o

Significant influence is the power to participate in the financial and/or operating policy decisions of an associates but does not extend to control over such policies.

Significant influence may be gained by share ownership, statute or agreement o .

o

RULE If investor holds 20% or more of the voting power directly or indirectly through subsidiaries it is presumed that the investor has SI If investor holds less than 20% of the voting power it is presumed that the investor doesnt have SI

RULE o Investments that do not meet the test of control, joint control but allow significant influence being exercised over the investee entity, are accounted as per AS-13 in the separate financials of investor.
o

In the CFS of investor, such investments are accounted for by adopting as AS-23. In the given example the effective holding of A is only 19.6% though the

EQUITY METHOD OF ACCOUNTING

o

Method of accounting whereby the investment is initially recorded at cost, including any goodwill/ capital reserve arising at the time of acquisition. Only for CFS. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investor's share of net assets of the investee or to recognize the investor's share of the

EQUITY METHOD OF ACCOUNTING

o

If the cost of the investment is more than share of the net assets of the investor in the associate then record it as GOODWILL (GW) and if not then record it as CAPITAL RESERVE(CR) in CFS of the investor group. Eg1: COI =40k,shareholders equity=2L, share of holding=21%, what is the initial recognition GW or CR Eg 2: same case as above , except the

EQUITY METHOD OF ACCOUNTING

IN CASE OF LOSSES
o

Share of losses of in an associate might exceed the net assets value. In such a situation, it is not necessary to reckon the losses in excess of the share of net assets, in the preparation and presentation of CFS.

IMPACT OF EQUITY METHOD ON INCOME TAX o Elimination of unrealized profits or losses attributable to transactions between investor and associate will be considered for the purpose of AS-22.
o

This will be treated as timing difference, because CFS eliminates unrealized profits or losses and Income tax considers the same for that period. The same DTA/ DTL will be reversed in the

EQUITY METHOD CEASES TO EXIST

o

If investments acquired and held exclusively for disposal in the near future (not exceeding 12 months) An associate that operates under long term restrictions that restricts to transfer funds to the investor are not considered for AS-23 under equity method for CFS , they will accounted in accordance with AS-13.EM ceases to exist in this scenario. EM should be discontinued, when the SI of

Disclosures o Name of the associate o Extent of Holding o Voting power held by the investor o Accounting policies if different o Non- inclusion of associate with reasons Audit Checklist AS 23

CONSOLIDATED BALANCE SHEET AS AT 31ST MARCH, 2011 WITHOUT AS-23 Liabilities Rs Assets Rs. Share capital 100 Sundry net assets 260 (with 100% subsidiary) Investment in associate 30% 40

Reserves

150

Minority int

50

300 300 ASSOCIATE BALANCE SHEET AS AT 31ST MARCH, 2011 Liabilities Share capital Reserves Rs 50 50 100 100 Assets Sundry net assets Rs. 100

CONSOLIDATED BALANCE SHEET AS AT 31ST MARCH, 2011 WITH AS-23 Liabilities Share capital Reserves Minority Interest Rs 100 150 50 300 300 Assets Sundry net assets (with 100% subsidiary) Investment in associate Rs 260 40

CONSOLIDATED BALANCE SHEET AS AT 31ST MARCH, 2012 WITHOUT AS-23 Liabilities Share capital Reserves Minority int Rs 100 175 75
350 350

Assets Sundry net assets (with 100% subsidiary) Investment in associate 30%

Rs 310 40

ASSOCIATE BALANCE SHEET AS AT 31ST MARCH, 2012 Liabilities Share capital Reserves Rs 50 100 (50) 150 150 Assets Sundry net assets Rs 150

CONSOLIDATED BALANCE SHEET AS AT 31ST MARCH, 2012 WITH AS-23 Liabilities Share capital Rs 100 Assets Sundry net assets (with 100% subsidiary) Investment in associate Rs 310

Reserves Minority Interest

190 75 365

55

365

Joint venture is a CA whereby two or more parties undertake an economic activity(EA) which is subject to joint control. Parties include any form, company, partnership or even AOP. Joint Control is defined as the power to govern the financial and operating policies of an EA so as to obtain benefits of it. Venturer is a party to JV and has joint control over the JV Investor in a Joint venture is a party to JV

All forms are bound by CA and establishes joint control

Jointly controlled characteristics:

o o o o

operation

No separate legal status or entity Investor creates and owns asset No separate accounting records Sale takes place as per contract

Jointly controlled Assets - characteristics

o

There is either a common control or common ownership of assets Assets and other resources are used to derive benefits to the JV Each venturer outputs may have share of

No separate accounting records

Jointly controlled Entity - characteristics

o

Separate legal entity for the common benefits of joint venturers Each venturer is entitled to a share of results of JV Maintains own accounting record, prepares its SFS as per AS-13 and CFS as per proportionate consolidation method(PCM) Investor doesnt own assets, but owns an

Jointly controlled applicable

o o

Entity

PCM

Not

When the joint control ceases to exist When there are serious long term constraints that significantly JCEs ability to transfer of funds. when PCM is N.A, then in that case AS21,AS-23 and AS-13 will be applied.

STEPS FOR PROPORTIONATE CONSOLIDATION o Ascertain date of investment of venturer in JCE o Venturers share of financial interest in the JCE o Analyse profits of the JCE as pre and post w.r.to date of acquisition o Ascertain the venturers share of the profits o Ascertain cost of control

Disclosure
o

Disclosure for SFS of the venturer and CFS of venturer List of all joint ventures (form of JV) Description of interest in significant JV Proportion of ownership interest only in case of JCE. Disclose venturer's share acquisition under R&S. of post

o o o

Items Coverage

AS-13 All entities

AS-21 Parent preparing CFS Line by line addition of all assets and liabilities of its subsidiaries, subject to inter company transactions

AS-23 Parent preparing CFS Adjustment of investment value for the share of profits or losses under equity method

AS-27 All entities, for SFS and CFS JCA- separate financial statements and JCE applying proportionate consolidation method for assets and liabilities of JCE

Reporting

Current investments at lower of cost and fair value and long term investments at cost-except permanent diminution in value

CONSOLIDATED BALANCE SHEET AS AT 31ST MARCH, 2011 WITHOUT AS-27

Liabilities Share capital Reserves Rs 100 150 250 Assets Sundry net assets (with 100% subsidiary) Investment in JCE 60% Rs 175 75 250

JCE BALANCE SHEET AS AT 31ST MARCH, 2011 Liabilities Share capital Reserves Rs 50 50 100 100 Assets Sundry net assets Rs 100

CONSOLIDATED BALANCE SHEET AS AT 31ST MARCH, 2011 WITH AS-27 Liabilities Rs Assets Rs Share capital Reserves 100 150 Goodwill 75-60% (50+50) Sundry net assets (with 100% subsidiary) and 60% of JCE 100 Investment in JCE 250 15 235

NIL 250

CONSOLIDATED BALANCE SHEET AS AT 31ST MARCH, 2012 WITHOUT AS-27 Liabilities

Share capital Reserves

Rs
100 175 275

Assets
Sundry net assets (with 100% subsidiary) Investment in JCE 60%

Rs
200 75 275

JCE BALANCE SHEET AS AT 31ST MARCH, 2012 Liabilities Share capital Reserves profit of 50 Rs 50 100 150 150 Assets Sundry net assets Rs 150

CONSOLIDATED BALANCE SHEET AS AT 31ST MARCH, 2012 WITH AS-27 Liabilities

Share capital

Rs
100

Assets
Goodwill 75-60% (50+50)

Rs
15

Reserves

205

Sundry net assets (with 290 100% subsidiary) and 60% of JCE 150

Investment in JCE 305

NIL 305