CA NITIN GOEL AS 23 CH 10S
ACCOUNTING FOR INVESTMENT IN ASSOCIATES
IN CONSOLIDATED FINANCIAL STATEMENTS
AS 23 describes the principles procedures for recognizing investments in
associates (in which the investor has significant influence, but not a
subsidiary or joint venture of investor) in consolidated financial statements
of the investor.
Coverage An investor which presents consolidated financial statements
should account for investments in associates as per equity method in
accordance with this standard but in its separate financial statements, AS
13 will be applicable.
The objective of this Standard is to lay down principles and procedures for
recognizing the investments in associates and its effect on the financial
operations of the group in the consolidated financial statements.
Objective
Reference to AS 23 is compulsory for the companies following AS 21 and
preparing consolidated financial statement for their group.
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 is the power to participate in the financial and/or
operating policy decisions of the investee but not control over those
policies.
Meaning of
Any enterprise having 20% or more of the voting power or any
Associate
interest directly or indirectly in any other enterprise will be assumed to
have significantly influence the other enterprise unless proved otherwise.
Significant influence may be gained by share ownership, statute or
agreement.
Example 1
A Ltd. has 70% holding in C Ltd. and B Ltd. also has 28% holding in the same
company. So, A Ltd. with the majority holding i.e. more than 50% is the
parent company i.e. a holding company.
Since B Ltd. holds more than 20% but not more than 50% in C Ltd., C Ltd.
will be an associate of B Ltd.
Example 2
Examples
A Ltd. is holding 90% share in B Ltd. and 10% shares in C Ltd., and B Ltd. is
holding 11%shares in C Ltd. In this case, A Ltd. is parent of B Ltd. As far as
the relationship between A Ltd. and C Ltd. is concerned; A Ltd. has a total
of direct and indirect holding of (10 + 11) 21% in C Ltd.,
Thus, C Ltd. is an associate of A Ltd. It may however be noted that for
consolidated financial statement purposes, the holding will be 19.9% (10% +
90% of 11%).
Accounting as The equity method is a method of accounting whereby the investment is
per Equity initially recorded at cost, identifying any goodwill/capital reserve arising at
Method the time of acquisition.
Page 10S.1
CA NITIN GOEL AS 23 CH 10S
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. Goodwill/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 should be disclosed
separately.
From the definition, following broad conclusions can be drawn:
a. Investment is initially recorded at cost.
b. Any surplus or deficit in cost and net asset to be recorded as goodwill
or capital reserve.
c. Distributions received from an investee reduce the carrying amount of
the investment.
d. Any subsequent change in share in net asset is adjusted in cost of
investment and goodwill/capital reserve.
e. Consolidated Profit & Loss shows the investor’s share in the results of
operations of the investee.
Equity method of accounting is to be followed by all the enterprises having
significant influence on their associates except in the following cases:
a. Control is intended to be temporary because the investment is
acquired and held exclusively with a view to its subsequent disposal
in the near future.
b. Or it operates under severe long-term restrictions, which
significantly impair its ability to transfer funds to the investor. In both
the above cases, investment of investor in the share of the investee
is treated as investment according to AS 13.
Circumstances
An investor should discontinue the use of the equity method from the date
under which
that:
Equity Method
a. It ceases to have significant influence in an associate but retains,
is Followed
either in whole or in part, its investment.
b. The use of the equity method is no longer appropriate because the
associate operates under severe long-term restrictions that
significantly impair its ability to transfer funds to the investor.
From the date of discontinuing the use of the equity method, investments in
such associates should be accounted for in accordance with AS 13,
Accounting for Investments. For this purpose, the carrying amount of the
investment at that date should be regarded as cost thereafter.
Many of the rules followed under equity method for an associate is similar
to consolidated financial statement rules as in case of subsidiary i.e. AS 21.
Investment in an associate should be recorded as per the equity method
from the date when such relation comes in effect.
Applicability of
Equity Method
Investment in the associate is recorded at cost and any difference in the
cost and investor’s share in equity on the date of acquisition is shown as
goodwill or capital reserve
Page 10S.2
CA NITIN GOEL AS 23 CH 10S
An enterprise having share of profits of more than 50% in other company,
they are said to be in Parent-Subsidiary relationship. However, if the share
Step in profits is more than 20% but upto 50% then this relationship is termed as
Acquisition in associate relationship. This stake of 20% can be acquired either in one go
case of an or in more than one transaction. This share of stake can be increased
associate further say from 25% to 30%. Adjustment should be made with each
transaction.
As far as possible the reporting date of the financial statements should be
same for consolidated financial statement. If practically it is not possible to
draw up the financial statements of one or more enterprise to such date
and, accordingly, those financial statements are drawn up to reporting
Different
dates different from the reporting date of the investor, adjustments should
Reporting
be made for the effects of significant transactions or other events that occur
Dates
between those dates and the date of the consolidated financial statements.
In any case, the difference between reporting dates of the concern and
consolidated financial statement should not be more than 6 months.
Accounting policies followed in the preparation of the financial statements
of the investor, investee and consolidated financial statement should be
uniform for like transactions and other events in similar circumstances.
Uniform
If accounting policies followed by different enterprises in the group are not
Accounting
uniform, then adjustments should be made in the items of the individual
Policies
financial statements to bring it in line with the accounting policy of the
consolidated statement.
The carrying amount of investment in an associate should be reduced to
recognise a decline, other than temporary, in the value of the investment,
Carrying Value
such reduction being determined and made for each investment
of Investment
individually.
As per AS 4, the investor discloses in the consolidated financial statements:
a. Its share of the contingencies and capital commitments of an associate
for which it is also contingently liable; and
Contingencies
b. Those contingencies that arise because the investor is severally liable
for the liabilities of the associate.
Investments in associates cannot be treated as a normal investment under
AS 13. The intent of investing to such an extent (i.e.; 20% or more but less
than 50% of equity) in an associate is an expression of the fact that the
investor is not merely interested in the dividend distribution, but also is
interested in the participation of decision-making process in the associate.
Why Equity
method As the investor has significant influence over the associate, the investor
adopted? has a measure of responsibility for the associate’s performance and, as a
result, the return on its investment. The investor accounts for this
stewardship by extending the scope of its consolidated financial statements
to include its share of results of such an associate and so provides an
analysis of earnings and investment from which more useful ratios can be
calculated.
Page 10S.3
CA NITIN GOEL AS 23 CH 10S
As a result, application of the equity method in consolidated financial
statements provides more informative reporting of the net assets and net
income of the investor.
❖ In addition to the disclosures required above, an appropriate listing and
description of associates including the proportion of ownership interest
and, if different, the proportion of voting power held should be disclosed
in the consolidated financial statements.
❖ 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 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.
❖ The name(s) of the associate(s) of which reporting date(s) is/are
different from that of the financial statements of an investor and the
differences in reporting dates should be disclosed in the consolidated
Disclosures
financial statements.
❖ In case an associate uses accounting policies other than those adopted
for the consolidated financial statements for like transactions and
events in similar circumstances and it is not practicable to make
appropriate adjustments to the associate’s financial statements, the fact
should be disclosed along with a brief description of the differences in
the accounting policies
❖ If an associate is not accounted for using the equity method the reasons
for not doing the same.
❖ Goodwill/capital reserve arising on the acquisition of an associate by an
investor should be disclosed separately though it is included in the
carrying amount of the investment.
In case an associate has made a provision for proposed dividend (i.e.
dividend declared after the reporting period but it pertains to that reporting
Treatment of
year) in its financial statements, the investor's share of the results of
Proposed
operations of the associate should be computed without taking into
Dividend
consideration the proposed dividend.
Consideration The potential equity shares of the investee held by the investor should not
of Potential be taken into account for determining the voting power of the investor.
Equity Share
Page 10S.4
CA NITIN GOEL AS 23 CH 10S
ASSIGNMENT QUESTIONS
Question 1 (ICAI Study Material)
A Ltd. acquire 45% of B Ltd. shares on April 01, 2021, the price paid was ₹ 15,00,000.
Following are the extracts of balance sheet of B Ltd. as of 1 April 2021:
Paid up Equity Share Capital ₹ 10,00,000
Securities Premium ₹ 1,00,000
Reserve & Surplus ₹ 5,00,000
B Ltd. has reported net profits of ₹ 3,00,000 and paid dividends of ₹ 1,00,000 for the year ended
31 March 2022. Calculate the amount at which the investment in B Ltd. should be shown in
the consolidated balance sheet of A Ltd. as on March 31, 2022.
Question 2 (ICAI Study Material)
A Ltd. acquired 40% share in B Ltd. on April 01, 2021 for ₹ 10 lacs. On that date B Ltd.
had 1,00,000 equity shares of ₹ 10 each fully paid and accumulated profits of ₹ 2,00,000.
During the year 2021-2022, B Ltd. suffered a loss of ₹ 10,00,000; during 2022-2023 loss of ₹
12,50,000 and during 2023-2024 again a loss of ₹ 5,00,000. Show the extract of consolidated
balance sheet of A Ltd. on all the four dates recording the above events.
Solution:
Calculation of Goodwill/Capital Reserve under Equity Method
Particulars ₹
Equity Shares 10,00,000
Reserves & Surplus 2,00,000
Net Assets 12,00,000
40% share of Net Assets 4,80,000
Less: Cost of Investment (10,00,000)
Goodwill 5,20,000
Consolidated Balance Sheet (Extract) as on April 01, 2021: ASSETS
Investment in Associate as per AS 23 ₹ ₹
Share of Net Assets on April 1 4,80,000
Add: Goodwill 5,20,000 10,00,000
Calculation of Carrying Amount of Investment as at 31 March 2022:
Investment in Associate as per AS 23 ₹
Share of Net Assets on 1 April, 2021 4,80,000
Add: Goodwill 5,20,000
Cost of Investment 10,00,000
Less: Loss for the year (10,00,000 x 40%) (4,00,000)
Carrying Amount of Investment 6,00,000
Consolidated Balance Sheet (Extract) as on March 31, 2022: ASSETS
Investment in Associate as per AS 23 ₹ ₹
Share of Net Assets on 1 April, 2021 4,80,000
Less: Share of Loss as above (4,00,000)
80,000
Add: Goodwill 5,20,000 6,00,000
Page 10S.5
CA NITIN GOEL AS 23 CH 10S
Calculation of Carrying Amount of Investment as at 31 March 2023:
Investment in Associate as per AS 23 ₹
Carrying Amount of Investment as on 31 March 2022 6,00,000
Less: Loss for the year (12,50,000 x 40%) (5,00,000)
Carrying Amount of Investment 1,00,000
Consolidated Balance Sheet (Extract) as on March 31, 2023: ASSETS
Investment in Associate as per AS 23 ₹ ₹
Share of Net Assets on 1 April, 2021 4,80,000
Less: Share of Loss as above (₹4,00,000 +₹ 5,00,000) (9,00,000)
(4,20,000)
Add: Goodwill 5,20,000 1,00,000
Calculation of Carrying Amount of Investment as at 31 March 2024:
Investment in Associate as per AS 23 ₹
Carrying Amount of Investment 1,00,000
Less: Loss for the year (5,00,000 x 40% = 2,00,000, restricted to (1,00,000)
Carrying amount of Investment in B Ltd.) - refer note below
Carrying Amount of Investment -
Consolidated Balance Sheet (Extract) as on March 31, 2024: ASSETS
Investment in Associate as per AS 23 ₹
Investment in B Ltd. -
If, under the equity method, an investor’s share of losses of an associate equal or exceeds
the carrying amount of the investment, the investor ordinarily discontinues recognizing its
share of further losses and the investment is reported at nil value.
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.
Question 3 (ICAI Study Material)
Bright Ltd. acquired 30% of East India Ltd. shares for ₹ 2,00,000 on 01-06-2021. By such an
acquisition Bright can exercise significant influence over East India Ltd.
During the financial year ending on 31-03-2021 East India earned profits ₹ 80,000 and
declared a dividend of ₹ 50,000 on 12-08-2021. East India reported earnings of ₹ 3,00,000 for
the financial year ending on 31-03-2022 (assume profits to accrue evenly) and declared
dividend of ₹ 60,000 on 12-06-2022. Calculate the carrying amount of investment in:
i. Separate financial statements of Bright Ltd. as on 31-03-2022.
ii. Consolidated financial statements of Bright Ltd.; as on 31-03-2022.
iii. What will be the carrying amount as on 30-06-2022 in consolidated financial statements?
Question 4 (ICAI Study Material)
A Ltd. acquired 25% of shares in B Ltd. as on 31.3.2021 for ₹ 3 lakhs. The Balance Sheet
of B Ltd. as on 31.3.2021 is given below:
₹
Share Capital 5,00,000
Reserves and Surplus 5,00,000
10,00,000
Page 10S.6
CA NITIN GOEL AS 23 CH 10S
Fixed Assets 5,00,000
Investments 2,00,000
Current Assets 3,00,000
10,00,000
During the year ended 31.3.2022 the following are the additional informationavailable:
a. A Ltd. received dividend from B Ltd., for the year ended 31.3.2021 at 40% from Reserves
b. B Ltd., made a profit after tax of ₹ 7 lakhs for the year ended 31.3.2022.
c. B Ltd., declared a dividend @ 50% for the year ended 31.3.2022 on 30.4.2022.
A Ltd. is preparing Consolidated Financial Statements in accordance with AS 21 for its
various subsidiaries. Calculate:
a. Goodwill if any on acquisition of B Ltd.’s shares.
b. How A Ltd., will reflect the value of investment in B Ltd., in Consolidated Financial
Statements?
c. How dividend received from B Ltd. will be shown in ConsolidatedFinancial Statements?
Page 10S.7
