in the carrying amount of investment without routing it through the consolidated statement of profit and loss. The corresponding debit /credit should be made in the relevant head of the equity interest in the consolidated balance sheet

❑ For example, in case the adjustment arises because oaf revaluation of fixed assets by the associate, apart from adjusting the carrying amount of investment to the extent of proportionate share of the investor in the revalued amount, the corresponding amount of revaluation reserve should be shown in the consolidated balance sheet.

CA Vivek Agarwal [email protected] www.vivekonline.com I 27 AS- 27 : Financial Reporting of Interest in Joint Ventures

CA Vivek Agarwal [email protected] www.vivekonline.com I AS-27 – Financial Reporting of Interests in Joint Ventures

❑ A jointly controlled entity is a joint venture which involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other enterprises, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity. ❑ A jointly controlled entity maintains its own accounting records and prepares and presents financial statements in the same way as other enterprises in conformity with the requirements applicable to that jointly controlled entity. ❑ Joint control is the contractually agreed sharing of control over an economic activity ❑ Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it. ❑ Accounting of partnership firm/AOP in separate and consolidated financial statements ❑ Proportionate Consolidation is a method of accounting and reporting whereby a venturer's share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer's financial statements.

CA Vivek Agarwal [email protected] www.vivekonline.com I 29 CA Vivek Agarwal [email protected] www.vivekonline.com I 30 Accounting for share of losses

CA Vivek Agarwal [email protected] www.vivekonline.com I 31 Jointly Controlled Entities – Accounting Treatment

❑Separate financial statements of a venturer : Interest should be accounted for as an investment – AS 13

❑Consolidated financial statements of a venturer : Using proportionate consolidation except where:

✓ Acquisition with a view to disposal in the near future ✓ Entity operates under severe long-term restrictions

❑Interest in such exceptions as mentioned above should be accounted for as an investment in accordance with Accounting Standard 13, Accounting for Investments

CA Vivek Agarwal [email protected] www.vivekonline.com I 32 Case Study

CA Vivek Agarwal [email protected] www.vivekonline.com I Case Study

Q. Mukesh Ltd sold all its three subsidiaries at different dates during the year. Whether is it required to present CFS?

❑ As per Para 22 of AS-21 – results of operations of subsidiaries where the relationship has ceased during the year are included in CFS profits till the date of cessation. Thus even if the company is a parent at any time during the year the preparation of CFS becomes compulsory.

Q. High Ltd and Low Ltd each hold 50% equity in Middle Ltd. Each company exercises control over the board every alternate year. Who shall consolidate Middle Ltd.?

❑ Control test will fail. Accounting may be in line with AS-27.

Q. NCP Ltd owns more than 50% voting power of RG Ltd. RG Ltd. has incurred losses. NCP Ltd argues it does not intend to control RG and thus does not want to consolidated. As an auditor, what would be your views?

❑ Intention to control is not relevant in AS-21, hence NCP Ltd will have to consolidate RG Ltd.

Q M/s Sonia Ltd has four wholly owned subsidiaries which own 25% each in M/s Manmohan Ltd. Whether equity accounting would be required by the intermediary subsidiaries and then consolidated by M/s Sonia Ltd, or would it directly consolidate?

❑ M/s Sonia Ltd is exercising the control of voting power indirectly. Hence it can directly consolidate M/s Manmohan Ltd.

CA Vivek Agarwal [email protected] www.vivekonline.com I 34 Case Study

Q. Raju Ltd acquired 60% equity in Satyam Ltd. on March 31, 2004. However due to control restrictions it could not consolidate the entity. But w.e.f April 1, 2008 all restrictions were removed. How should goodwill calculation be done?

❑ As per para 22 of AS-21, “ The result of operations of a subsidiary are included in CFS from the date on which the parent-subs relationship came into existence.” Thus calculation of goodwill would be with reference to the date of and not with reference to the date on which the subsidiary came out of restriction.

Q. Can gross amount of goodwill be netted off against gross amount of capital reserves in the case of a parent that has several subsidiaries some of which have given rise to goodwill whereas others have given rise to capital reserve on acquisition?

❑ Gross amount of goodwill and capital reserves should be disclosed separately. Alternatively, they could be disclosed in the CFS balance sheet at the net amount and the respective gross amounts can be disclosed in the notes to the financial statements.

Q. Where consolidation is performed for the first time, is it appropriate to charge / credit opening balance of reserves with the adjustments arising due to harmonising the accounting policies followed (to make them uniform for consolidation purposes), in respect of period up to the beginning of the year?

CA Vivek Agarwal [email protected] www.vivekonline.com I 35 Case Study

❑ On account of harmonization of the accounting policies, the resultant adjustments (attributable to earlier years) to the value of opening balances of net fixed assets may be adjusted in the opening balance of revenue reserves

Q. A large group has several subsidiaries, associates and joint ventures. Whether transaction between (a) parent and subsidiary, (b) subsidiary and subsidiary, (c) parent and associate, (d) parent and joint venture, (e) associate and associate, (f) joint venture and joint venture, (g) associate and joint venture, (h) subsidiary and associate and (i) subsidiary and joint venture need to be eliminated in the CFS?

❑ With AS 21, intra-group transactions are required to be eliminated, i.e. between the parent and the subsidiary. AS 23 requires transactions between the investor (or its consolidated subsidiaries) and the associates should be eliminated to the extent of the investor’s interest. AS 27 states that transactions between a venturer and the jointly controlled entity needs to be adjusted where CFS are prepared

❑ Transactions between subsidiary and subsidiary, subsidiary and associate, and subsidiary and joint venture would need intra-group adjustments

❑ Transactions between associate and another associate, joint venture entity and another joint venture entity and between associate and a joint venture entity should not be adjusted for intra-group effects

CA Vivek Agarwal [email protected] www.vivekonline.com I 36 Case Study Q. In the first CFS, how should unrealised profits / losses arising from intra-group transactions of earlier years be adjusted?

❑ In the case of unrealized profits / losses arising from intra-group transactions of earlier years, such profits / losses should be adjusted against opening balance of reserves and in the case of inadequacy of reserves, to the accumulated losses

Q. What would be the accounting treatment if the contractual arrangement ceases to apply to the venturers, but the venturers continue to operate in the same manner?

❑ It is the existence of a contractual arrangement that determines whether or not an investment by an enterprise is in the nature of an investment in a JV. Accordingly, in the absence of a contractual arrangement, it may not be appropriate to consider an investee as a JV.

Q. How should venture capitalists and financial institutions account for their investments in JV?

❑ According to circumstances but the investor’s relationship to its investment tends to be that of a portfolio investor. In these circumstances, for consistency, such investment is accounted for as an investment according to the method of accounting applied to other investments within that investment portfolio rather than as a JV, even if the investor has joint control.

CA Vivek Agarwal [email protected] www.vivekonline.com I 37 Case Study

Q. Whether proportionate consolidation is required for investment in an entity which was a JV for a part of the year (sold off during the year)?

❑ AS 27 requires discontinuance of the use of proportionate consolidation when the venture ceases to have joint control but retains its interest in the entity either in whole or in part. Therefore proportionate consolidation of the profit and loss account for part of the year would be required, ie proportionate consolidation would be required till the time the entity was a JV. The question of proportionate consolidation of the balance sheet does not arise, since at the balance sheet date, there was no joint ownership

Q. A public sector corporation owned by the Central Government is incorporated under the Companies Act, 1956, and has several subsidiaries. The company has offered, on private placement basis, to the Government of India, guaranteed redeemable non-convertible OTS tax free bonds in the nature of debentures which are listed in BSE. Since the shares are unlisted, whether the company would need to prepare CFS and get them audited?

❑ As per SEBI Guidelines, a public company which has any of its securities listed on any recognised stock exchange is a listed company. Further as per clause 32 of the listing agreement, it is mandatory for the CFS to be audited by the statutory auditors of the company and the same should be filed with the Stock Exchange

CA Vivek Agarwal [email protected] www.vivekonline.com I 38 Key issues - Goodwill

Whether goodwill arising on consolidation is required to be amortised?

❑ Practice under Indian GAAP on goodwill is divergent. ❑ Amortisation is not mandatory under AS 10 (mandatory under AS 14) ❑ AS 21, AS 23 and AS 27 are silent on goodwill amortisation.

Goodwill – other issues ❑ Whether goodwill arises on further investment in 100% subsidiary ❑ Setting off of goodwill and capital reserves of different subsidiaries ❑ Setting off CFS Goodwill against Securities premium or General Reserve

CA Vivek Agarwal [email protected] www.vivekonline.com I 39 Practical Guidance

CA Vivek Agarwal [email protected] www.vivekonline.com I ACCOUNTING STANDARD – 21

“Consolidated Financial Statements”

CA Vivek Agarwal [email protected] www.vivekonline.com I 41 Issue: In the Consolidated Financial Statements of a company, the following note was appearing:

“Most of the accounting policies of the reporting company and that of its subsidiaries are similar and are in line with generally accepted accounting principles in India. However since certain subsidiaries are in the business lines which are distinct from that of the reporting company and function in a different regulatory environment, certain policies in respect of investments,gratuity, depreciation/ amortization etc. differ. ”

Paragraph 20 of AS 21, requires that:

“20. Consolidated financial statements should be prepared using uniform accounting policies for like transactions and other events in similar circumstances. If it is not practicable to use uniform accounting policies in preparing the consolidated financial statements, that fact should be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.”

CA Vivek Agarwal [email protected] www.vivekonline.com I 42 It was noted from the given note that although the fact that the accounting policy followed by the subsidiaries in respect of investment, gratuity, depreciation/ amortization etc. differ from that followed by the parent company has been disclosed, however, neither the proportion of these items in the consolidated financial statements to which these different accounting policies have been applied has been disclosed nor the fact that it is not practicable to do so has been mentioned.

CA Vivek Agarwal [email protected] www.vivekonline.com I 43 Issue: From the Annual Report of a company, it was noted from the “Related Party Disclosure” in the Standalone Financial Statements that it had acquired a subsidiary during the year.

However, from the Consolidated Financial Statements, it was noted that the said subsidiary was neither consolidated nor information relating to it as a subsidiary was disclosed.

Paragraphs 29(a) and 11 of AS 21, provides as follows:

“29. In addition to disclosures required by paragraph 11 and 20, following disclosures should be made:

(a) in consolidated financial statements a list of all subsidiaries including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held;”

CA Vivek Agarwal [email protected] www.vivekonline.com I 44 “11. A subsidiary should be excluded from consolidation when: a. control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or

b. it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent. In consolidated financial statements, investments in such subsidiaries should be accounted for in accordance with Accounting Standard(AS) 13, Accounting for Investments. The reasons for not consolidating a subsidiary should be disclosed in the consolidated financial statements.”

It was noted from related party disclosure given in the standalone financial statements that the company had acquired a subsidiary during the financial year. It has also been noted that during the year, certain transactions have taken place with the said subsidiary company. However, the same was neither included in the list of entities the financials of which have been consolidated nor any note providing the reasons for not consolidating the subsidiary was disclosed as required under paragraph 29(a) and paragraph 11 of AS 21 respectively.

CA Vivek Agarwal [email protected] www.vivekonline.com I 45 Issue: From the Standalone and Consolidated Financial Statements of a company, it was noted that in the note of “Other Current Assets” the amount of “Assets held for disposal” was higher in the Standalone Financial Statements than in the Consolidated Financial Statements.

Paragraph 13 of AS 21, provides as follows:

“13. In preparing consolidated financial statements, the financial statements of the parent and its subsidiaries should be combined on a line by line basis by adding together like items of assets, liabilities, income and expenses.”

It was observed that the amount of “assets held for disposal” in the standalone note of other assets was much higher than the amount disclosed in the Consolidated schedule of other assets. Paragraph 13 of AS 21 requires the similar items should be combined on a line by line basis by adding together like items of assets. It prima facie appears that a line by line consolidation of “assets held for disposal” has not been done.

CA Vivek Agarwal [email protected] www.vivekonline.com I 46 Issue - From the Consolidated Balance Sheet of a company, it was noted that minority interest was disclosed as part of the Shareholders’ fund. It may be noted that paragraph 25 of AS 21, provides as follows:

“25. Minority interests should be presented in the consolidated balance sheet separately from liabilities and the equity of the parent’s shareholders. Minority interests in the income of the group should also be separately presented.”

It was viewed that the presentation of minority interest as part of Shareholders’ fund amounts to presenting it as equity of the parent’s shareholders which is not in accordance with requirements of paragraph 25 of AS 21.

CA Vivek Agarwal [email protected] www.vivekonline.com I 47 Issue - From the Consolidated notes to account given in the Annual Report of a company, it was noted that it has disclosed only the names of the subsidiaries consolidated by it.

It may be noted that paragraph 29(a) of AS 21, provides as follows –

“29. In addition to disclosures required by paragraph 11 and 20, following disclosures should be made:

(a) in consolidated financial statements a list of all subsidiaries including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held;...”

It was noted from reproduced disclosure given in the Consolidated Financial Statements that although the list of subsidiaries held has been disclosed, neither the country of their incorporation nor proportion of ownership interest held in them were disclosed as required by paragraph 29(a) of AS21.

CA Vivek Agarwal [email protected] www.vivekonline.com I 48 ACCOUNTING STANDARD – 23

“Accounting for Investments in Associates in Consolidated Financial Statements”

CA Vivek Agarwal [email protected] www.vivekonline.com I 49 Issue : Note relating to Other Income read with Note relating to Non- Current Investments in the Consolidated Financial Statements given in the Annual Report of a company, states as follows:

Note: Other Income Dividend Income On Investment in Associates xxx

Note: Non-Current Investments Unquoted Equity Instruments (Fully Paid up) Investment in Associates 1. ABC Ltd. Xxx

Hence, the equity method of accounting for investments in associates has not been followed in the Consolidated Financial Statements as prescribed in AS-23.

CA Vivek Agarwal [email protected] www.vivekonline.com I 50 Paragraph 7 of AS 23, provides that:

“7. An investment in an associate should be accounted for in consolidated financial statements under the equity method except when:

a) the investment is acquired and held exclusively with a view to its subsequent disposal in the near future; or b) the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor”.

From the above, it was viewed that the Consolidated Financial Statements should be prepared using the equity method except in the above mentioned two conditions.

CA Vivek Agarwal [email protected] www.vivekonline.com I 51 The equity method has been defined under paragraph 3.8 of AS 23, as follows:

“3.8 The equity method is 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.”

From the above, it was noted that in case an associate does not fall in the exceptional circumstances defined in paragraph 7 of AS 23, then on consolidation of the financials of an associate, it is investor’s share in the results of the associate that is included in the Consolidated Statement of Profit and Loss. In the given case, it was noted from the Standalone Financial Statements that although the company holds investments in an associate, in Consolidated Statement of Profit & Loss, the dividend on such investment has been recognised as income.

CA Vivek Agarwal [email protected] www.vivekonline.com I 52 It was viewed that in the absence of any information that such investments in associate falls under the exceptions as per paragraph 7 states above, equity method of accounting should have been adopted for consolidating its results. Hence, company’s share in the associate company’s result of operation should have been recognised in Consolidated Statement of Profit and Loss instead of recognizing the dividend income on such investments. Accordingly, it was viewed that neither the Consolidated Financial Statements have been prepared as per the equity method nor has been stated that the associate company meets the prescribed exceptional conditions. Accordingly, it was viewed that the requirement of AS 23 has not been complied with.

CA Vivek Agarwal [email protected] www.vivekonline.com I 53 ACCOUNTING STANDARD – 27

“Financial Reporting of Interests in Joint Ventures”

CA Vivek Agarwal [email protected] www.vivekonline.com I 54 QUERY 1: From the Annual Report of a company having interest in jointly controlled entities, it was noted that it had disclosed only its interest in the assets and liabilities of the jointly controlled entitites.

Paragraph 53 of AS 27, provides as follows:

“53. A venturer should disclose, in its separate financial statements, the aggregate amounts of each of the assets, liabilities, income and expenses related to its interests in the jointly controlled entities.”

It was observed that although the interest in the assets and liabilities with respect to the jointly controlled entities has been disclosed, the aggregate amount of income and expenses related to such interests in jointly controlled entities have not been disclosed as per the above stated requirements.

CA Vivek Agarwal [email protected] www.vivekonline.com I 55 QUERY 2: In the Annual Report of a company, from the note of Related Party Disclosures, it was noted that only the names of its joint ventures has been disclosed.

Paragraphs 52 and 53 of AS 27, provides as follows:

“52. A venturer should disclose a list of all joint ventures and description of interests in significant joint ventures. In respect of jointly controlled entities, the venturer should also disclose the proportion of ownership interest, name and country of incorporation or residence.

53. A venturer should disclose, in its separate financial statements, the aggregate amounts of each of the assets, liabilities, income and expenses related to its interests in the jointly controlled entities.”

CA Vivek Agarwal [email protected] www.vivekonline.com I 56 It was noted that although, it has disclosed the names of the joint venture companies, however, description of the company’s interest in joint ventures has not been disclosed as required under paragraph 52 of AS 27.

Further, the disclosures with regard to assets, liabilities, income and expenses as required under paragraph 53 of AS 27 have also not been made.

CA Vivek Agarwal [email protected] www.vivekonline.com I 57 CA Vivek Agarwal [email protected] www.vivekonline.com I 58 THANK YOU

For further information please contact

VIVEK AGARWAL Partner Email: [email protected] Handheld : +91 96817 06868

S. K. AGRAWAL & CO. CHARTERED ACCOUNTANTS Since 1968 www.skagrawal.co.in

CA Vivek Agarwal [email protected] www.vivekonline.com I 59