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Consolidation Accounting Indian GAAP. Consolidation Accounting – Indian GAAPPage 2 Contents ► AS 21 – Consolidated Financial Statements ► AS 23 – Accounting.

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Presentation on theme: "Consolidation Accounting Indian GAAP. Consolidation Accounting – Indian GAAPPage 2 Contents ► AS 21 – Consolidated Financial Statements ► AS 23 – Accounting."— Presentation transcript:

1 Consolidation Accounting Indian GAAP

2 Consolidation Accounting – Indian GAAPPage 2 Contents ► AS 21 – Consolidated Financial Statements ► AS 23 – Accounting for Investments in Associates in Consolidated Financial Statements ► AS 27 – Financial reporting of Interests in Joint Ventures

3 Consolidation Accounting – Indian GAAPPage 3 Key features: ► Objective and scope ► Concept of ‘Group’, ‘Minority Interest’ etc. ► Control ► Exclusion from consolidation ► Concept of associate and its accounting ► Concept of joint venture and its accounting ► Issues in consolidation accounting ► Auditing of consolidated financial statements

4 Consolidation Accounting – Indian GAAPPage 4 Consolidation requirements ► Legal Requirements: ► Companies Act require Consolidation at every level ► SEBI regulations require listed companies to prepare ► Annually ► Quarterly (Optional) In the consolidated financial statements of the parent: Present economic position and results of operations as if there was essentially one single entity

5 Consolidation Accounting – Indian GAAPPage 5 Why consolidation ? ► Increasingly business operations managed through complex structures ► Standalone financials do not reflect economic reality ► Mergers and acquisitions – including cross border transactions ► Significant Impact on all profit and loss and even balance sheet ratios

6 Consolidation Accounting – Indian GAAPPage 6 Accounting for the economics Significant Influence Equity Method Neither control nor significant influence Cost or Fair Value Method Consolidation Proportionate consolidation Joint control Corporate relationship Control

7 Consolidation Accounting – Indian GAAPPage 7 General rule

8 Consolidation Accounting – Indian GAAPPage 8 Accounting for share of losses Full Restricted to the carrying amount of investment* Proportion of their shares in the venture* Proportion of their shares in the venture* Joint Venture Associates Subsidiary * Unless there is a binding obligation

9 Consolidation Accounting – Indian GAAPPage 9 Control ► Three Criteria: ► Direct ownership of more than half of the voting power ► Indirect ownership of more than half of the voting power ► Control of the composition of the Board of Directors ► Difference between the definition of control as given in Companies Act & Accounting Standard ► de facto control ?

10 Consolidation Accounting – Indian GAAPPage 10 Control example-1 Company B Company A Company C 60% Holding 60% Holding Representation of 3/4 directors Representation of 3/4 directors Both B and C will consolidate A in their books as per AS 21, as both the companies have control over A

11 Consolidation Accounting – Indian GAAPPage 11 Control example-2 Is Company D controlled by Company A ? Company A Company B Company D Company C 100 % 30 %

12 Consolidation Accounting – Indian GAAPPage 12 Is Company D controlled by Company A ? Company A Company B Company D Company C 51 % 30 % Control example-3

13 Consolidation Accounting – Indian GAAPPage 13 Is Company C controlled by Company A ? Company A Company B Company C 40 % 60 % Control example-4

14 Consolidation Accounting – Indian GAAPPage 14 Start and end of consolidation ► Date from which holding subsidiary relationship comes into existence ► Date upto which holding subsidiary relationship ceases to exist Start End

15 Consolidation Accounting – Indian GAAPPage 15 Steps to consolidate ► Eliminate cost of investment and related equity accounts ► Identify minority interest in the equity and the net income for the year, of the subsidiary, and record in the CFS as a current liability ► Record goodwill / capital reserve computed based on the net worth of investee at the date of investment ► Eliminate intercompany payables and receivables ► Eliminate intercompany sales, purchases and profit in unsold inventory at the date of consolidation ► Eliminate effects of other intercompany transactions

16 Consolidation Accounting – Indian GAAPPage 16 Calculation of GW and MI –Step by step basis Example An investing parent A invests Rs 65 lacs on October 1, 2001, to acquire 60% of the equity of B, thereby making it a subsidiary. On that date, the net assets of the subsidiary aggregated Rs 50 lacs. Subsequently, A invested, on January 1, 2002, Rs 22 lacs to acquire a further 20% of B’s equity shares, on which date the net assets of B were Rs 80 lacs. At March 31, 2002, the net assets of the subsidiary were Rs 120 lacs. Assuming that there are no intra group transactions between A & B and that both have their reporting date as March 31, How is the amount of goodwill and minority interest calculated for the purpose of CFS of A?

17 Consolidation Accounting – Indian GAAPPage 17 Calculation of GW and MI –Step by step basis Acquisition cost % share holding Net Assets Own Share Minority InterestGoodwill Oct % Oct -Dec 60% Dec Jan % Jan -Mar 80%40328 Mar %

18 Consolidation Accounting – Indian GAAPPage 18 Exclusion from consolidation ► When control is intended to be temporary ► Severe long-term restrictions over transfer of funds ► Key considerations: ► Near future - not more than 12 months from acquisition unless a longer period can be justified ► Intention of disposal should be at time of acquisition

19 Consolidation Accounting – Indian GAAPPage 19 Amortisation of goodwill Issue ► Whether goodwill arising on consolidation is required to be amortised? View ► Practice under Indian GAAP on goodwill is divergent. ► Amortisation is not mandatory under AS 10 (mandatory under AS 14) ► whereas AS 21, AS 23 and AS 27 are silent on goodwill amortisation.

20 Consolidation Accounting – Indian GAAPPage 20 Industry practice on amortisation of goodwill

21 Consolidation Accounting – Indian GAAPPage 21 Goodwill H Ltd consolidates its wholly owned (acquired) subsidiary S Ltd and records a goodwill on consolidation. In subsequent year S Ltd, amalgamates with its parent H Ltd. Issue: Accounting for Goodwill subsequent to amalgamation in CFS? Whether the goodwill on consolidation until prior year should be adjusted against reserves since the subsidiary is merged into the parent ? Preferred view: Continue Goodwill Alternate view: Reverse Goodwill

22 Consolidation Accounting – Indian GAAPPage 22 Goodwill – other issues ► Determination of goodwill and capital reserve on Preferential allotment when holding has taken up its full allocation and also subscribed additional shares ► Setting off of goodwill and capital reserves of different subsidiaries ► Step up acquisition – determination of goodwill and minority interest

23 Consolidation Accounting – Indian GAAPPage Classification of Foreign Entity ► As per AS 11 (revised), all foreign entities should be classified either as integral operations or non-integral operations. ► AS 11 (revised) provides certain indicators which should be considered for determining classification ► However, such assessment is usually very subjective

24 Consolidation Accounting – Indian GAAPPage 24 Foreign operations/ subsidiaries ► Appropriate classification of foreign operations is critical for proper disclosure of assets and liabilities and accounting of translation gains and losses. ► Integral Operations ► Non-monetary assets are stated at historical rate ► Translation gain or loss is accounted in profit and loss a/c ► Non-Integral Operations ► Non-monetary assets are translated at closing rate ► Translation gain or loss is accounted in foreign currency translation reserve. ► Goodwill/capital reserve of non-integral operations - Closing rate

25 Consolidation Accounting – Indian GAAPPage 25 Significant influence 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 ► Dependence on technical information ► Share ownership - 20 % or more

26 Consolidation Accounting – Indian GAAPPage 26 AS 23 – Investments in associates ► Goodwill/Capital Reserve – included in carrying amount of investment and to be disclosed separately ► Outstanding cumulative preference shares held outside the group – preference dividend to be adjusted whether declared or not ► Carrying amount of investments – reduce to recognise a decline other than temporary

27 Consolidation Accounting – Indian GAAPPage 27 AS 23 – Investments in Associates ► Treatment of Proposed Dividend ► Consideration of potential equity shares to determine whether an Investee is an associate under AS 23 ► Adjustments to the carrying amount of Investment arising from changes in equity

28 Consolidation Accounting – Indian GAAPPage 28 Adjustments to the carrying amount of Investment arising from changes in equity 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 and loss of the associate, should be directly made in the carrying amount of investment without routing it through the consolidated statement of profit and loss account Examples: ► Revaluation of fixed assets ► Foreign exchange translation ► Amalgamations ► Demergers ► Issue of shares at premium

29 Consolidation Accounting – Indian GAAPPage 29 AS 27 – Interests in Joint Venture ► Three Types of Joint Venture: ► Jointly controlled operations ► Manufacture of an aircraft ► Jointly controlled assets ► Oil pipeline ► Building ► Jointly controlled entity ► Separate legal entity

30 Consolidation Accounting – Indian GAAPPage 30 Company A Company B Company JV (Contractual arrangement for joint control) 60% 40% Whether Company should consolidate Company JV as a subsidiary under AS 21 or a A s a Joint Venture under AS 27? Accounting for JV which is a subsidiary ► Effective for periods commencing on or after ► Enterprises by a contractual arrangement establishes Joint Control in a subsidiary, to be consolidated as per AS 21 and not treated as JV as per AS 27 [earlier treated as JV] ► The other JV partners may continue treating the same as JV

31 Consolidation Accounting – Indian GAAPPage 31 Inter Group transactions ► Parent & subsidiary ► Subsidiary & subsidiary ► Parent/subsidiary & Associate ► Parent/subsidiary & JV ► Associate & Associate ► JV & JV ► Associate & JV

32 Consolidation Accounting – Indian GAAPPage 32 Other Considerations ► FS should be of same reporting date ► Not practicable then drawn up to different reporting dates ► Adjustments for significant transactions between those dates ► Difference between reporting dates to be not more than six months ► Use of uniform accounting policies, else adjusted ► Use of CFS – Associate/Joint Venture

33 Consolidation Accounting – Indian GAAPPage 33 Key Issues ► Deemed disposal arising from new issue of shares by subsidiary ► Accounting for redemptions of shares of subsidiaries held by minority interest ► Adjustment arising due to harmonizing accounting policies for the first consolidation

34 Consolidation Accounting – Indian GAAPPage 34 Accounting for dilution gains & losses Gains or losses arising on account of direct issue of shares by a subsidiary/associate at a price different from the book value per share A Ltd. B Ltd. 25% NAV – Rs.100 A Ltd. B Ltd. 20% NAV – Rs.150 Issue of shares by B at a premium

35 Consolidation Accounting – Indian GAAPPage 35 Accounting for dilution gains & losses A’s share of Net Assets of B (post issue) (150 x 20%)30 A’s share of Net Assets of B (pre issue) (100 x 25%)25 Dilution Gain5 How should the dilution gain be accounted for? Dilution possible on ► Conversion of FCCB ► Exercise of ESOP

36 Consolidation Accounting – Indian GAAPPage 36 Widespread 1 Equity Owner Company A 74% 26% Able to nominate maximum number of directors on the board Consolidation- Control Would the single 26% Equity Owner consolidate as per AS 21?

37 Consolidation Accounting – Indian GAAPPage 37 Key issues ► Subsidiaries during the reporting period – but not at the balance sheet date – is consolidation required? ► First CFS – Adjustment of intra-group unrealized profits/losses of earlier years ► Whether preferential capital stockholders have 20% voting power but do not participate in the net results or assets of the company other than to the extent of a guaranteed IRR or dividend rate ► minority interest or a liability

38 Consolidation Accounting – Indian GAAPPage 38 Accounting for taxes on income in CFS ► While preparing CFS, the tax expense to be shown in the CFS should be the aggregate of the amounts of tax expense appearing in the separate financial statements of the parent and its subsidiaries

39 Consolidation Accounting – Indian GAAPPage 39 Audit of consolidated financial statements ► Guidance note issued by ICAI deals with the auditing of CFS ► Guidance covers of the following aspects ► Responsibility of parent ► Responsibility of auditors ► Audit considerations relating to audit of CFS ► Using of the work of another auditors ► Audit of consolidated adjustments – Permanents adjustments and current adjustments ► Management representations ► Reporting requirements

40 Consolidation Accounting – Indian GAAPPage 40 Consolidation reconciliations ► Profit reconciliation ► Profits of parent and subsidiary, share of associates and joint ventures added together ► Adjustment on account of consolidation adjustments having impact on profits e.g. Stock reserve, amortization of goodwill, elimination of dividends from subsidiaries ► Net worth Reconciliation ► Net worth of parent and subsidiary, share of associates and joint ventures added together ► Adjustment for pre-acquisition net worth of subsidiaries ► Other adjustments e.g. accumulated amortization of goodwill, stock reserve ► Minority interest reconciliation ► Goodwill reconciliation ► Investment reconciliation


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