Accounting Standard - 21 Consolidated Financial Statements

CA Mehul Shah
B. Com, F.C.A., DISA (ICA).

# : 2510 0861; 2510 9990 Email : mehulshah@shah3ca.com

Accounting Standard Broadly.

ICAI The Income-tax Act 1961 Ministry of Corporate Affairs

Level - I

Listed/Proposed to be listed Cos Banks, FIs, Insurance Cos Enterprises with > 50 crores Turnover in preceding year > 10 crores borrowings at any time during the year Holding & subsidiary Cos of above.

Level - II

Enterprises with > 40 Lacs but < 50 crores Turnover. > 1 crore but < 10 crores borrowings Holding & subsidiary cos of above. Other than Level - I & Level - II cases
w.e.f 17-Sep-2003

Level - III

The Companies (Accounting Standards) Rules, 2006.

December 7, 2006 Exemptions withdrawn? 3 (1) The Central Government hereby prescribes Accounting Standards 1 to 7 and 9 to 29 as recommended by the Institute of Chartered Accountants of India, which are specified in the Annexure to these rules.

The Companies (Accounting Standards) Rules, 2006.

The Company is a Small and Medium Sized Company (SMC) as defined in the General Instructions in respect of Accounting Standards notified under the Companies Act 1956. Accordingly, the Company has complied with the Accounting Standards as applicable to a Small and Medium Sized Company.

Background
Not mandatory under the Companies Act, 1956 Statement under section 212 Financial performance and net worth of the group as a whole were not known to stakeholders Not in line with international reporting standards SEBI made consolidation mandatory for listed companies AS 21 provides guidelines for consolidation

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

Follow other AS in CFS, as applicable

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

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

Key Definitions
Subsidiary

Enterprise controlled by another enterprise 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)

Control

...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

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
CFS in addition to Individual FS of the Parent

Scope
Consolidate results of all subsidiaries (domestic / Foreign) 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?

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?

Consolidation procedures
Line by line consolidation
Effect

to AS - 22

Elimination of parents investments and parents portion of equity Determining goodwill (cost of investments > parents portion of equity); or capital reserve (cost of investments < parents portion of equity) arising on date of investment

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?

...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

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)

Consolidation procedures

Same reporting date for financial statements used in consolidation; or If date of reporting differ, 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

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

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

Issues
Presentation of consolidated financial statements of a group which has diverse businesses such as banking, Insurance, Mutual Fund, Stock Broking etc. Identification of goodwill/capital reserve at the time of acquisition of another enterprise does not capture fair value of assets and liabilities since the same is based on book value. Companies Act, 1956 needs to be amended to include preparation/audit of consolidated financial statements Should goodwill be subject to amortization/tested for impairment On first time consolidation can impact of differences in accounting policies be adjusted against reserves

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

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

ASI 24
Control Enterprise is controlled by two enterprises

Investment Composition of Board

Consolidation to be done by both

ASI 25
Where an enterprise owns majority of voting power by virtue of ownership of the shares held as stockin-trade acquired and held exclusively with a view to their subsequent disposal in the near future, the control should be considered to be temporary