Indian GAAP Contents AS 21 Consolidated Financial Statements AS 23 Accounting for Investments in Associates in Consolidated Financial Statements AS 27 Financial reporting of Interests in Joint Ventures ID: 151600
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Slide1
Consolidation Accounting
Indian GAAPSlide2
Contents
AS 21 – Consolidated Financial Statements
AS 23 – Accounting for Investments in Associates in Consolidated Financial
Statements
AS 27 – Financial reporting of Interests in Joint VenturesSlide3
Key
features:
Objective and scope
Concept
of ‘Group’, ‘Minority Interest’ etc.
Control
Exclusion
from
consolidation
Concept
of
associate and its accountingConcept of joint venture and its accountingIssues in consolidation accounting Auditing of consolidated financial statementsSlide4
Consolidation
requirementsLegal Requirements:
Companies
Act
require Consolidation at every level
SEBI
regulations require listed companies to prepare Annually
Quarterly
(Optional
)
In the consolidated financial statements of the parent: Present economic position and results of operations as if there was essentially one single entitySlide5
Why
consolidation ?Increasingly business operations managed through complex structures
Standalone financials do not reflect economic reality
Mergers and acquisitions – including cross
border transactions
Significant Impact on all profit and loss and even balance sheet ratiosSlide6
Accounting for the economics
Significant Influence
Equity
Method
Neither control nor significant influence
Cost
or Fair Value Method
Consolidation
Proportionate consolidation
Joint control
Corporate
relationship
ControlSlide7
General ruleSlide8
Accounting for
share of losses
Full
Restricted to the carrying
amount of
investment
*
Proportion of their
shares in the venture*
Joint Venture
Associates
Subsidiary
* Unless there is a binding obligationSlide9
Control
Three Criteria:Direct ownership of more than half of the voting powerIndirect ownership of more than half of the voting power
Control of the composition of the Board of Directors
Difference between the definition of control as given in Companies Act & Accounting Standard
de
facto control ?Slide10
Control
example-1Company B
Company A
Company C
60%
Holding
Representation
of 3/4 directors
Both B and C will consolidate A in their books as per AS 21, as both the companies have
control
over A Slide11
Control
example-2Is Company D controlled by Company A ?
Company A
Company B
Company D
Company C
100 %
100 %
30 %
30 %Slide12
Is Company D controlled by Company A ?
Company A
Company B
Company D
Company C
51 %
51 %
30 %
30 %
Control
example-3Slide13
Is Company C controlled by Company A ?
Company A
Company B
Company C
40 %
40 %
60 %
Control
example-4Slide14
Start and end of consolidation
Date from which holding subsidiary relationship comes into
existence
Date upto which holding subsidiary relationship ceases to exist
Start
EndSlide15
Steps to consolidate
Eliminate cost of investment and related equity accountsIdentify minority interest in the equity and the net income for the year, of the subsidiary, and record in the CFS as a current liability
Record goodwill / capital reserve computed based on the net worth of investee at the date of investment
Eliminate intercompany payables and receivables
Eliminate intercompany sales, purchases and profit in unsold inventory at the date of consolidation
Eliminate effects of other intercompany transactionsSlide16
Calculation of GW and MI –Step by step basis
Example An investing parent A invests Rs 65 lacs on October 1, 2001, to acquire 60% of the equity of B, thereby making it a subsidiary. On that date, the net assets of the subsidiary aggregated Rs 50 lacs.
Subsequently, A invested, on January 1, 2002, Rs 22
lacs
to acquire a further 20% of B’s equity shares, on which date the net assets of B were Rs 80
lacs
. At March 31, 2002, the net assets of the subsidiary were Rs 120 lacs. Assuming that there are no intra group transactions between A & B and that both have their reporting date as March 31, 2002. How is the amount of goodwill and minority interest calculated for the purpose of CFS of A?Slide17
Calculation of GW and MI –Step by step basis
Acquisition
cost
% share holding
Net Assets
Own Share
Minority Interest
Goodwill
Oct-01
65
60%
50
30
20
35
Oct -Dec
60%
30
18
12 Dec-02 804832
35Jan-022220%8016-166
80
64
16
41
Jan -Mar
80%
40
32
8
Mar-02
87
80%
120
96
24
41Slide18
Exclusion from consolidation
When control is intended to be
temporary
Severe
long-term restrictions over transfer of funds
Key considerations:
Near future - not more than 12 months from acquisition unless a longer period can be justified
Intention
of disposal should be at time of acquisitionSlide19
Amortisation
of goodwillIssueWhether goodwill arising on consolidation is required to
be amortised
?
View
Practice under Indian GAAP on goodwill is divergent.
Amortisation is not mandatory under AS 10 (mandatory under AS 14)whereas AS 21, AS 23 and AS 27 are silent on goodwill amortisation.Slide20
Industry practice on
amortisation of goodwill
Name of the Companies
Amortisation
Years
L&T, ACC, IRB
Yes
10
Hindustan Unilever Limited
Yes
4
Mahindra & Mahindra, Tata
Steel, UPL
No
-Slide21
Goodwill
H Ltd consolidates its wholly owned (acquired) subsidiary S Ltd and records a goodwill on consolidation. In subsequent year S Ltd, amalgamates with its parent H Ltd.
Issue
:
Accounting
for Goodwill subsequent to
amalgamation in CFS?Whether the goodwill on consolidation until prior year should be adjusted against reserves since the subsidiary is merged into the parent ?
Preferred view:
Continue Goodwill
Alternate view:
Reverse GoodwillSlide22
Goodwill –
other issuesDetermination of goodwill and capital reserve on Preferential allotment when holding has taken up its full allocation and also subscribed additional shares
Setting off of goodwill and capital reserves of different subsidiaries
Step up acquisition – determination of goodwill and minority interestSlide23
23
Classification of Foreign EntityAs per AS 11 (revised), all foreign entities should be classified either as integral operations or non-integral operations.
AS 11 (revised) provides certain indicators which should be considered for determining classification
However, such assessment is usually very subjectiveSlide24
Foreign
operations/ subsidiariesAppropriate classification of foreign operations is critical for proper disclosure of assets and liabilities and accounting of translation gains and losses.
Integral Operations
Non-monetary assets are stated at historical rate
Translation gain or loss is accounted in profit and loss a/c
Non-Integral Operations
Non-monetary assets are translated at closing rateTranslation gain or loss is accounted in foreign currency translation reserve.Goodwill/capital reserve of non-integral operations - Closing rateSlide25
Significant
influence
Significant influence may be exercised in several ways:
Representation on the Board of directors
Participation in policy making process
Material intercompany transactions
Interchange of managerial personnel
Dependence on technical information
Share ownership - 20 % or more
Slide26
AS 23 – Investments in
associatesGoodwill/Capital Reserve – included in carrying amount of investment and to be disclosed separately
Outstanding
c
umulative preference
s
hares held outside the group – preference dividend to be adjusted whether declared or notCarrying amount of investments – reduce to recognise a decline other than temporary Slide27
AS 23 – Investments in Associates
Treatment of Proposed DividendConsideration of potential equity shares to determine whether an Investee is an associate under AS 23
Adjustments
to the carrying amount of Investment arising from changes in
equitySlide28
Adjustments to the carrying amount of Investment arising from changes in
equityAdjustments to the carrying amount of investment in an associate arising from changes in the associate’s equity that have not been included in the statement of profit and loss of the associate, should be directly made in the carrying amount of investment without routing it through the consolidated statement of profit and loss account
Examples:
Revaluation of fixed assets
Foreign exchange translation
Amalgamations
Demergers
Issue of shares at premiumSlide29
AS 27 – Interests in Joint Venture
Three Types of Joint Venture:
Jointly
controlled operations
Manufacture of an aircraft
Jointly controlled assets
Oil pipeline
Building
Jointly controlled entity
Separate legal entitySlide30
Company A
Company B
Company JV
(Contractual arrangement
for joint control)
60%
40%
Whether
Company should consolidate Company JV as a subsidiary under AS 21 or a
A
s
a Joint Venture under AS 27?
Accounting for JV which is a subsidiary
Effective for periods commencing on or after 1-4-2004
Enterprises by a contractual arrangement establishes Joint Control in a subsidiary, to be consolidated as per AS 21 and not treated as JV as per AS 27 [earlier treated as JV]
The other JV partners may continue treating the same as JVSlide31
Inter Group transactions
Parent & subsidiarySubsidiary & subsidiary
Parent/subsidiary & Associate
Parent/subsidiary & JV
Associate
& Associate
JV & JVAssociate & JVSlide32
Other Considerations
FS should be of same reporting dateNot practicable then drawn up to different reporting datesAdjustments for significant transactions between those dates
Difference between reporting dates to be not more than six months
Use of uniform accounting policies, else adjusted
Use of CFS – Associate/Joint VentureSlide33
Key Issues
Deemed disposal arising from new issue of shares by subsidiary
Accounting for redemptions of shares of subsidiaries held by minority interest
Adjustment arising due to harmonizing accounting policies for the first consolidationSlide34
Accounting for dilution gains & losses
Gains or losses arising on account of direct issue of shares by a subsidiary/associate at a price different from the book value per share
A Ltd.
B Ltd
.
25%
NAV – Rs.100
A Ltd.
B Ltd.
20%
NAV – Rs.150
Issue of shares by B at a premiumSlide35
Accounting for dilution gains & losses
A’s share of Net Assets of B (post issue) (150 x 20%)
30
A’s share of Net Assets of B (pre issue) (100 x 25%)
25
Dilution Gain
5
How should the dilution gain be accounted for?
Dilution possible on
Conversion of FCCB
Exercise of ESOPSlide36
Widespread
1 Equity Owner
Company A
74%
26%
Able to nominate maximum number of directors on the board
Consolidation- Control
Would the single 26% Equity Owner consolidate as per AS 21?Slide37
Key
issuesSubsidiaries during the reporting period – but not at the balance sheet date – is consolidation required?
First
CFS – Adjustment of intra-group unrealized profits/losses of earlier years
Whether
preferential capital stockholders have 20% voting power but do not participate in the net results or assets of the company other than to the extent of a guaranteed IRR or dividend
rate
minority
interest or a liability Slide38
Accounting for taxes on income in CFS
While preparing CFS, the tax expense to be shown in the CFS should be the aggregate of the amounts of tax expense appearing in the separate financial statements of the parent and its subsidiariesSlide39
Audit of consolidated financial statements
Guidance note issued by ICAI deals with the auditing of CFS
Guidance covers of the following aspects
Responsibility of parent
Responsibility of auditors
Audit considerations relating to audit of CFS
Using of the work of another auditors
Audit of consolidated adjustments – Permanents adjustments and current adjustments
Management representations
Reporting requirements Slide40
Consolidation
reconciliations Profit reconciliation
Profits
of parent and subsidiary, share of associates and joint
ventures
added together
Adjustment on account of consolidation adjustments having impact on profits e.g. Stock reserve, amortization of goodwill, elimination of dividends from subsidiaries
Net
worth Reconciliation
Net
worth of parent and subsidiary, share of associates and joint ventures
added togetherAdjustment for pre-acquisition net worth of subsidiaries Other adjustments e.g. accumulated amortization of goodwill, stock reserve Minority interest reconciliation Goodwill reconciliation
Investment reconciliation