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Consolidation of accounts background

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Prepared by CA Sandesh Mundra - An exhaustive presentation on Consolidation of Accounts covering the Standards - AS 21, AS23 and AS 27 with indepth analysis of the finer aspects involved.

Prepared by CA Sandesh Mundra - An exhaustive presentation on Consolidation of Accounts covering the Standards - AS 21, AS23 and AS 27 with indepth analysis of the finer aspects involved.

Published in: Economy & Finance, Business

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  • 1. PRACTICAL ASPECTS in Consolidation of Accounts
  • 2.
    • Background Not mandatory under the Companies Act, 1956 – which prescribes for a Statement under section 212
    • Thus the Financial performance and net worth of the group as a whole can-not be known to the stakeholders
    • SEBI made consolidation mandatory for listed companies AS 21 provides guidelines for consolidation
  • 3. Applicable in – Preparation and presentation of CFS for a group of enterprises under the control of a parent – Accounting for investments in subsidiaries in the separate financial statements of a parent would be as per AS-13 – Follow other AS in CFS, as applicable
  • 4. Applicability Effective in respect of accounting periods commencing on or after April 01, 2001 Applicable to enterprises that present consolidated financial statements:- – Mandatory for listed entities – Optional for other entities
  • 5. Not Applicable to…….. Methods of accounting for amalgamations and their effects on consolidation, including goodwill arising on amalgamation – AS 14 Accounting for investments in associates - AS 23 Accounting for investments in joint ventures – AS 27
  • 6. Key Definitions… Subsidiary – Enterprise controlled by another enterprise Control – The ownership, directly or indirectly through subsidiary (ies), of more than one-half of the voting power of an enterprise – Control of the composition of the board (in case of company) or the corresponding governing body (other enterprises) so as to obtain economic benefits from its activities (Control is established where there is power to appoint all or majority of directors/members without the consent or concurrence of any other person)
  • 7. ...Key Definitions Minority interest – is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent. Equity – Residual interest in the assets of an enterprise after deducting all its liabilities i.e. net worth
  • 8.
    • What includes in CFS?
    • Balance Sheet
    • Profit and Loss A/c. Use Same format;
    • e.g. Schedule VI
    • Notes, other statements and explanatory
    • material that form an integral part thereof
    • Cash flow statement
  • 9. Consolidate results of all subsidiaries (domestic / Foreign) Scope Subsidiary – Corporate or Non-Corporate – Control Prerequisite Exceptions: – Gratuity Trust, Provident Fund Trust – Not held for economic benefits definition of Control (supra) Section 25 Company or a Charitable Trust?
  • 10. Scope:- Subsidiary to be excluded from consolidation when: – Control is intended to be temporary – It operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent AS 13 to be applied and CFS to disclose reasons for Exclusion Exclusion when activities are dissimilar?
  • 11. Consolidation procedures… Line by line consolidation Elimination of parent’s investments and parent’s portion of equity determining goodwill (cost of investments > parent’s portion of equity); or capital reserve (cost of investments < parent’s portion of equity) arising on date of investment
  • 12. Consolidation procedures… Determine minority interest – Profits – Net Assets Minority interests in the net assets consist of: the amount of equity attributable to minorities at the date on which investment in a subsidiary is made; and the minorities’ share of movements in equity since the date the parent-subsidiary relationship came in existence. Separate Disclosure?
  • 13. ...Minority interests Where losses applicable to a minority exceed minority interest, the excess to be adjusted against the majority interest, unless the minority has a binding obligation to, and is able to make good the losses
  • 14. Consolidation procedures… Elimination of intra group transactions including sales, expenses, dividends, and unrealized profits on sale of stocks / assets. Eliminate unrealized losses unless cost cannot be recovered. (Unrealized profits and loss on transactions relating to periods prior to April 2001 may not be eliminated if not practicable to determine)
  • 15. … Consolidation procedures Same reporting date for financial statements used in consolidation; or If date of reporting differs, FS of the subsidiary for the immediately preceding period are used ( difference between reporting dates should not be more than six months) Apply uniform accounting policies and if different, disclose items where different policy applied No comparative figures for the previous period for the first year
  • 16.
    • Disposal of stake in subsidiary
    • Results to be included in the consolidated profit and
    • loss account upto the date parent subsidiary relationship ceases to exist.
    • Difference between proceeds from investments
    • disposal and equity on the date of disposal recognised in the consolidated profit and loss account
  • 17. Disclosures… List of all subsidiaries including name, country of incorporation, proportion of ownership interest and, if different, the proportion of voting power The nature of relationship between parent and subsidiary, if parent does not own one-half of the voting power The effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date, the results for the reporting period and on the corresponding amounts for the preceding period The names of the subsidiaries of which the reporting dates are different from that of the parent and the difference in reporting dates
  • 18. ASI 8 ‘ Near future’ Primarily depends on the facts and circumstances of each case Ordinarily, not more than twelve months Intention of disposal of relevant investment should be considered at the time of acquisition of the investment
  • 19. ASI 15 All the notes of separate FS of parent and subsidiaries need not be included in the notes to CFS. Notes necessary for presenting a true and fair view of CFS notes involving items which are material Additional statutory information if material
  • 20. ASI 24 Control Enterprise is controlled by two enterprises – Investment – Composition of Board Consolidation to be done by both
  • 21. Key difference between the def’n of subsidiary as per The Companies Act, 1956 and as per AS-21
    • AS-21 includes non-corporate entities to be defined as subsidiaries.
    • AS-21 requires ownership of more than 50% of voting power and not more than 50% of nominal value of shares.
    • As per AS-21, Control by way of composition of BOD should be to obtain economic benefits from from the activities of the entity.
  • 22. AS-23 – Accounting for Investment of Associates in CFS
    • An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.
    • Significant influence is the power to participate in the financial and/or operating policy decisions of the investee but not control over those policies
    • As regards share ownership, if an investor holds, directly or indirectly through subsidiary(ies), 20%ormore 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.
  • 23. AS 23 continued…..
    • As regards share ownership, if an investor holds, directly or indirectly through subsidiary(ies), 20%ormore 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.
    • Under the equity method, the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition and the carrying amount is increased or decreased to recognise the investor’s share of the profits or losses of the investee after the date of acquisition.
  • 24. AS-27 – Financial Reporting of Interests in Joint Ventures
    • A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.
    • Joint control is the contractually agreed sharing of control over an
    • economic activity.
    • In its consolidated financial statements, a venturer should report
    • its interest in a jointly controlled entity using proportionate
    • consolidation except
    • (a) an interest in a jointly controlled entity which is acquired and
    • held exclusively with a view to its subsequent disposal in the
    • near future5; and
    • (b) an interest in a jointly controlled entity which operates under
    • severe long-term restrictions that significantly impair its
    • ability to transfer funds to the venturer.
  • 25. Poser 1
    • M/s Urea Corporation Ltd sold all its three subsidiaries at different dates during the year. Whether is it required to present CFS?
    • As per Para 22 of AS-21 – results of operations of subsidiaries where the relationship has ceased during the year are included in CFS profits till the date of cessation. Thus even if the company is a parent at any time during the year the preparation of CFS becomes compulsory.
  • 26. Poser 2
    • M/s Bottles International Ltd has 100 subsidiaries. It is preparing CFS, would it be still required to attach all subsidiaries FS as per Section 212 of The Companies Act, 1956?
    • Central Government has issued a circular giving guidelines for applications seeking exemptions from the requirement of Section 212. Those parents which are not granted exemption will have to attach the financials of all the subsidiaries.
  • 27. Poser 3
    • M/s HLS Ltd and M/s LHS Ltd each hold 50% equity in M/s HLHS Ltd. Each company exercises control over the board every alternate year.
    • Subsidiaries should not be consolidated when there are long term restrictions which hinder control. Thus Joint Venture accounting needs to be followed as per AS-27.
  • 28. Poser 4
    • M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS?
    • Intention to control is not relevant in AS-21, hence M/s ICAI Ltd will have to consolidate M/s ICSI Ltd.
  • 29. Poser 4
    • M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS?
    • Intention to control is not relevant in AS-21, hence M/s ICAI Ltd will have to consolidate M/s ICSI Ltd.
  • 30. Poser 4
    • M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS?
    • Intention to control is not relevant in AS-21, hence M/s ICAI Ltd will have to consolidate M/s ICSI Ltd.
  • 31. Poser 5
    • M/s Gujarat Ltd owns 60% in M/s Ahmedabad Ltd. M/s Ahmedabad Ltd owns 60% in M/s AMC Ltd. Thus indirectly M/s Gujarat Ltd owns 36% shares in M/s AMC Ltd. Is M/s AMC Ltd subsidiary of M/s Gujarat Ltd as per AS-21?
    • As per AS-21 an enterprise becomes a subsidiary if more than one-half of voting power directly or indirectly is held by another enterprise. Thus if a resolution is put to vote in M/s AMC Ltd, M/s Gujarat Ltd because of its control over M/s Ahmedabad Ltd will be able to pass that resolution.
  • 32. Poser 6
    • M/s Sonia Ltd A has four wholly owned subsidiaries which own 25% each in M/s Manmohan Ltd. Whether equity accounting would b required by the intermediary subsidiaries and then consolidated by M/s Sonia Ltd, or would it directly consolidate?
    • M/s Sonia Ltd is exercising the control of voting power indirectly. Hence it can directly consolidate M/s Manmohan Ltd.
  • 33. Poser 7
    • M/s China Ltd acquired 60% equity in M/s Hongkong Ltd on 31-03-2004. However due to control restrictions it could not consolidate the entity. But w.e.f 1-4-2008 all restrictions have gone . How should be the goodwill calculation be done?
    • As per para 22 of AS-21, “ The result of operations of a subsidiary are included in CFS from the date on which the parent-subs relationship came into existence. Thus calculation of goodwill would be with reference to the date of acquisition i.e. 31-03-2004 and not with reference to the date on which the subsidiary came out of restriction.
  • 34. Poser 8
    • M/s ISI Ltd is completely funded by M/s Pakistan Ltd, although it is not owning any equity/control whether directly or indirectly as per AS-21. Would it be required to consolidate the same?
    • This is the concept of SPV – Special Purpose Vehicles which has not been taken into consideration under the Indian GAAP.
    • However under IAS 27- ability to direct / dominate the decision making of an enterprise by other enterprise for its own benefits is one of the criteria under which the enterprises would have to be consolidated.
  • 35. Consolidation of subsidiary where full provision is made for diminution
    • The fact that entry for diminution has been passed does not effect the position with regard to consolidation as long as the entity Is legally satisfying the control criteria as laid down under AS – 21.
  • 36. Consolidation by preference share holder
    • Under the Indian Companies Act, preference share holders are entitled to vote if dividends are not paid for a particular period of time, which in exceptional situtation may give them more than 50% voting power.
    • Since such control is temporary in nature the control criteria of AS-21 is not satified.
  • 37.
    • THANK YOU…………