1. Consolidation Accounting
Indian GAAP

2. Contents AS 21 – Consolidated Financial Statements
15 April 2017
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. Key features: Objective and scope
15 April 2017
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 requirements
15 April 2017
Consolidation requirements
Legal Requirements:
Companies Act require Consolidation at every level
SEBI regulations require listed companies to prepare
Annually
Quarterly (Optional)
Consolidated Financial Statements (Clause 32 to the listing agreement)
Companies shall be mandatorily required to publish Consolidated Financial Statements in the annual report in addition to the individual financial statements.
Clause 50 to the listing agreement:
Companies shall mandatorily comply with all the Accounting Standards issued by ICAI from time to time.
Annual numbers give a more accurate picture since all companies do not report quarterly consolidated results. For example, L&T and Hindalco reported just standalone financials for Q109. It is mandatory to announce both standalone and consolidated results at the end of the fiscal. Companies like GMR and IRB reports consolidated numbers on quarterly basis.
Companies Bill, 2012:
Preparation of CFS mandatory for all companies having subsidiaries
Requirement of the new Act pertaining to preparation, adoption and audit will apply to CFS
In the consolidated financial statements of the parent: Present economic position and results of operations as if there was essentially one single entity

5. 15 April 2017
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
Aditya Birla Nuvo’s Q1(June 08) results would normally have cheered shareholders: in turbulent times like these, standalone revenues were up 38%
and net profit rose 23%. But the scrip still fell 6%, possibly due to dismal consolidated numbers. Group revenues grew 48% but were accompanied by a loss of Rs 28.3 crore.
Losses in the life insurance business and lower profits in telecom and garments dampened the performance. For automobile major Mahindra & Mahindra, it was the other way around. First, the newtickers flashed a 26% jump in standalone revenues but a 17% decline in profit. However, the consolidated results announced later, showed a 36.5% growth in net profit. The stock, which had slipped after the first numbers were out, closed the day 2.7% higher.
These are but two instances of how consolidated financials can dominate the corporate landscape. Investors, therefore, need to analyse consolidated numbers closely before making investment decisions. It will impact all profit and loss and even balance sheet ratios. Tata Steel, for example, quotes at a price to earnings (P/E) multiple of 4 or 10 times, using consolidated and standalone FY08 financials, respectively. Now, that can make all the difference between a ‘buy’ or ‘sell’ decision.
The gap between standalone and consolidated numbers is fast widening. In FY08, consolidated revenues at Rs 1,719,229 crore were 23% higher than standalone sales. Two years ago, the difference was just 11.1%. Profits were higher by 12% at Rs 180,191 crore compared with 7% in the same period. If we exclude oil companies, banks and Tata Steel (whose sales shot up from Rs 25,000 crore to Rs 138,779 crore after the Corus acquisition), the percentages still do not change much. That shows the breadth and depth of the change underway
Major Impact on:
GMR, Mahindra & Mahindra (Various significant Subsidiaries)
UPL (Significant revenue flows from foreign subsidiaries)

6. Accounting for the economics
Control
Significant Influence
Equity Method
Neither control nor significant influence
Cost or Fair Value Method
Consolidation
Proportionate consolidation
Joint control
Corporate
relationship
In case of Joint Venture, “Contractual Agreement “ is must

7. General rule

8. Accounting for share of losses
Subsidiary
Full
Associates
Restricted to the carrying amount of investment*
Joint Venture
Proportion of their
shares in the venture*
where an investor’s share of losses of an associate equals or exceeds the carrying amount of the investment, the investor discontinues recognising its share of further losses and the investment is reported at nil value. Additional losses are provided for to the extent that the investor has incurred obligations on behalf of the associate to satisfy obligations of the associate that the investor has guaranteed or to which the investor is otherwise committed. 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.
* Unless there is a binding obligation

9. Control Three Criteria:
15 April 2017
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 ?
Companies Act envisages the holding of more than half of the nominal value of equity capital, AS 21 deals with the holding of more than one-half of the voting power. Since the extent of voting power held, for the purposes of the Act, is governed by the amount paid up on equity shares and not the nominal value there is difference in the definition of control, to this limited extent.

10. Control example-1 Company A Representation of 3/4 directors 60%
Holding
Company B
Company C
Refer ASI 24.
Where in case an enterprise is controlled by two enterprises; one controls by virtue of ownership of majority of the voting power of that enterprise and the other controls, by virtue of an agreement or otherwise, the composition of the board of directors so as to obtain economic benefits from its activities, whether in such a case both the controlling enterprises should consolidate the financial statements of the first mentioned enterprise.
A: Yes.
Definition of control is two fold.
AS 21 was drafted with the view to define a subsidiary consistent with the Companies Act, This has led to a situation that a subsidiary is defined as that has majority voting power or control over composition. This is different from IAS which defines ‘ control’ as follows :
Control (for the purpose of this standard) is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.
Give example where Company B is a local company that has no control but is a majority shareholder and has given substantial management rights to Company C. Discuss structures in Insurance companies, telecom companies
e.g. L&T has consolidated the FS of the following foreign subsidiaries on account of control on the composition of the BOD.
L&T Readymix Concrete Industries LLC (UAE)
L&T Kuwait Construction General Contracting Company WLL (Kuwait)
L&T-ECC Construction (M) SDN BHD (Malaysia)
L&T Qatar LLC (Qatar)
R-com has consolidated following subsidiaries on account of control on the composition of the BOD.
Lagerwood Investments Limited
Reliance Telecom Infrastructure (Cyprus) Holdings Limited
Both B and C will consolidate A in their books as per AS 21, as both the companies have control over A

11. Control example-2 100 % 30 % Is Company D controlled by Company A ?
Company B
Company D
Company C
100 %
30 %
Is Company D controlled by Company A ?

12. Control example-3 51 % 30 % Is Company D controlled by Company A ?
Company B
Company D
Company C
51 %
30 %
Is Company D controlled by Company A ?

13. Control example-4 40 % 60 % Is Company C controlled by Company A ?
Company B
Company C
40 %
60 %
Is Company C controlled by Company A ?

14. Start and end of consolidation
15 April 2017
Start and end of consolidation
Start
Date from which holding subsidiary relationship comes into existence
Date upto which holding subsidiary relationship ceases to exist
End
Date to which consolidation is continued:
The results of operations of a subsidiary with which parent-subsidiary relationship ceases to exist are included in the consolidated statement of profit and loss until the date of cessation of the relationship.
The difference between the proceeds from the disposal of investment in a subsidiary and the carrying amount of its net assets as of the date of disposal is recognised in the consolidated statement of profit and loss as the profit or loss on the disposal of the investment in the subsidiary.
Therefore the provision of AS 21 apply to an enterprise which is a parent at the reporting date or was a parent at any time during the reporting period.

15. 15 April 2017
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. 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. Calculation of GW and MI –Step by step basis
Acquisition
cost
% share holding
Net Assets
Own Share
Minority Interest
Goodwill
Oct-01 65
60% 50 30 20 35
Oct -Dec 18 12
Dec-02 80 48 32
Jan-02 22
20% 16
-16 6 64 41
Jan -Mar
80% 40 8
Mar-02 87
120 96 24

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
Refer ASI-8 for the term near future

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.
Refer Question No. 11(b) of back ground material.
The existing practice under Indian GAAP on goodwill is divergent. Amortisation -not mandatory under AS 10, mandatory under AS 14, whereas AS 21, AS 23 and AS 27 are silent on goodwill amortisation.
In the international framework goodwill amortisation is being or has been replaced by impairment testing for goodwill.
ICAI seems to be moving towards that position as well. Goodwill should at least be tested for impairment. If the Co. is not amortizing Goodwill, it must at least carry out an impairment test in accordance with AS 28.

20. Industry practice on amortisation of goodwill
15 April 2017
Industry practice on amortisation of goodwill
Name of the Companies
Amortisation
Years
L&T, ACC, IRB
Yes 10
Hindustan Unilever Limited 4
Mahindra & Mahindra, Tata Steel, UPL No -

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
Whether the goodwill on consol until prior year should be adjusted against reserves since the sub is merged into the parent ?
Preferred approach
There is no change. Earlier, sub was consolidated as per AS now amalgamated as per law. Hence, the goodwill should continue to appear in the CFS.
Another approach – since sub doesn’t exist, the goodwill should be adjusted against reserves.

22. Goodwill – other issues
15 April 2017
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
Number of shares acquired which is contributing in increase in stake in subsidiary should be considered for determining goodwill/capital reserve
Accounting for Goodwill in CFS in the event of merger of acquired subsidiary with the Holding Company
Preferred View: Goodwill can be eliminated only if the subsidiaries are sold and not if the subsidiaries are amalgamated. The subsidiary as a legal entity may not exist, but the entire business continues to exist. Assuming if what was acquired was not a company in the first place but a business ab initio, even then, AS-10 would apply and the same amount of goodwill as was created under AS-21 would have got recorded. Alternative View:
Goodwill arose on consolidation of subsidiaries. These subsidiaries have been subsequently amalgamated. Since the subsidiaries do not exist any more, goodwill should also be reversed. 22

23. 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. 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
If subsidiaries and holding company period does not match, than which rate to use?
If the foreign operation’s financial statements are drawn up to a different date, translate at the exchange rate ruling at its balance sheet date.

25. Significant influence
15 April 2017
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
Give an example of ION Exchange where one Malaysia based company named IEI WaterTech (M) Sdn. Bhd was treated as an associate inspite of holding only 9% of voting power. Management considered the fact that decrease in the Investment was temporary and they had future Investment plan in the company
Give an example of

26. AS 23 – Investments in associates
15 April 2017
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
Significant influence
Accounting for investments in CFS - Equity Method
Give an example of TITAN Industries where Loans & Advance given to Associate should be adjusted or not in case of losses ?
-No mention under Indian GAAP. However IFRS allows the same.

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
Treatment of Proposed Dividend: Refer ASI 16
Adjustments to the carrying amount of Investment arising from changes in Equity: Refer ASI 17
Consideration of Potential Equity Shares to determine whether an Investee is an Associate under AS 18

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
Refer ASI 17

29. AS 27 – Interests in Joint Venture
15 April 2017
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
Contractual agreement
Proportionate consolidation method

30. Accounting for JV which is a subsidiary
Company A
Company B
60%
40%
Company JV
(Contractual arrangement
for joint control)
Whether Company should consolidate Company JV as a subsidiary under AS 21 or a A s a Joint Venture under AS 27?
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. Inter Group transactions
15 April 2017
Inter Group transactions
Parent & subsidiary
Subsidiary & subsidiary
Parent/subsidiary & Associate
Parent/subsidiary & JV
Associate & Associate
JV & JV
Associate & JV

32. Other Considerations 15 April 2017 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
Give an example of ION exchange for the year ended 31/3/2008 where following were included in the financials only upto the date of last financials available as there were no significant transactions between from Jan to march 2008.
Name of the Company Country of Incorporation Relationship
IEI WaterTech (M) Sdn.Bhd Malaysia Associate
Ion Exchange Dynamics Pte Limited Singapore Jointly Controlled Entity
AS per AS 23, CFS should be used where an associate presents CFS.
AS per AS 27, CFS should be used for proportionate Consolidation method.

33. 15 April 2017
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
Refer IFRS Q&A:
Whether or not an entity disposes of, or acquires a percentage interest of shares in a subsidiary or has a change in ownership percentage due to actions of the subsidiary itself, the same economic impact occurs – the parent loses or gains a percentage share in the net assets of the subsidiary as the case may be. Accordingly, the accounting for deemed disposals/acquisitions and actual disposals/acquisitions should be consistent in order to reflect the substance of a transaction.
In the case of a deemed disposal, the proceeds and percentage acquisition/disposal are not always clear cut, and therefore the easiest way to determine the effect on goodwill, profit or loss and equity is to consider the net change in the percentage ownership interest in the underlying net assets
Use of uniform accounting policies for consolidation purposes may affect the opening balances of the items in respect of which such policies are applied – Eg. of difference in depreciation method followed by parent and subsidiary. Resultant adjustment arising out of such harmonization would be adjusted in the opening balance of revenue reserves. (However the statement is silent, whether it should be charged off to Profit & loss account or to Reserves.)
Control over Partnership Firm: First Step is to determine whether company controls the partnership firm. Same three criteria for control as referred before should be assessed.

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
Refer IFRS Q&A
Indian GAAP is silent.
ASI 17:
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. The corresponding debit / credit should be made in the relevant head of equity interest in the consolidated balance sheet. (e.g. revaluation of fixed asset by an associate).
IFRS ED of Proposed Amendments to IAS 27
Decrease in ownership interest without loss of control – Equity
Decrease in ownership interest with loss of control – income and expenditure

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 Gain 5
How should the dilution gain be accounted for?
Dilution possible on
Conversion of FCCB
Exercise of ESOP
Disclosures made by companies
Satyam: Dilution Gains and losses are recorded as Goodwill/Capital Reserve under Indian GAAP and recorded in statement of equity under US GAAP
Gujarat Ambuja: The unrealised gain on dilution of shareholding in XYZ has been credited to “Unrealised gain on dilution” which is disclosed in Reserves and Surplus.

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

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
As per Para 22, results of operations of a subsidiary with which parent-subsidiary relationship ceases to exist are included in the consolidated statement of profit and loss untill the date of cessation of relationship.
The difference between the proceeds from the disposal of investment in subsidiary and the carrying amount of its assets less liabilities as of the date of disposal is reconised in the cosolidated statement of profit and loss as the profit or loss on the disposal of the investment in the subsidiary.
Use of uniform accounting policies for consolidation purposes may affect the opening balances of the items in respect of which such policies are applied.
Give an example where company A, the parent, follows SLM of depreciation for its assets, and the company B the subsidiary, follows the written-down value method. Management adopts the straight-line method in respect of CFS. In such a case, on account of the harmonization of the accounting policies, the resultant adjustment (attributable to earlier years) to the value of opening balances of net fixed assets may be adjusted in the opening balance of revenue reserves.
Refer PTG opinion 2
Under AS 21 minority interest is defined as that part of the net results of operations and of the net asset of the subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent. Preferential capital or preferred stock with or without a pre-agreed IRR or dividend rate or with or without voting powers, but no stake in the company's net assets, would be treated as any other external liability but not as minority interest in the consolidated financial statements. The position is also similar under US GAAP (CON6) where minority interest is defined as 'minority interest in net assets of consolidated subsidiaries that do not represent present obligations of the enterprise to pay cash or distribute other assets to minority stockholders. Rather, those stock holders have ownership or residual interests in components of a consolidated enterprise'.

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
Refer ASI 26

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 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