AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES

IN CONCOLIDATED FINANCIAL STATEMENTS

APPLICABILITY
STUDENT
AS - 23 should be applied in accounting for Investments in Associates in preparation and
NOTES
presentation of Consolidated Financial Statements.
In the Separate Financial Statements of the Investor AS-13 is applicable.
MEANINGS:

DEFINE SIGNIFICANT INFLUENCE

Significant Influence is the power to participate in the financial and/or operating policy
decisions of the Investee, but not control over those policies. Significant Influence does
not extend to power to govern the financial and/or operating policies of an Enterprise.
How to Gain Significant Influence
1. Share Ownership:
2. Agreement
3. Statute

1. SHARE OWNERSHIP: If an Investor holds, directly or indirectly through

Subsidiary(ies), 20% or more of the voting power of the Investee, it is presumed
that the Investor has significant influence, unless it can be clearly demonstrated
that this is not the case.
Eg: Bittu Ltd holds 25% voting power in Bitti Ltd. It is presumed that Rani has
Significant Influence over Raja Ltd, unless demonstrated otherwise.
NOTE: If despite owning > or = to 20% ownership the investor does not exercise
significant influence, the same will have to be proved.
Sometimes, it may also happen that an investor holds less than 20% share ownership
but still exercises significant influence. Again, this will have to be proved by the investor.
Potential Equity Shares; For the purpose of calculating 20% , the Potential Equity
Shares of the Investee held by the Investor, will not be taken into account for
determining the voting power of the Investor. Voting power should be determined on the
basis of the current outstanding securities with voting rights.
Majority Ownership by another Investor:
A substantial or majority ownership by another Investor, does not necessarily preclude an
Investor from having significant influence.
Evidence/Examples of Significant Influence:
(a) Representation on the Board of Directors or corresponding Governing Body of the
Investee,
(b) Participation in policy making processes,
(c) Material transactions between the Investor and the Investee,
(d) Interchange of Managerial Personnel, or
 AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONCOLIDATED FINANCIAL STATEMENTS

(e) Provision of essential technical information.

STUDENT
NOTES
Example:
Ram Ltd and Sita Ltd hold 15% Equity each in Ayodhya Ltd. Sita Ltd is already a
Subsidiary of Ram Ltd. Is Ayodhya Ltd an Associate, for AS - 23 purposes ?
1. If an Investor holds, directly or indirectly through Subsidiary(ies), 20% or more f the
voting power of the Investee, it is presumed that the Investor has significant influence,
unless it can be clearly demonstrated that this is not the case.
2. Ram Ltd, through itself and its Subsidiary Sita Ltd, holds 30% Equity in Ayodhya Ltd
(greater than 20%). Hence, it is presumed that Ram Ltd has significant influence in
Ayodhya Ltd. Hence, Ram Ltd should account for investment in Ayodhya Ltd under
Equity Method as per AS - 23.
AGREEMENT:
Shareholders agreement normally contains clauses relating to rights and powers of the
minority shareholders. This states to what extent they can participate in the financial
or operating policy decisions of the associate entity. Sucha agreements can be
considered as an evidence to significant influence.
STATUTE:
Government or PSUs can exercise significant influence over a company through a special
statute for a company operating in a regulated industry.

EQUITY METHOD OF ACCOUNTING

Equity Method is a method of accounting with the following features -
(a) Acquisition: Investment is initially recorded at cost.
(b) Determine the Net Assets(equity) acquired as on the date of acquisition of the
investment.
(c) Difference of Step 1 and 2 will help in identifying any Goodwill / Capital Reserve
arising at the time of acquisition.
NOTE: The goodwill/Capital reserve calculated above will be included in the carrying
amount of the investment (with a separate disclosure). It won’t be recognised
separately.
(d) Post Acquisition Profits: The Carrying Amount of the Investment is
increased/decreased to recognise the post acquisition change in equity of the
Investee (i.e. the Associate) after the date of acquisition.

NOTE: change in equity may arise because of post-acquisition profits/losses,

revaluation of fixed assets/investments. Every change in equity may not be through
P&L a/c.

(e) Distributions: Distributions(dividends) received from an Investee reduce the

Carrying Amount of the Investment.
 AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONCOLIDATED FINANCIAL STATEMENTS

IMPORATANT POPINTS TO BE NOTED:

STUDENT
1. Arrears of Fixed Cumulative Dividend to be provided: If an Associate has
NOTES
outstanding Cumulative Preference Shares held outside the Group, the Investor
should compute its Share of Profits or Losses after adjusting for Preference
Dividends, whether or not the Dividends have been declared.
Incase of Non-Cumulative Preference Shares, it should be considered only
when Preference dividend is declared.
2. Elimination of Unrealised Profits / Losses: Unrealised Profits and Losses
resulting from transactions between the Investor (or its Consolidated Subsidiaries)
and the Associate are eliminated, to the extent of the Investor's interest in the
Associate. However, Unrealised Losses should not be eliminated if and to the
extent, the cost of the transferred asset cannot be recovered.
3. Provision for Proposed Dividend: Carrying Amount of Investment is reduced by
the distributions (Dividends received) from Associates. However, when the
Associate has made a Provision for Proposed Dividend in its Financial Statements
Investor should calculate its share in the associate without taking into
consideration the Proposed Dividend.
Example: A Limited, a Company registered with SEBI, has three Subsidiaries and one Associate.
While doing the audit of Consolidated Financial Statements (CFS) of A Limited you have come to
know that the Associate Entity had made a Provision for Proposed Dividend in its Financial
Statements. A Limited computed it share of the results of operations of the Associate after taking
into account the Proposed Dividend. Comment.

4. Changes in Share of Equity without routing through P & L: Where adjustments

are required for items which are not reflected in the Associate's P&L, the same
should be reflected in the Carrying Amount of Investment, without routing it through
the Investor's Consolidated P&L Account.
Example: Veer Ltd (Associate) has revalued its Fixed Assets from ₹100 Lakhs to ₹ 360 Lakhs.
This Revaluation Amount has not been included in its Statement of Profit and Loss. Kapil Ltd
(Investor) holds 25% stake in the Associate. Explain how this should be reflected in Kapil Ltd’s
Consolidated Financial Statements.

Answer:
Effect of such adjustments: Where adjustments are required for items which are not
reflected in the Associate's P & L, the same should be reflected in the Carrying Amount of
Investment, without routing it through the Investor's Consolidated P & L Account.

Accounting Treatment: The corresponding debit / credit should be made in the relevant
head of the Equity Interest in the Consolidated Balance Sheet, i.e. without including it in
the Consolidated P & L Account.

Revaluation Effect: Where the Associate has revalued its Fixed Assets upward by ₹ 260
Lakhs (₹ 360 Lakhs - ₹ 100 Lakhs), the adjustment entry in the Consolidated Balance
Sheet should be as under –
 AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONCOLIDATED FINANCIAL STATEMENTS

Particulars Debit (₹) Credit(₹)

STUDENT
Investment in Associate A/c Dr. 65 Lakhs NOTES
To Revaluation Reserve A/c 65 Lakhs
(Being upward revaluation of Associate's Fixed Assets by
₹ 260 Lakhs, Investor's Share of ₹ 260 x 25% = ₹ 65 Lakhs,
recognised directly without routing it through the
Consolidated P & L Account)

5. Excessive Losses = Nil Value of Investment: If an Investor's share of Losses of

an Associate equals or exceeds the Carrying Amount of the Investment, the
Investor ordinarily discontinues recognising its share of further losses, and the
Investment is reported at Nil Value.
Example: Latha Ltd has invested to the extent of 25% in Manju & Co. At the end of the
financial year, for reporting in Consolidated Fin.Statements, Latha Ltd values its
Investment in the Associate at Carrying Amount. Latha Ltd finds that its share of loss of
the Associate exceeds the amount at which the Investment is carried and also in the
current year, the Associate reports loss. Should Latha Ltd recognise the Loss for the
current year in its Separate Financial Statements?

Answer:
Where the Investor's share of losses exceeds or equals the Carrying Amount of the
Investment, the Investor stops recognizing further losses and carries the investment at
'NIL' value.

Conclusion:
(a) Latha Ltd need not recognise its share of loss for the current year, and shall carry the
Investment at 'NIL' value for the purpose of CFS.
(b) However, in the case of "Separate Financial Statements", permanent diminution in
value, if any, should be adjusted from the Carrying Amount as per AS-13.

Example: P Ltd purchased 30% stake in J Ltd on 1st January 2016, at a Cost of ₹ 14
Lakhs, when the latter’s Equity was ₹ 100 Lakhs. JLtd reported a profit of ₹ 20 Lakhs for
the 16-17. In the following 2 FYs Jltd. Reported a loss of 150lakhs and a profit of 120lakhs.
Discuss the accounting for the above in P Ltd’s Consolidated Financial Statements.

Answer:

Particulars ₹ Lakhs
P’s Share of Equity in JLtd (100 Lakhs x 30%)(incl cap Res) 30.00
Add: Proportionate Share in Profits for 16-17(20L*30%) 6.00
Carrying Amount of Investment in Consolidated B/Sheet for year 2016- 36L
17
Less: Proportionate Share of losses for 17-18(150*30%) (45L)
Carrying Amount of investment in consolidate Balance Sheet for the year NIL
17-18
Add: Proportionate Share in Profits for 16-17(120L*30%)-9lakhs 27L

Carrying Amount of Investment for Year 2018-19 27lakhs

 AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONCOLIDATED FINANCIAL STATEMENTS

NOTE: In the FY 17-18, the additional losses of 9lakhs are borne by the holding
company. In the following year 18-19, out of the share of associates profits, 9 lakhs STUDENT
is first transferred to the holding company and only the balance profit is transferred NOTES
to the investor.
Example: Bright Ltd acquired 30% of East India Ltd Shares for ₹2,00,000 on 01.06.2015.
By such an acquisition, Bright can exercise significant influence over East India Ltd. During
the Financial Year ending on 31.03.2015, East India Ltd earned Profits ₹80,000 and
declared a Dividend of ₹50,000 on 12.08.2015. East India reported earnings of ₹3,00,000
for the Financial Year ending on 31.03.2016 and declared dividends of ₹60,000 on
12.06.2016.
(a)Calculate the Carrying Amount of Investment in Separate Financial Statement of Bright
Ltd as on 31.03.2016, and Consolidated Financial Statement of Bright Ltd as on
31.03.2016.
(b)What will be the Carrying Amount as on 30.06.2016 in Consolidated Financial
Statements?
Ans: 1. Separate Financial Statements of Bright Ltd as at 31.03.2016: To be disclosed
in accordance with AS 13 - Accounting for Investments, i.e. at Cost as follows
Particulars ₹
Cost of Acquisition 2,00,000
Less: Pre-Acquisition Period Dividend (₹ 50,000 x Bright Ltd's Share (15,000)
30%)
Net Cost = To be disclosed in Separate Financial Statements 1,85,000

2. Consolidated Financial Statements of Bright Ltd as at 31.03.2016: To be disclosed

in accordance with AS 23 -
Accounting for Investment in Associates, i.e. as per Equity Method as follows —
Particulars ₹
Net Cost as per Separate Financial Statements 1,85,000
Add: Share of Post Acquisition Period Reserves (₹ 3,00,000 x Bright Ltd's 90,000
Share 30%)
Carrying Amount in Consolidated Balance Sheet 2,75,000
Note: Dividends actually received before the date of Balance Sheet should be considered.
Dividends after the Balance Sheet date, 31.03.2016 should not be considered.

3. Consolidated Financial Statements of Bright Ltd as at 30.06.2016: To be disclosed

in accordance with AS 23 -
Accounting for Investment in Associates, i.e. as per Equity Method as follows -
Particulars ₹
Net Cost as per Separate Financial Statements 2,75,000
Less: Dividend Received (₹ 60,000 x Bright Ltd's Share 30%) 18,000
Carrying Amount in Consolidated Balance Sheet 2,57,000
Note: Dividends actually received is accounted as per AS 13 - Accounting for Investments.
It is assumed that the Dividend Declared on 30.06.2016 is out of profits for the year ended
31.03.2016. Hence the same will be credited to the Profit and Loss Account.
Common Note to Point 2 and Point 3 above: The amount of Goodwill / Capital Reserve
on Consolidation is not ascertainable, since the Amount of Net Assets attributable to Bright
Ltd is not given.
 AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONCOLIDATED FINANCIAL STATEMENTS

Example:
Amar Ltd acquired 30% Equity Capital of Bala Ltd at a Cost of ₹ 4,50,000. The comparative STUDENT
Balance Sheets of Bala Ltd, on the NOTES
date of acquisition & year end are given below:
Liabilities Beginning Year end Assets Beginnin Year end
g
Share Capital 10,00,000 10,00,000 Fixed Assets 6,00,000 7,00,000
General Reserve 2,00,000 3,30,000 Investment 3,50,000 4,80,000
Securities 1,00,000 1,00,000 Current Assets 5,00,000 5,10,000
Premium
Current Liabilities 1,50,000 2,10,000
Proposed - 50,000
Dividend
Total 14,50,000 16,90,000 Total 14,50,000 16,90,00
0
There was no Revaluation of Asset by Bala Ltd during the year. Current Assets of Bala
Ltd at year end include Stock costing ₹ 60,000 purchased from Amar Ltd which sells at
Cost plus 20%.
Show the Investment in Associate, in the CBS to be prepared by Amar Ltd in the beginning
and at year end.
Ans:
1. Computation of Goodwill/Capital Reserve
Particulars
Share Capital of Bala Ltd 10,00,000
General Reserve of Bala Ltd 2,00,000
Securities Premium of Bala Ltd 1,00,000
Total Equity of Bala Ltd 13,00,000
% holding of Amar Ltd 30%
Share of Amar Ltd 3,90,000
Cost of Acquisition 4,50,000
Goodwill 60,000

2. Computation of Share of Profit earned during the year

Particulars
Increase in General Reserve 1,30,000
Add: Proposed Dividend 50,000
Total Profit for the year 1,80,000
Share of Amar Ltd (30%) 54,000

3. Computation of Unrealised Profit on Stock

Particulars
Cost of Stock to Bala Ltd 60,000
Unrealised Profit of Amar Ltd (60,000 x 20/120) 10,000
Share of Amar Ltd in Unrealized Profit (30%) 3,000

4. Consolidated Balance Sheet of Amar Ltd (Beginning) (Extract)

Equity & Liabilities Assets
 AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONCOLIDATED FINANCIAL STATEMENTS

Investment in Bala Ltd 4,50,000

(Including Goodwill ₹ 60,000) STUDENT
NOTES

5. Consolidated Balance Sheet of Amar Ltd (Year end) (Extract)

Equity & Liabilities Assets ₹
Investment in Bala Ltd 5,01,000
(Including Goodwill ₹60,000)
4,50,000
Add: Share of Profit (current years)
54,000
Less: Unrealised Profit on Stock
(3,000)

6. Subsequent Profits & Prudence Principle: If the Associate subsequently reports

profits, the Investor resumes including its share of those profits, only after its share
of the profits equals the share of net losses that have not been recognised.
7. Subsidiary's CFS to be used: Where an Associate presents Consolidated
Financial Statements, the Results and Net Assets to be taken into account are
those reported in that Associate's Consolidated Financial Statements.
8. Dates of Reporting: Generally, the Associate uses the same reporting date as
that of the Investor, so that consolidation procedures / equity method application
is made simple. Adjustments are made for any significant transactions between
Investor's CFS and Associate's Financial Statements.
9. Uniform Accounting Policies: When an Associate uses different accounting
policies (from that of the Investor), appropriate adjustments are made to its (the
Associate's) Financial Statements. If it is not practicable to do so, that fact is
disclosed along with a brief description of the differences between the accounting
policies.
WHEN SHOULD EQUITY METHOD NOT BE FOLLOWED
1. The investment is held acquired and held exclusively with a view to its subsequent
disposal in the near future. (near future = period not exceeding 12months).
2. Associate operates under severe long term restrictions that impairs its abitlity to
transfer funds to the investor.

DISCLOSURES
1. Investments in associates accounted for using the equity method should be
classified as long term investments and disclosed separately in the consolidated
balance sheet. The investors share in the profit losses of the associate should be
disclosed separately in the statement of profit and loss.
2. The investors share of any extraordinary or prior period items should be disclosed
separately in the consolidated financial statements of the Profit and Loss.
3. The name of associates having different reporting dates than the investor should
be separately disclosed in the consolidated financial statements.
4. Associates following accounting policies different than those of the Investor, where
adjustment to such accounting policies is not practicable in the financial staements
 AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONCOLIDATED FINANCIAL STATEMENTS

of the associate, the fact should be disclosed along with a brief of the differences
in accounting policies. STUDENT
NOTES
Example:

S Ltd holds 35% of total Equity Shares of M Ltd, an Associate Company. The value
of Investments in M Ltd on 31s1 March is ₹ 3 Crores in the Consolidated Financial
Statements of S Ltd. S Ltd sold Goods worth ₹3,50,000 to M Ltd. The cost of goods
sold is ₹ 3,00,000. Out of these, goods costing ₹ 1,00,000 to M Ltd were in the
Closing Stock of M Ltd. During the year, the Profit and Loss Statement of M Ltd
showed a Loss of ₹1 Crore. What is the value of Investment in M Ltd as on
31st March in the Consolidated Financial Statements of S Ltd, if Equity Method is
adopted for valuing the Investments in Associates.

Will your answer be different if M Ltd had earned a Profit of ₹ 1.50 Crores and
declared a Dividend of ₹ 75 Lakhs to the Equity Shareholders of the Company?

Answer:
Value of Investment in M Ltd as on 31st March as per Equity Method
Case A Case B
Cost of Investment 3,00,00,000 3,00,00,000
Less: Share in Post-Acquisition 1 Crore x 35% = 1.5 Crores x 35% =
Profit / Loss (35,00,000) 52,50,000
Less: Unrealised Gain on Inventory 16,667 x 35% = 16,667 x 35% =
(Note) (5,833) (5,833)
Less: Dividend received 75,00,000 x 35% =
(26,25,000)
Carrying Value as per Equity 2,64,94,167 3,26,19,167
Method
Note: Total Stock Reserve = 50,000/3,00,000 x 1,00,000 = 16,667.

Example:

Question 19.B Ltd acquired a 30% interest in D Ltd and achieved significant
influence. The Cost of the Investment was ₹ 2,50,000. The associate has Net
Assets of ₹5,00,000 at the date of acquisition. The Fair Value of those Net Assets
is ₹ 6,00,000 as a Fair Value of PPE is ₹1,00,000 higher than its Book Value. This
PPE has a remaining useful life of 10 Years After acquisition, D Ltd recognize profit
after tax of ₹1,00,000 and paid a Dividend out of these Profits of ₹ 9,000. D Ltd
has not recognized Exchange Losses of ₹ 20,000. Compute B Ltd’s Interest in D
Ltd at the end the Year.
 AS-23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONCOLIDATED FINANCIAL STATEMENTS

Answer:
STUDENT
NOTES
Particulars ₹
Share of B Ltd in D Ltd 6,00,000 x 30% =
1,80,000
Add: Goodwill (bal. fig.) 70,000
Cost of Investment (including Goodwill) 2,50,000
Add: Share in Post-Acquisition Profit / Loss 1,00,000 X 30% =
30,000
Less: Share in Exchange Losses 20,000 x 30% = (6,000)
Less: Additional Depreciation on PPE 1,00,000 / 10 Years x
30% = (3,000)
Less: Dividend received 9,000 x 30% = (2,700)
Carrying Value as per Equity Method 2,68,300