Accounting Standard (AS) 23: Accounting for Investments in Associates in Consolidated Financial Statements (CFS)
An enterprise that presents CFS should account for investments in Associates as per this standard.
This standard is not applicable for preparing and presenting stand-alone Investors’ financial statement (in such cases AS 3 is followed).
An Associate is an enterprise in which the investor has significant influence (power to participate in the financial/ operating policy decisions of the investee but not control over those policies) and which is neither a subsidiary nor a joint venture of the Investor. The ‘control’ for the purpose of AS-23 is similar to that of AS-21.
Significant influence may be evidenced in one or more ways in the following line
a) Representation on the Board of Directors or Governing Body of the Investee.
b) Participation in policy making process
c) Material transaction between investor and investee
d) Interchange of managerial personnel
e) Provision of essential technical information.
But it does not extend to power to govern the financial and/or operating policies of an enterprise.
Significant influence may be gained through share ownership, statute or agreement
a) For share ownership, 20% or more in voting power in investee (held directly or indirectly through subsidiary) indicates significant influence but that is not the ultimate, the significant influence must be clearly demonstrated.
b) A substantial or majority ownership by another investor in the investee does not necessarily preclude an investor to have significant influence.
c) Voting power is determined on the basis of current outstanding securities and not potential equity.
Non applicability of AS-23
1) Investment in associates are accounted for using the ‘equity method’ in the CFS except when,
a) the investment is made and held exclusively with a view to subsequent disposal in the near future, or
b) the associate operates under severe long-term restrictions that significantly impairs its ability to transfer funds to investor. Investments in such a situation is accounted for in accordance with AS -3 in CFS.
2) Equity method of accounting is also not applicable if
a) it has no investment in Association
b) it has investment in Association but has no subsidiaries, CFS is not required
c) it has subsidiaries and associates but these are not material, hence CFS is not prepared.
d) It is not listed enterprise hence not mandatory to present CFS or has not chosen voluntarily to present CFS.
Equity method of accounting recognizes the investment initially recorded at cost identifying goodwill/capital reserve at the time of acquisition. The carrying amount of investment is thereafter adjusted for the post-acquisition charge in the investor’s share of net assets of the investee and consolidated P/L A/c reflect the investor’s shares in the result of operation of the investee. Further any permanent decline in the value of investment is reduced to arrive at the carrying amount for each such investment.
Except inconsistent with AS-23, other accounting treatment would follow AS-21
Disclosure under AS 23
a) Reasons for not applying Equity Method in accounting for investments in associates in CFS .
b) Goodwill/capital reserve as included in the carrying amount of investment in Associates disclosed separately.
c) Description of associates, proportion of ownership interest and if different proportion of voting power held disclosed in CFS.
d) Investment using equity method should be classified as long-term investment in consolidated balance sheet, similarly investor’s share in profit/loss in consolidated P/L Account and also investor’s share of extraordinary or prior period items should be disclosed separately.
e) The names of associates of which reporting date is different from that of the financial statements of the investor and difference in reporting date should be disclosed in CFS.
f) Difference in the accounting policies if not practicable for appropriate adjustment in Associate’s financial statement for being adjusted in CFS, the fact as such with description of difference in accounting policies should be disclosed.
g) In compliance with AS-4, Contingencies and events occurring after the balance sheet date, the investor discloses in the CFS:
(i) its share of contingencies and capital commitments of an Associate for which the investor is contingently liable, and
(ii) those contingencies that arise because the investor is severely liable for the liabilities of the associate.