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

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    Accounting Standards
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    Default Appendix D of Accounting Standard (AS) 23 Accounting for Investments – AS 23

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


    Note: This Appendix is provided to bring out the major differences between the Exposure Draft of AS 23(Revised 20XX) and existing AS 23 (Issued 2001) with a view to facilitate commentators in sending their comments on the Exposure Draft of AS 23 (Revised 20XX).


    Major differences between the Exposure Draft of AS 23 (Revised 20XX), Investments in Associates, and existing AS 23 (issued 2001)

    1. The Exposure Draft of AS 23 (Revised 20XX) excludes from its scope, investments in associates held by venture capital organisations, mutual funds, unit trusts and similar entities including investment-linked insurance funds, which are treated in accordance with AS 30 (Revised 20XX) Financial Instruments: Recognition and Measurement. The existing AS 23 does not make such exclusion. This difference has, however, been removed vide limited revision issued as a consequence to issuance of AS 30, which has become recommendatory from 1.4.2009.


    2. As per the definition given in the Exposure Draft of AS 23 (Revised 20XX), control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The definition of control given in the existing AS 23 is rule-based, which requires the ownership, directly or indirectly through subsidiary(ies), of more than half of the voting power of an enterprise; or control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other entity so as to obtain economic benefits from its activities.


    3. In the existing AS 23, ‘Significant Influence’ has been defined as ‘power to participate in the financial and/or operating policy decisions of the investee but is not control over those policies’. In the Exposure Draft of AS 23 (Revised 20XX), the same has been defined as ‘power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies’. The Exposure Draft of AS 23 (Revised 20XX) defines the joint control also.


    4. For considering share ownership for the purpose of significant influence, potential equity shares of the investee held by investor are not taken into account as per the existing AS 23. As per the Exposure Draft of AS 23 (Revised 20XX), existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether an entity has significant influence or not.

    5. One of the exemptions from applying equity method in the existing AS 23 is where the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investee. No such exemption is provided in the Exposure Draft of AS 23 (Revised 20XX). The Exposure Draft of AS 23 (Revised20XX)

    further provides exemption from application of the equity method where investor is a wholly owned or a partially owned subsidiary of another entity and its other owners do not object to not applying equity method, where investor’s debt or equity are not publicly traded, where 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 where ultimate or intermediate parent of investor prepares consolidated financial statements as per
    Accounting Standards. An explanation has been given in existing AS 23 regarding the term ‘near future’ used in
    another exemption from applying equity method, ie, where the investment is acquired and held exclusively with a view to its subsequent disposal in the near future. This explanation has not been given in the Exposure Draft of AS 23 (Revised 20XX), as such situations are covered by AS 24 (Revised 20XX),
    Non-current Assets Held for Sale and
    Discontinued Operations.


    6. As per the existing AS 23, where investment in an associate is not accounted for as per the equity method, the same is accounted for in accordance with existing AS 13, Accounting for investments. As per the Exposure Draft of AS 23 (Revised 20XX), where investment in an associate is not accounted for as per equity method, the same is to be
    accounted for in accordance with AS 30(Revised 20XX)
    Financial Instruments; Recognition and Measurement. This difference has, however, been removed vide limited revision issued as a consequence to issuance of AS 30, which has become recommendatory from 1.4.2009.


    7. As per the existing AS 23, on acquisition of the investment in an associate, any difference between the cost of acquisition and investor’s share of equity of the associate is described as goodwill/Capital reserve, and the same is included in the carrying amount of investment in the associate but disclosed separately. For calculating goodwill /capital reserve, equity of the associate is determined on the basis of carrying amounts of assets and liabilities on the date of acquisition.


    As per the Exposure Draft of AS 23 (Revised 20XX), on acquisition of the investment in associate, any difference between the cost of acquisition and investor’s share of the net fair value of the associate’s identifiable assets and liabilities is accounted for as follows:


    (i) Goodwill relating to an associate is included in the carrying amount of the investment.


    (ii) 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.



    8. The existing AS 23 permits the use of financial statements of the associate drawn upto a date different from the date of financial statements of the investor when it is impracticable to draw the financial statements of the associate upto the date of the financial statements of the investor. There is no limit on the length of difference in the reporting dates of the investor and the associate. As per the Exposure Draft of AS 23 (Revised 20XX), length of difference in the reporting dates of the investor and the associate should not be more than three months unless it is impracticable.


    9. Both the existing AS 23 and the Exposure Draft of AS 23 (Revised 20XX) require that similar accounting policies should be used for preparation of investor’s financial statements and in case an associate uses different accounting policies for like transactions, appropriate adjustments shall be made to the accounting policies of the associate. The existing AS 23 provides exemption to this that if it is not possible to make adjustments to the accounting policies of the associate, the fact shall be disclosed along with a brief description of the differences between the accounting policies.

    This exemption is not available under the Exposure Draft of AS 23 (Revised 20XX).


    10. As per existing AS 23, investor’s share of losses in the associate is recognised to the extent of carrying amount of investment in the associate. As per the Exposure Draft of AS 23 (Revised 20XX), carrying amount of investment in the associate as well as its other long term interests in the associate that, in substance form part of the investor’s net investment in the associate shall be considered for recognising investor’s share of losses in the associate.


    11. With regard to impairment, the existing AS 23 requires that the carrying amount of investment in an associate should be reduced to recognise a decline, other than temporary, in the value of the investment. The Exposure Draft of AS 23 (Revised 20XX) requires that after application of equity method, including recognising the associate’s losses, the requirements of AS 30 (Revised 20XX) shall be applied to determine whether it is necessary to recognise any additional impairment loss. This difference has, however, been removed vide limited revision issued as a consequence to issuance
    of AS 30, which has become recommendatory from 1.4.2009.

    12. The Exposure Draft of AS 23 (Revised 20XX) requires more disclosures as compared to the existing AS 23.
    Last edited by Accounting Standards; 12-08-2010 at 05:21 PM.

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