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Thread: 21 Accounting Standard 21 - Consolidated Financial Statements - AS 21

  1. #11
    Accounting Standards
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    Default Limited Revision to Accounting Standard (AS) 21 - AS 21

    Limited Revision to Accounting Standard (AS) 21 (issued 2001)


    The following is the text of the limited revision to AS 21, Consolidated Financial Statements, issued by the Institute of Chartered Accountants of India.


    In view of the proposed Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, AS 21 (issued 2001) is modified as under (modifications are shown as double-underline/strike-through):


    1. The name of the Standard is modified as below:

    Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements

    2. The ‘Applicability’ paragraph of the Standard is amended as follows:

    Accounting Standard (AS) 21 (issued 2001),

    Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements, issued by the Council of the Institute of Chartered Accountants of India, comes came into effect in respect of accounting periods commencing on or after 1-4-2001. This limited revision to the Standard comes into effect in respect of accounting periods commencing on or after the date on which Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, comes into effect. In respect of separate financial statements of an enterprise, this limited revision comes into effect from the same date. In respect of consolidated financial statements, this Accounting Standard is mandatory where the enterprise prepares and presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements, for a period commencing on or after the date on which this Standard first came into effect, i.e., 1-4-2001, for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with this Standard
    The following is the text of the Accounting Standard.

  2. #12
    Accounting Standards
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    Default Objective paragraph amended of Accounting Standard (AS) 21 Consolidated Financial Statements – AS 21

    3. The ‘Objective’ paragraph of the Standard is amended as follows:


    The objective of this Statement is to lay down principles and procedures for preparation and
    presentation of consolidated financial statements and for accounting for investments in subsidiaries in separate financial statements. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. These statements are intended to present financial information about a parent and its subsidiary(ies) as a single economic entity to show the economic resources controlled by the group, the obligations of the group and results the group achieves with its resources.


    4. The ‘Scope’ paragraphs of the Standard are amended as follows:
    Last edited by Accounting Standards; 12-08-2010 at 06:19 PM.

  3. #13
    Accounting Standards
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    Default Scope of Accounting Standard (AS) 21 - Consolidated Financial Statements - AS 21

    Scope of Accounting Standard (AS) 21 - Consolidated Financial Statements , AS 21


    1. This Statement should be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent.

    2. This Statement should also be applied in accounting for investments in subsidiaries in the separate financial statements of a parent.

    3. In the preparation of consolidated financial statements, other Accounting Standards also apply in the same manner as they apply to the separate financial statements.

    4. This Statement does not deal with:
    (a) methods of accounting for amalgamations and their effects on consolidation,including goodwill arising on amalgamation (see AS 14, Accounting for Amalgamations)

  4. #14
    Accounting Standards
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    Default Amended Paragraph of Accounting Standard (AS) 21 Consolidated Financial Statements – AS 21

    (b) accounting for investments in associates 23, Accounting for Investments in Associates and

    (c) accounting for interests in joint ventures AS 27 Financial Reporting of Interests in Joint Ventures

    5. Paragraph 11 is amended as follows:


    11. A subsidiary should be excluded from consolidation when:

    (a) control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or

    (b) it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent. In consolidated financial statements, investments in such subsidiaries should be
    accounted for in accordance with Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement. The reasons for not consolidating a subsidiary should be disclosed in the consolidated financial statements.


    6. After paragraph 11, new paragraph 11A is added. New paragraph 11A is as follows:


    11A. A subsidiary is not excluded from consolidation simply because the parent is a venture capital organisation or a similar entity.

    7. Paragraphs 23 and 24 are amended as follows:

    23. An investment in an enterprise should be accounted for in accordance with Accounting Standard (AS) 30, Financial Instruments: Recognition and


    Measurement, from the date that the enterprise ceases to be a subsidiary,provided that it does not become an associate as defined in AS 23 or a jointly controlled entity as described in AS 27.


    24. The carrying amount of the investment at the date that the enterprise ceases to be a subsidiary is regarded as the cost on initial measurement of a financial asset in accordance with AS 30.


    8. Paragraph 28, appearing under the heading ‘Accounting for Investments in Subsidiaries in a Parent’s Separate Financial Statements’ is amended. New paragraph 28A is added. Amended paragraph 28 and new paragraph 28A are as follows:

    Accounting for Investments in Subsidiaries in a Parent’s Separate Financial Statements


    28. In a parent’s separate financial statements, investments in subsidiaries, except investments in subsidiaries covered under paragraph 11 of this Statement, should be accounted for either:

    (a) at cost, or

    (b) in accordance with AS 30, Financial Instruments: Recognition and Measurement.

    The same accounting should be applied for each category of investments. Investments in subsidiaries covered under paragraph 11 of this Statement should be accounted for in accordance with Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement.


    28A. To determine whether an investment in a subsidiary accounted for at cost in accordance
    with paragraph 28 is impaired, an enterprise applies AS 28, Impairment of Assets. AS 28 which
    explains how an enterprise reviews the carrying amount of its assets, how it determines the
    recoverable amount of an asset, and when it recognises, or reverses the recognition of, an impairment loss is also applicable to impairment of an investment in a subsidiary.
    Last edited by Accounting Standards; 12-08-2010 at 06:19 PM.

  5. #15
    Accounting Standards
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    Default Accounting Standards Interpretation (ASI) 28 Disclosure of parent’s / venturer’s shares

    Accounting Standards Interpretation (ASI) 28 Disclosure of parent’s/venturer’s shares in
    post-acquisition reserves of a subsidiary/ jointly controlled entity Accounting Standard (AS) 21,Consolidated Financial Statements and AS 27, Financial Reporting of Interests in Joint Ventures


    ISSUE


    1. What should be the manner of disclosure of the parent’s/venturer’s share in the post-acquisition reserves of a subsidiary/jointly controlled entity in the consolidated balance sheet?


    CONSENSUS

    2. The parent’s share in the post-acquisition reserves of a subsidiary, forming part of the corresponding reserves in the consolidated balance sheet, is not required to be disclosed separately in the consolidated balance sheet.

    3. While applying proportionate consolidationmethod, the venturer’s share in the post-acquisition reserves of the jointly controlled entity should be shown separately under the relevant reserves in the consolidated financial statements.


    BASIS FOR CONCLUSIONS


    4. The objective paragraph of AS 21 provides, inter alia, that the consolidated financial statements are intended to present financial information about a parent and its subsidiary(ies) as a single economic entity to show the economic resources controlled by the group, the obligations of the group and the results the group achieves with its resources. Further, paragraph 8 of AS 21 provides that users of the financial statements of a parent are usually concerned with, and need to be informed about, the financial position and results of operations of not only the enterprise itself but also of the group as a whole. It further provides that this need is served by providing the users
    separate financial statements of the parent and consolidated financial statements, which present financial information about the group as that of a single enterprise without regard to the legal boundaries of the separate legal entities.


    5. Paragraph 13 of AS 21, as a starting point of applying consolidation procedures, provides, inter alia, that in preparing consolidated financial statements, the financial statements of the parent and its subsidiaries should be combined on a line by line basis adding together like items of assets,
    liabilities, income and expenses. Pursuant to this, the reserves of the subsidiary(ies) are also added line by line with the corresponding reserves of the parent. Other provisions of paragraph 13 and paragraphs 14 to 27 lay down other consolidation procedures which, considering the overall scheme
    of the consolidation procedures, are to be applied after addition on a line by line basis. These procedures are applied so as to present financial information about the group as that of a single enterprise. The effect of applying consolidation procedures as per AS 21 is that the parent’s share in the postacquisition reserves of the subsidiary forms part of the corresponding reserves in the consolidated balance sheet. This is not disclosed separately keeping in view the objective of consolidated financial statements to present financial information of the group as a whole.


    6. Paragraphs 31 and 33 of AS 27 provide as below:

    “31. The application of proportionate consolidation means that the consolidated balance sheet of the venturer includes its share of the assets that it controls jointly and its share of the liabilities forwhich it is jointly responsible. The consolidated statement of profit and loss of the venturer includes its share of the income and expenses of the jointly controlled entity.Many of the procedures appropriate for the application of proportionate consolidation are similar to the procedures for the consolidation of investments in subsidiaries, which are set out in Accounting Standard (AS) 21, Consolidated Financial Statements.”

    “33. Under proportionate consolidation, the venturer includes separate line items for its share of the assets, liabilities, income and expenses of the jointly controlled entity in its consolidated financial statements. For example, it shows its share of the inventory of the jointly controlled entity separately as part of the inventory of the consolidated group; it shows its share of the fixed assets of the jointly controlled entity separately as part of the same items of the consolidated group.”
    In viewof the above,while applying proportionate consolidationmethod, as in the case of items of assets and liabilities, the venturer’s share in the post-acquisition reserves of the jointly controlled entity is shown separately under the relevant reserves in the consolidated financial statements.

  6. #16
    Accounting Standards
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    Default Accounting Standards Interpretation (ASI) 8 Interpretation of the term ‘Near Future’ of Accounting Standard (AS) 21 - AS 21

    Accounting Standards Interpretation (ASI) 8

    Interpretation of the term ‘Near Future’

    Accounting Standard (AS) 21,Consolidated Financial Statements, AS 23, Accounting for Investments in Associates in Consolidated Financial Statements and AS 27, Financial Reporting of Interests in Joint Ventures


    ISSUE

    1. Paragraph 11 of AS 21, paragraph 7 of AS 23 and paragraph 29 of AS 27 use thewords ‘near future’ in the context of exclusions fromconsolidation, application of the equity method and application of the proportionate consolidation method, respectively.


    2. The issue is what period of time should be considered as ‘near future’ for the above purposes.


    CONSENSUS

    3. The issue as to what period of time should be considered as near future for the purposes of AS 21, AS 23 and AS 27 primarily depends on the facts and circumstances of each case. However, ordinarily, the meaning of the words ‘near future’ should be considered as not more than twelve months from acquisition of relevant investments unless a longer period can be justified on the basis of facts and circumstances of the case. The intention with regard to disposal of the relevant investment should be considered at the time of acquisition of the investment. Accordingly, if the relevant investment is acquired without an intention to its subsequent disposal in near future, and
    subsequently, it is decided to dispose off the investment, such an investment is not excluded from consolidation, application of the equity method or application of the proportionate consolidation method, as the case may be, until the investment is actually disposed off. Conversely, if the relevant
    investment is acquired with an intention to its subsequent disposal in near future, however, due to some valid reasons, it could not be disposed off within that period, the samewill continue to be excluded fromconsolidation, application of the equity method or application of the proportionate
    consolidation method, as the casemay be, provided there is no change in the intention.


    BASIS FOR CONCLUSIONS

    4. A period ofmore than twelvemonths would not normally signify ‘near future’.Accordingly, it is considered appropriate that the near future should normally be considered as a period not exceeding twelve months.

    5. Paragraph 11 of AS 21, paragraph 7 of AS 23 and paragraph 29 of AS 27, also use the words, ‘acquired and held’. Accordingly, for exclusion from consolidation, application of the equity method or application of the proportionate consolidation, as the casemay be, consideration of the intention at the time of acquisition of the relevant investment is essential.

  7. #17
    Accounting Standards
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    Default Accounting Standards Interpretation (ASI) 24 Definition of Control of Accounting Standard (AS) 21 - Consolidated Financial Statements - AS 21

    Accounting Standards Interpretation (ASI) 24 Definition of ‘Control’

    Accounting Standard (AS) 21,Consolidated Financial Statements


    [Pursuant to the issuance of this Accounting Standards Interpretation, General Clarification (GC) – 16/2002, issued in October 2002, stands withdrawn.]


    ISSUE

    1. In case an enterprise is controlled by two enterprises - one controls by virtue of ownership ofmajority 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.

    CONSENSUS

    2. In a rare situation, when an enterprise is controlled by two enterprises as per the definition of ‘control’ under AS 21, the firstmentioned enterprise will be considered as subsidiary of both the controlling enterpriseswithin the meaning ofAS 21 and, therefore, both the enterprises should consolidate the financial statements of that enterprise as per the requirements of AS 21.


    BASIS FOR CONCLUSIONS

    3. AS 21 defines “control” and “subsidiary” as under: “Control:


    (a) the ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise; or


    (b) 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 enterprise so as to obtain
    economic benefits from its activities.

    A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).”


    The definition of ‘control’ lays down two independent tests as above. Consequently, it is possible that 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. This Interpretation, while recognising that the above situation will occur rarely, requires that in such a case, the first mentioned enterprise will be considered as subsidiary of both the controlling enterpriseswithin the meaning ofAS 21 and, therefore, both the enterprises should consolidate the financial statements of that enterprise as per the requirements of AS 21.

  8. #18
    Accounting Standards
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    Default Accounting Standards Interpretation (ASI) 25 Exclusion of a subsidiary from consolidation of AS 21

    Accounting Standards Interpretation (ASI) 25 Exclusion of a subsidiary from consolidation


    Accounting Standard (AS) 21,Consolidated Financial Statements


    [Pursuant to the issuance of this Accounting Standards Interpretation, General Clarification (GC) – 17/2002, issued in October 2002, stands withdrawn.]


    ISSUE

    1. In case an enterprise owns majority of the voting power of another enterprise but all the shares are held as ‘stock-in-trade’, whether this will amount to temporary control within the meaning of paragraph 11(a) of AS 21.


    CONSENSUS

    2. Where an enterprise owns majority of voting power by virtue of ownership of the shares of another enterprise and all the shares held as ‘stock-in-trade’ are acquired and held exclusively with a view to their subsequent disposal in the near future, the control by the first mentioned enterprise should be considered to be temporary within the meaning of paragraph 11(a).


    BASIS FOR CONCLUSIONS

    3. Paragraph 11 of AS 21 provides as under:

    “11. A subsidiary should be excluded from consolidation when:

    (a) control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or

    (b) it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent.


    In consolidated financial statements, investments in such subsidiaries should be accounted for in accordance with Accounting Standard (AS) 13, Accounting for Investments.

    The reasons for not consolidating a subsidiary should be disclosed in the consolidated financial statements.”


    In view of the above, merely holding all the shares as ‘stock-in-trade’, is not sufficient to be considered as temporary control within the meaning of paragraph 11(a) above. It is only when all the shares held as ‘stock-in-trade’ are acquired and held exclusivelywith a viewto their subsequent disposal in the near future, the control would be considered to be temporary within the
    meaning of paragraph 11(a).

  9. #19
    Accounting Standards
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    Default Accounting for taxes on income in the consolidated financial statements of Accounting Standard (AS) 21 - AS 21

    Accounting Standards Interpretation (ASI) 26


    Accounting for taxes on income in the consolidated financial statements


    Accounting Standard (AS) 21,Consolidated Financial Statements



    [Pursuant to the issuance of this Accounting Standards Interpretation, General Clarification (GC) – 18/2002, issued in October 2002, stands withdrawn.]


    ISSUE

    1. For preparing consolidated financial statements,whether the tax expense (comprising current tax and deferred tax) should be recomputed in the context of consolidated information or the tax expense appearing in the separate financial statements of the parent and its subsidiaries should be aggregated and no further adjustments should be made for the purposes of consolidated
    financial statements.

    CONSENSUS

    2. While preparing consolidated financial statements, the tax expense to be shown in the consolidated financial statements should be the aggregate of the amounts of tax expense appearing in the separate financial statements of the parent and its subsidiaries.


    BASIS FOR CONCLUSIONS

    3. The amounts of tax expense appearing in the separate financial statements of a parent and its subsidiaries do not require any adjustment for the purpose of consolidated financial statements. In viewof this,while preparing consolidated financial statements, the tax expense to be shown in the consolidated financial statements is the aggregate of the amounts of tax expense appearing in the
    separate financial statements of the parent and its subsidiaries.

  10. #20
    Accounting Standards
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    Default Accounting Standards Interpretation (ASI) 5 of Accounting Standard (AS) 21 - Consolidated Financial Statements - AS 21

    Accounting Standards Interpretation (ASI) 5 of Accounting Standard (AS) 21 - Consolidated Financial Statements - AS 21


    Accounting for Taxes on Income in the situations of Tax Holiday under Sections 10A and 10B of the Income-tax Act, 1961 Accounting Standard (AS) 22,Accounting for Taxes on Income


    ISSUE


    1. Chapter III of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) deals with incomes which do not form part of total income. Sections 10A and 10B of the Act are covered under Chapter III. These sections allow certain deductions, for certain years, from the total income of an assessee. These deductions are commonly described as ‘tax holiday’ and the period during which these deductions are available is commonly described as ‘tax holiday period’.


    2. The issue is how AS 22 should be applied in the situations of taxholiday under sections 10A and 10B of the Act.


    CONSENSUS

    3. The deferred tax in respect of timing differenceswhich originate during the tax holiday period and reverse during the tax holiday period, should not be recognised to the extent deduction from the total income of an enterprise is allowed during the tax holiday period as per the provisions of sections
    10A and 10B of the Act.

    4. Deferred tax in respect of timing differences which originate during the tax holiday period but reverse after the tax holiday period should be recognised in the year in which the timing differences originate. However, recognition of deferred tax assets should be subject to the consideration of prudence as laid down in paragraphs 15 to 18 of AS 22.


    5. For the above purposes, the timing differences which originate first should be considered to reverse first.


    BASIS FOR CONCLUSIONS

    6. Sections 10A and 10B are covered under Chapter III of the Act. These sections allow certain deductions, for certain years, fromthe total income of the assessee.


    7. The Framework for the Preparation and Presentation of Financial Statements provides that “An asset is recognised in the balance sheet when it is probable that the future economic benefits associated with it will flow to the enterprise and the asset has a cost or value that can be measured
    reliably”. The Framework also provides that “A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably”. In the situation of tax holiday under sections 10A and 10B of the Act, it is probable that deferred tax assets and liabilities in respect of timing differences which originate and reverse during the tax holiday period will not be realised or settled. Accordingly, a deferred tax asset or a liability for timing differences which reverse during the tax holiday period does not meet the above criteria for recognition of asset or liability, as the case may be, and therefore is not recognised to the extent deduction from the total income of the enterprise is allowed during the tax holiday period as per the provisions of sections 10A and 10B of the Act.

    8. Deferred tax assets/liabilities for timing differenceswhich reverse after the tax holiday period are recognised in the period inwhich these differences originate because these can be realised/paid after the expiry of the tax holiday period by payment of lesser or higher amount of tax after the tax holiday period because of reversal of timing differences.


    9. This Interpretation prescribes the same accounting treatment for situations of tax holiday under sections 10Aand 10Bof theAct as prescribed for situations of tax holiday under sections 80-IA and 80-IB of the Act (see ASI 3).


    According to one view situation of tax holiday under sections 10A and 10B should be treated differently as compared to situations of tax holiday under sections 80-IA and 80-IB of the Act since sections 10A and 10B are covered under Chapter III of the Act which deals with incomes which do not form part of total income whereas sections 80-IA and 80-IB are covered under Chapter VI-A which deals with deductions to be made in computing total income.


    This view was not accepted because irrespective of the fact that Sections 10A and 10B are covered under Chapter III and Sections 80-IA and 80-IB are covered under Chapter VI-A, the substance of the reliefs, in terms of economic reality is the same. Keeping in view the ‘substance over form’ principle of accounting as laid down in AS 1, Disclosure of Accounting Policies, there should not be any difference between the treatment in respect of tax holiday under sections 80-IA, 80-IB and 10A, 10B.

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