Consolidation of Associate Companies ASHOK SETH, Lucknow B. Sc, FCA, DISA (ICA) ashok@sethspro.com www.Sethspro.com https://twitter.com/sethspro Dear Members

Companies Act 2013- S. 129(3) Provides where a company has one or more subsidiaries, it shall, in addition to financial statements (FS) provided under sub section (2), prepare a consolidated financial statements of the company and all its subsidiaries in the same form and manner as that of its own which shall also be laid before the AGM 6 Jan 2017 CA Ashok Seth, Lucknow

129(3)- Proviso -1 & Explanation The company shall also attach along with its FS a separate statement containing salient features of the FS or its subsidiaries in such form as may be prescribed. (AOC-1) Explanation. – for the purposes of this sub section, the word “subsidiary” shall include associate company and joint venture. 6 Jan 2017 CA Ashok Seth, Lucknow

The Companies (Accounts) Rules, 2014 Rule 5- Form f statement of salient features in AOC-1 Rule 6- Provides for manner of consolidation of accounts. Lays that consolidation of FS shall be made in accordance with Sch.-III and applicable accounting standards. 6 Jan 2017 CA Ashok Seth, Lucknow

Rule- 6 Contd. Rule 6 further provided that the consolidation will not be required to be made for FY ending 31st march 2015 in case of a company which only has one or more associate companies or Joint Ventures or both. So in above situation consolidation will be required for 1st time from FY 2015-16. 6 Jan 2017 CA Ashok Seth, Lucknow

“Associate Company”- Sec 2(6) In relation to another Co, means a Co in which that other Co has a significant influence, but which is not a subsidiary Co of the Co having such influence &includes a joint venture Co. Explanation.—For the purposes of this clause, "significant influence" means control of at least 20% of total share capital, or of business decisions under an agreement; 6 Jan 2017 CA Ashok Seth, Lucknow

Accounting Standards AS 13 Accounting for Investments 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 6 Jan 2017 CA Ashok Seth, Lucknow

Applicability of Accounting Standards Control of SC<less Than 20%- AS 13 Control of SC>= 20% upto =50%- AS 23 Control of SC > 50% AS 21 Joint Venture AS 27 6 Jan 2017 CA Ashok Seth, Lucknow

AS 23- Definitions Associate – an enterprise in which investor has significant influence & which is neither subsidiary nor joint venture Significant influence – power to participate in financial and / or operating policy decisions of investee but not control over those policies (20% holding normally assumed as significant influence) Control – definition same as in AS 21 6 Jan 2017 CA Ashok Seth, Lucknow

Procedures Investments in Associates to be recorded in CFS using equity method. NO if investment acquired for disposal in near future- Reasons for not applying to be disclosed in CFS to be initially recorded as cost, identifying goodwill / capital reserve arising at the time of acquisition. Carrying amount of investment is adjusted thereafter for the post acquisition change in investor’s share of net assets of the investee. Near Future generally mean not later than 12 months unless in facts higher period is justified. - to be seen at the point of acquisition 6 Jan 2017 CA Ashok Seth, Lucknow

Investor’s share of results of operations of investee to be included in Consolidated profit & loss account Unrealised profits and losses resulting from transactions between investor (or its consolidated subsidiaries) and the associate should be eliminated to the extent of the investor’s interest in the associate. 6 Jan 2017 CA Ashok Seth, Lucknow

Most recent available statements to be used preferably drawn upto same date Using uniform accounting policy. If not then appropriate adjustments to be made. If not practical then facts to be disclosed with brief descriptions of the differences between policies 6 Jan 2017 CA Ashok Seth, Lucknow

If, under the equity method, 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 6 Jan 2017 CA Ashok Seth, Lucknow

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. 6 Jan 2017 CA Ashok Seth, Lucknow

Contingencies and Events Occurring After the B.Sheet Date TO DISCLOSE: - its share of the contingencies and capital commitments of an associate for which it is also contingently liable; and those contingencies that arise because the investor is severally liable for the liabilities of the associate 6 Jan 2017 CA Ashok Seth, Lucknow

Capital reserve\(Goodwill) Capita Reserve= Share of equity- Cost of investment IF >0 Goodwill = Share of equity- Cost of investment IF <0 6 Jan 2017 CA Ashok Seth, Lucknow

Illustration A Ltd Acquired 45% of B Ltd on 1-4-2015 for 15 Lacs B Ltd B Sheet Extract:- Paid up SC 10 Lacs Security Premium 1Lacs Reserves 5 Lacs Reported Profit 3 Lacs Dividend 1 Lacs 6 Jan 2017 CA Ashok Seth, Lucknow

Solution Equity Shares 1000000 Security Premium 100000 Reserves 500000 Net assets 1600000 45% of the Net Assets 720000 Add 45% of the Profits 135000 855000 Less Dividend Received -45000 810000 Cost of Investment -1500000 Good will 690000 6 Jan 2017 CA Ashok Seth, Lucknow

Balance sheet Extract Assets Investments in B Ltd 8,10,000 Add Goodwill 6,90,000 15,00,000 6 Jan 2017 CA Ashok Seth, Lucknow

Illustration 2 A Ltd Acquired 40% share in B Ltd om 1-4-2009 for 10 lacs. On that date B Ltd had 1 Lacs Share of Rs 10.- each and accumulated Profit of Rs 2 lac. In 2009-10 B Ltd had loss of 10 Lacs In 2010-11 Loss of 12.50 Lacs In 2011-12 Loss of 5 lacs 6 Jan 2017 CA Ashok Seth, Lucknow

1-4-2009 Equity Shares 1000000 Reserves & Surplus 200000 Net Assets 1200000 40% of Net Assets 480000 Cost of Investment -1000000 Goodwill 520000 Investment in B Ltd 480000 Add Goodwill 520000 1000000 6 Jan 2017 CA Ashok Seth, Lucknow

31-03-2010 Investment in B Ltd 480000 Add Goodwill 520000 Cost of Investment 1000000 Share of Loss for the year 40% of 10 Lacs -400000 Goodwill 600000 Investment in B Ltd 80000 Add Goodwill 520000 600000 6 Jan 2017 CA Ashok Seth, Lucknow

31-03-2011 Carrying amount of Investment in B Ltd 600000 Share of Loss for the year 40% of 12.50 Lacs -500000 100000 Investment in B Ltd Add Goodwill 100000 6 Jan 2017 CA Ashok Seth, Lucknow

31-03-2012 Carrying amount of Investment in B Ltd 100000 Share of Loss for the year 40% of 5 Lacs -200000 -100000 Investment in B Ltd Add Goodwill 6 Jan 2017 CA Ashok Seth, Lucknow

Misc. Issues If there are more than one investor all will make CFS CFS to be made only if the investment more than 20% is there as on last day of FY LLP also need to be consolidated. CFS to be approved by the Board 6 Jan 2017 CA Ashok Seth, Lucknow

Auditor If in investor and associate two different auditors the auditor of the CFS will have to use due diligence CFS auditor may be different than both auditor of Investor and Associate. 6 Jan 2017 CA Ashok Seth, Lucknow

Disclosure Appropriate listing and description of Associates and proportion of ownership held Investment in Associate should be classified as Long term investments and disclosed separately The Investor share of the profit or loss of such investment to be disclosed separately in CFS P&L 6 Jan 2017 CA Ashok Seth, Lucknow

Investors share in Extraordinary and Prior period items to be shown separately Appropriate disclosure of different reporting dates and different accounting policies. 6 Jan 2017 CA Ashok Seth, Lucknow