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Thread: 23 Accounting Standard 23 Accounting for Investments in Associates in Consolidated Financial Statements - AS 23

  1. #21
    Accounting Standards
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    Default Definitions of Accounting Standard (AS) 23 Accounting for Investments - AS 23

    Definitions of Accounting Standard (AS) 23 Accounting for Investments

    2 The following terms are used in this Standard with the meanings specified:

    An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
    Consolidated financial statements are the financial statements of a group presented as those of a single economic entity. Control is the power to govern the financial and operating policies of an
    entity so as to obtain benefits from its activities.


    The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor's share of the profit or loss of the
    investee. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers).

    Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the
    investees. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

    A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).


    3 Financial statements in which the equity method is applied are not separate financial statements, nor are the financial statements of an entity that does not have a subsidiary, associate or venturer’s interest in a joint venture.

    4 Separate financial statements are those presented in addition to consolidated financial statements, financial statements in which investments are accounted for using the equity method and financial statements in which venturers’ interests in joint ventures are proportionately consolidated. Separate financial statements may or may not be appended to, or accompany, those financial statements.

    5 Entities that are exempted in accordance with paragraph 10 of AS 21 (Revised 20XX) Consolidated and Separate Financial Statements from consolidation, paragraph 2 of AS 27 (Revised 20XX) Interests in Joint Ventures from applying proportionate consolidation or paragraph 13(c) of this Standard from applying the equity method may present separate financial statements as their only financial statements.


    Significant influence

    6 If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent 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. Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is
    presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.


    7 The existence of significant influence by an investor is usually evidenced in one or more of the following ways:

    a. representation on the board of directors or equivalent governing body of the investee;

    b. participation in policy-making processes, including participation in decisions about dividends or other distributions;

    c. material transactions between the investor and the investee;

    d. interchange of managerial personnel; or

    e. provision of essential technical information.

    8 An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares3, or other similar instruments that have the potential, if exercised or converted, to give the entity additional voting power or reduce another party’s voting power over the financial and operating policies of another entity (ie potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether an entity has significant influence. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.


    9 In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential rights, except the intention of management and the financial ability to exercise or convert.

    10 An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels. It could occur, for example, when an associate becomes subject to the control of a government, court, administrator or regulator. It could also occur as a result of a contractual agreement. Equity method

    11 Under the equity method, the investment in an associate is initially recognised at cost and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the profit or loss of the investee is recognised in the investor’s profit or loss. Distributions received from an investee reduce the
    carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. The investor’s
    share of those changes is recognised in other comprehensive income of the investor (see AS 1 (Revised 20XX) Presentation of Financial Statements).


    12 When potential voting rights exist, the investor’s share of profit or loss of the investee and of changes in the investee’s equity is determined on the basis of present ownership interests and does not reflect the possible exercise or conversion of potential voting rights.

  2. #22
    Accounting Standards
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    Default Application of the equity method of Accounting Standard (AS) 23 Accounting for Investments - AS 23

    Application of the equity method

    13 An investment in an associate shall be accounted for using the equity method except when:

    a. the investment is classified as held for sale in accordance with AS 24 (Revised 20XX) Non-current Assets Held for Sale and Discontinued Operations;


    b. the exception in paragraph 10 of AS 21 (Revised 20XX), allowing a parent that also has an investment in an associate not to present consolidated financial statements, applies; or

    c. all of the following apply:

    i. the investor is a wholly-owned subsidiary, or is a partiallyowned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method;

    ii The investor’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);

    iii. the investor did not file, nor is it in the process of filing, its financial statements with a Securities Regulator or other regulatory organisation, for the purpose of issuing any class of instruments in a public market; and


    iv. the ultimate or any intermediate parent of the investor produces consolidated financial statements available for public use that comply with Accounting Standards.


    14 Investments described in paragraph 13(a) shall be accounted for in accordance with AS 24 (Revised 20XX) Non-current Assets Held for Sale and Discontinued Operations


    15 When an investment in an associate previously classified as held for sale no longer meets the criteria to be so classified, it shall be accounted for using the equity method as from the date of its classification as held for sale. Financial statements for the periods since classification as held for sale shall be amended accordingly.

    16 [Deleted]


    17 The recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate because the distributions received may bear little relation to the performance of the associate. Because the investor has significant influence over the associate, the investor has an interest in the associate’s performance and, as a result, the return on its investment. The investor accounts for this interest by extending the scope of its financial statements to include its share of profits or losses of such an associate. As a result, application of the equity method provides more informative reporting of the net assets and profit or loss of the investor.


    18 An investor shall discontinue the use of the equity method from the date that it ceases to have significant influence over an associate and shall account for the investment in accordance with AS 30 (Revised 20XX) from that date, provided the associate does not become a subsidiary or a joint
    venture as defined in AS 27 (Revised 20XX). On the loss of significant influence, the investor shall measure at fair value any investment the investor retains in the former associate. The investor shall recognise in profit or loss any difference between:

    a. the fair value of any retained investment and any proceeds from disposing of the part interest in the associate; and

    b. the carrying amount of the investment at the date when significant influence is lost.


    19 When an investment ceases to be an associate and is accounted for in accordance with AS 30 (Revised 20XX), the fair value of the investment at the date when it ceases to be an associate shall be regarded as its fair value on initial recognition as a financial asset in accordance with AS 30
    (Revised 20XX).

    19A If an investor loses significant influence over an associate, the investor shall account for all amounts recognised in other comprehensive income in relation to that associate on the same basis as would be required if the associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by an associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the
    investor reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses significant influence over the associate. For example, if an associate has available-for-sale financial assets and the investor loses significant influence over the associate, the investor shall
    reclassify to profit or loss the gain or loss previously recognised in other comprehensive income in relation to those assets. If an investor’s ownership interest in an associate is reduced, but the investment continues to be an associate, the investor shall reclassify to profit or loss only a proportionate amount of the gain or loss previously recognised in other comprehensive income.


    20 Many of the procedures appropriate for the application of the equity method are similar to the consolidation procedures described in AS 21 (Revised 20XX). Furthermore, the concepts underlying the procedures used in accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate.


    21 A group’s share in an associate is the aggregate of the holdings in that associate by the parent and its subsidiaries. The holdings of the group’s other associates or joint ventures are ignored for this purpose. When an associate has subsidiaries, associates, or joint ventures, the profits or losses and net assets taken into account in applying the equity method are those recognised in the associate’s financial statements (including the associate’s share of the profits or losses and
    net assets of its associates and joint ventures), after any adjustments necessary to give effect to uniform accounting policies (see paragraphs 26 and 27).

    22 Profits and losses resulting from ‘upstream’ and ‘downstream’ transactions between an investor (including its consolidated subsidiaries) and an associate are recognised in the investor’s financial statements only to the extent of unrelated investors’ interests in the associate. ‘Upstream’ transactions are, for example, sales of assets from an associate to the investor. ‘Downstream’
    transactions are, for example, sales of assets from the investor to an associate. The investor’s share in the associate’s profits and losses resulting from these transactions is eliminated.


    23 An investment in an associate is accounted for using the equity method from the date on which it becomes an associate. On acquisition of the investment any difference between the cost of the investment and the investor’s share of the net fair value of the associate’s identifiable assets and liabilities is accounted for as follows:

    a. goodwill relating to an associate is included in the carrying amount of the investment. Amortisation of that goodwill is not permitted.

    b. any excess of the investor’s share of the net fair value of the associate’s identifiable assets and liabilities over the cost of the investment is included as income in the determination of the investor’s share of the associate’s profit or loss in the period in which the investment is acquired. This
    treatment recognises that, in rare cases, acquisition of an investment at less than the net fair value of the associate’s identifiable assets and liabilities is a bargain purchase.


    Appropriate adjustments to the investor’s share of the associate’s profits or losses after acquisition are also made to account, for example, for depreciation of the depreciable assets based on their fair values at the acquisition date. Similarly, appropriate adjustments to the investor’s share of the associate’s profits or losses after acquisition are made for impairment losses recognised by the associate, such as for goodwill or property, plant and equipment.

    24 The most recent available financial statements of the associate are used by the investor in applying the equity method. When the end of the reporting period of the investor is different from that of the associate, the associate prepares, for the use of the investor, financial statements as of the same date as the financial statements of the investor unless it is impracticable to do so.


    25 When, in accordance with paragraph 24, the financial statements of an associate used in applying the equity method are prepared as of a different date from that of the investor, adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the investor’s financial statements. In any case, the difference between
    the end of the reporting period of the associate and that of the investor shall be no more than three months unless it is impracticable to do so. The length of the reporting periods and any difference in the ends of the reporting periods shall be the same from period to period.


    26 The investor’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances.


    27 If an associate uses accounting policies other than those of the investor for like transactions and events in similar circumstances, adjustments shall be made to conform the associate’s accounting policies to those of the investor when the associate’s financial statements are used by the investor in applying the equity method.

    28 If an associate has outstanding cumulative preference shares that are held by parties other than the investor and classified as equity, the investor computes its share of profits or losses after adjusting for the dividends on such shares, whether or not the dividends have been declared.

    29 If an investor’s share of losses of an associate equals or exceeds its interest in the associate, the investor discontinues recognising its share of further losses. The interest in an associate is the carrying amount of the investment in the associate under the equity method together with any long-term interests that, in substance, form part of the investor’s net investment in the associate. For
    example, an item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity’s investment in that associate. Such items may include preference shares and long-term receivables or loans but do not include trade receivables, trade payables or any long-term receivables for which adequate collateral exists, such as secured loans. Losses recognised under the equity method in excess of the investor’s investment in ordinary shares are applied to the other components of the investor’s interest in an associate in the reverse order of their seniority (ie priority in liquidation).

    30 After the investor’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the investor resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

  3. #23
    Accounting Standards
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    Default Impairment losses of Accounting Standard (AS) 23 Accounting for Investments - AS 23

    Impairment losses of Accounting Standard (AS) 23 Accounting for Investments - AS 23


    31 After application of the equity method, including recognising the associate’s losses in accordance with paragraph 29, the investor applies the requirements of AS 30 (Revised 20XX) to determine whether it is necessary to recognise any additional impairment loss with respect to the investor’s net investment in the associate.


    32 The investor also applies the requirements of AS 30 (Revised 20XX) to determine whether any additional impairment loss is recognised with respect to the investor’s interest in the associate that does not constitute part of the net investment and the amount of that impairment loss.


    33 Because goodwill that forms part of the carrying amount of an investment in an associate is not separately recognised, it is not tested for impairment separately by applying the requirements for impairment testing goodwill in AS 28 (Revised 20XX) Impairment of Assets. Instead, the entire carrying amount of the investment is tested for impairment in accordance with AS 28 (Revised 20XX) as a single asset, by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, whenever application of the requirements in AS 30 (Revised 20XX) indicates that the investment may be impaired. An impairment loss recognised in those circumstances is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment in the associate. Accordingly, any reversal of that impairment loss is
    recognised in accordance with AS 28 (Revised 20XX) to the extent that the recoverable amount of the investment subsequently increases. In determining the value in use of the investment, an entity estimates:

    a. its share of the present value of the estimated future cash flows expected to be generated by the associate, including the cash flows from the operations of the associate and the proceeds on the ultimate disposal of the investment; or


    b. the present value of the estimated future cash flows expected to arise from dividends to be received from the investment and from its ultimate disposal.


    Under appropriate assumptions, both methods give the same result.


    34 The recoverable amount of an investment in an associate is assessed for each associate, unless the associate does not generate cash inflows from continuing use that are largely independent of those from other assets of the entity.

  4. #24
    Accounting Standards
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    Default Separate financial statements Accounting Standard (AS) 23 Accounting for Investments - AS 23

    Separate financial statements Accounting Standard (AS) 23 Accounting for Investments


    35 An investment in an associate shall be accounted for in the investor’s separate financial statements in accordance with paragraphs 38-43 of AS 21 (Revised 20XX).


    36 This Standard does not mandate which entities produce separate financial statements available for public use.

  5. #25
    Accounting Standards
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    Default Disclosure of Accounting Standard (AS) 23 Accounting for Investments - AS 23

    Disclosure


    37 The following disclosures shall be made:

    a. the fair value of investments in associates for which there are published price quotations;


    b. summarised financial information of associates, including the aggregated amounts of assets, liabilities, revenues and profit or loss;


    c. the reasons why the presumption that an investor does not have significant influence is overcome if the investor holds, directly or indirectly through subsidiaries, less than 20 per cent of the voting or potential voting power of the investee but concludes that it has significant influence;


    d. the reasons why the presumption that an investor has significant influence is overcome if the investor holds, directly or indirectly through subsidiaries, 20 per cent or more of the voting or potential voting power of the investee but concludes that it does not have significant influence;


    e. the end of the reporting period of the financial statements of an associate, when such financial statements are used in applying the equity method and are as of a date or for a period that is different from that of the investor, and the reason for using a different date or different period;


    f. the nature and extent of any significant restrictions (eg resulting from borrowing arrangements or regulatory requirements) on the ability of associates to transfer funds to the investor in the form of cash dividends, or repayment of loans or advances;

    g. the unrecognised share of losses of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate;


    h. the fact that an associate is not accounted for using the equity method in accordance with paragraph 13; and

    i. summarised financial information of associates, either individually or in groups, that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues and profit or loss.


    38 Investments in associates accounted for using the equity method shall be classified as non-current assets. The investor’s share of the profit or loss of such associates, and the carrying amount of those investments, shall be separately disclosed. The investor’s share of any discontinued operations of such associates shall also be separately disclosed.


    39 The investor’s share of changes recognised in other comprehensive income by the associate shall be recognised by the investor in other comprehensive income.


    40 In accordance with AS 29 (Revised 20XX) Provisions, Contingent Liabilities and Contingent Assets the investor shall disclose:

    a. its share of the contingent liabilities of an associate incurred jointly with other investors; and

    b. those contingent liabilities that arise because the investor is severally liable for all or part of the liabilities of the associate.

  6. #26
    Accounting Standards
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    Default Effective date of Accounting Standard (AS) 23 Accounting for Investments in Associates in Consolidated Financial Statements

    Effective date of Accounting Standard (AS) 23 Accounting for Investments in Associates in Consolidated Financial Statements


    41 An entity to which this Accounting Standard is applicable shall apply it for accounting periods commencing on or after the date (to be announced separately) 1st April 2011 and will be mandatory in nature[1] from that date.








    1 This implies that, while discharging their attest function, it will be the duty of the members of the Institute to examine whether this Accounting Standard is complied with in the presentation of financial statements covered by their audit. In the event of any deviation from this Accounting Standard, it will be their duty to make adequate disclosures in their audit reports so that the users
    of financial statements may be aware of such deviations.

  7. #27
    Accounting Standards
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    Default Withdrawal of other pronouncements of Accounting Standard (AS) 23 Accounting for Investments

    Withdrawal of other pronouncements of Accounting Standard (AS) 23 Accounting for Investments


    42 This Standard supersedes AS 23 Accounting for Investments in Associates in Consolidated Financial Statements (Issued 2001) in respect of the entities to which this Accounting Standard is applicable.

  8. #28
    Accounting Standards
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    Default Appendix A of Accounting Standard (AS) 23 Accounting for Investments - AS 23

    Appendix A

    References to matters contained in other Accounting Standards


    This Appendix is an integral part of Accounting Standard 23 (Revised 20XX).



    1. Appendix A, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (Corresponding to IFRIC 5) contained in AS 29 Provisions, Contingent Liabilities and Contingent Assets (Revised 20XX) makes reference to this Standard also.

  9. #29
    Accounting Standards
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    Default Appendix B of Accounting Standard (AS) 23 Accounting for Investments - AS 23

    Appendix B

    Conflicting Legal and Regulatory Issues

    Note: This Appendix is not a part of the Accounting Standard (AS) 23 (Revised 20XX) Investments in Associates. Some of the situations or accounting treatments prescribed in AS 23 (Revised 20XX) may not be in conformity with the present requirements of applicable laws/regulations in the country. In such cases, the provisions of the applicable laws/regulations will prevail. This Appendix contains the following such instances.

    Conflicting Issues with Companies Act, 1956


    (i) Definition of control given in the Exposure Draft of AS 23 (Revised 20XX) is different from the holding-subsidiary relationship defined under section 4(1) of the Companies Act, 1956, which defines that a company shall be deemed to be a subsidiary of another on the basis of composition of board of directors or holding of more than half of the nominal value of the equity share capital. The Exposure Draft of AS 23 (Revised 20XX) defines control as the power to govern the financial and operating policies of another company, though it may not have current control over the composition of board of directors or may not currently hold more than half of the nominal value of the equity capital of the other company.

  10. #30
    Accounting Standards
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    Default Appendix C of Accounting Standard (AS) 23 Accounting for Investments – AS 23

    Appendix C of Accounting Standard (AS) 23 Accounting for Investments – AS 23


    Note: This Appendix is not a part of the Accounting Standard. The purpose of this appendix is only to bring out the major differences between the Exposure Draft of Accounting Standard 23 (Revised 20XX) and the corresponding International Accounting Standard (IAS) 28, Investments in Associates.
    Comparison with IAS 28, Investments in Associates The Exposure Draft of the AS 23 (Revised 20XX) is based on International Accounting Standard (IAS) 28, Investments in Associates, issued by the International Accounting Standards Board (IASB). There is no major difference between the Exposure Draft of AS 23 (Revised 20XX) and IAS 28 except that where the financial statements of an
    associate used in applying equity method are prepared as of a different date from that of the investor, IAS 28 requires that this difference should not be more than three months. However, the Exposure Draft of AS 23 (Revised 20XX) provides that this difference should not be more than three months, unless impracticable. This change has been made because there can be a situation, e.g., where an entity is an associate of two investors and difference between the reporting dates of the associate and one of the investors is more than three months. In that case, a problem will arise in applying the requirements of IAS 28 that the associate will have to prepare additional financial
    statements for use by the concerned investor. Since the investor does not have ‘control’ over the associate, the investor may not be able to influence the associate to prepare additional financial statements. Therefore, to cover such situations, the words ‘unless it is impracticable to do so’ have been added.

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