IAS 21

Accounting Standard (AS) 21

(issued 2001)

Consolidated Financial Statements

Contents

OBJECTIVE

SCOPE Paragraphs 1-4

DEFINITIONS 5-6

PRESENTATION OF CONSOLIDATED FINANCIAL

STATEMENTS 7-8

SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS 9-12

CONSOLIDATION PROCEDURES 13-27

ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES

IN A PARENT’S SEPARATE FINANCIAL STATEMENTS 28

DISCLOSURE 29

TRANSITIONAL PROVISIONS 30

The following Accounting Standards Interpretations (ASIs) relate to AS 21:

 ASI 8 - Interpretation of the term ‘Near Future’

 ASI 15 - Notes to the Consolidated Financial Statements

 ASI 24 - Definition of ‘Control’

 ASI 25 - Exclusion of a subsidiary fromconsolidation

 ASI 26 - Accounting for taxes on income in the consolidated

financial statements

 ASI 28 - Disclosure of parent’s/venturer’s shares in post-acquisition

reserves of a subsidiary/jointly controlled entity

The above Interpretations are published elsewhere in this Compendium.

Accounting Standard (AS) 21

(issued 2001)

Consolidated Financial Statements

(This Accounting Standard includes paragraphs set in bold italic type

and plain type, which have equal authority. Paragraphs in bold italic

type indicate the main principles. This Accounting Standard should be

read in the context of its objective and the Preface to the Statements of

Accounting Standards1.)

Accounting Standard (AS) 21, ‘Consolidated Financial Statements’, issued

by the Council of the Institute of Chartered Accountants of India, comes into

effect in respect of accounting periods commencing on or after 1-4-2001.

An enterprise that presents consolidated financial statements should prepare

and present these statements in accordance with this Standard.2 The

following is the text of the Accounting Standard.

Objective

The objective of this Statement is to lay down principles and procedures for

preparation and presentation of consolidated financial statements.

Consolidated financial statements are presented by a parent (also known as

holding enterprise) to provide financial information about the economic

activities of its group. These statements are intended to present financial

information about a parent and its subsidiary(ies) as a single economic entity

to show the economic resources controlled by the group, the obligations of

the group and results the group achieves with its resources.

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2 It is clarified that AS 21 is mandatory if an enterprise presents consolidated financial

statements. In other words, the accounting standard does not mandate an enterprise

to present consolidated financial statements but, if the enterprise presents

consolidated financial statements for complying with the requirements of any statute

or otherwise, it should prepare and present consolidated financial statements in

accordance with AS 21 (see ‘The Chartered Accountant’, July 2001, page 95).

Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a detailed

discussion on the implications of the mandatory status of an accounting standard.

410 AS 21 (issued 2001)

Scope

1. This Statement should be applied in the preparation and

presentation of consolidated financial statements for a group of

enterprises under the control of a parent.

2. This Statement should also be applied in accounting for investments

in subsidiaries in the separate financial statements of a parent.

3. In the preparation of consolidated financial statements, otherAccounting

Standards also apply in the same manner as they apply to the separate

financial statements.

4. This Statement does not deal with:

(a) methods of accounting for amalgamations and their effects on

consolidation, including goodwill arising on amalgamation (seeAS

14, Accounting for Amalgamations);

(b) accounting for investments in associates (at present governed by

AS 13, Accounting for Investments3 ); and

(c) accounting for investments in joint ventures (at present governed

by AS 13, Accounting for Investments4 ).

Definitions

5. For the purpose of this Statement, the following terms are used

with the meanings specified:

Control5:

(a) the ownership, directly or indirectly through subsidiary(ies),

3 Accounting Standard (AS) 23, ‘Accounting for Investments in Associates in

Consolidated Financial Statements’, which came into effect in respect of

accounting periods commencing on or after 1-4-2002, specifies the requirements

relating to accounting for investments in associates in Consolidated Financial

Statements.

4 Accounting Standard (AS) 27, ‘Financial Reporting of Interests in Joint Ventures’,

which came into effect in respect of accounting periods commencing on or after 1-4-

2002, specifies the requirements relating to accounting for investments in joint

ventures.

5 See also Accounting Standards Interpretation (ASI) 24, published elsewhere in this

Compendium.

.

Consolidated Financial Statements 411

of more than one-half of the voting power of an enterprise; or

(b) control of the composition of the board of directors in the

case of a company or of the composition of the corresponding

governing body in case of any other enterprise so as to obtain

economic benefits from its activities.

A subsidiary is an enterprise that is controlled by another enterprise

(known as the parent).

A parent is an enterprise that has one or more subsidiaries.

A group is a parent and all its subsidiaries.

Consolidated financial statements are the financial statements of a group

presented as those of a single enterprise.

Equity is the residual interest in the assets of an enterprise after

deducting all its liabilities.

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.

6. Consolidated financial statements normallyinclude consolidated balance

sheet, consolidated statement of profit and loss, and notes, other statements

and explanatory material that form an integral part thereof. Consolidated

cash flow statement is presented in case a parent presents its own cash flow

statement. The consolidated financial statements are presented, to the extent

possible, in the same format as that adopted by the parent for its separate

financial statements.6

Presentation ofConsolidated Financial Statements

7. A parent which presents consolidated financial statements

should present these statements in addition to its separate financial

statements.

6 See also Accounting Standards Interpretation (ASI) 15, published elsewhere in this

Compendium.

412 AS 21 (issued 2001)

8. Users of the financial statements of a parent are usually concerned

with, and need to be informed about, the financial position and results of

operations of not only the enterprise itself but also of the group as a whole.

This need is served by providing the users -

(a) separate financial statements of the parent; and

(b) consolidated financial statements, which present financial

information about the group as that of a single enterprise without

regard to the legal boundaries of the separate legal entities.

Scope of Consolidated Financial Statements

9. A parent which presents consolidated financial statements should

consolidate all subsidiaries, domestic as well as foreign, other than those

referred to in paragraph 11.

10. The consolidated financial statements are prepared on the basis of

financial statements of parent and all enterprises that are controlled by the

parent,otherthanthosesubsidiariesexcludedforthereasonssetoutinparagraph

11. Control exists when the parent owns, directly or indirectly through

subsidiary(ies), more than one-half of the voting power of an enterprise.

Control also exists when an enterprise controls the composition of the board

of directors (in the case of a company) or of the corresponding governing body

(in case of an enterprise not being a company) so as to obtain economic

benefits fromits activities. An enterprisemay control the composition of the

governing bodies of entities such as gratuity trust, provident fund trust etc.

Since the objective of control over such entities is not to obtain economic

benefits from their activities, these are not considered for the purpose of

preparation of consolidated financial statements. For the purpose of this

Statement, an enterprise is considered to control the composition of:

(i) the board of directors of a company, if it has the power, without

the consent or concurrence of any other person, to appoint or

remove all or a majority of directors of that company. An

enterprise is deemed to have the power to appoint a director, if

any of the following conditions is satisfied:

(a) a person cannotbe appointed as directorwithout the exercise

in his favour by that enterprise of such a power as aforesaid;

or

Consolidated Financial Statements 413

(b) a person’s appointment as director follows necessarily from

his appointment to a position held by himin that enterprise;

or

(c) the director is nominated by that enterprise or a subsidiary

thereof.

(ii) the governing body of an enterprise that is not a company, if it has

the power, without the consent or the concurrence of any other

person, to appoint or remove all majority of members of the

governing body of that other enterprise. An enterprise is deemed

to have the power to appoint a member, if any of the following

conditions is satisfied:

(a) a person cannot be appointed as member of the governing

body without the exercise in his favour by that other

enterprise of such a power as aforesaid; or

(b) a person’s appointment as member of the governing body

follows necessarily from his appointment to a position held

by him in that other enterprise; or

(c) themember of the governing body is nominated by that other

enterprise.

11. A subsidiary should be excluded from consolidation when:

(a) control is intended to be temporary because the subsidiary is

acquired and held exclusively with a view to its subsequent

disposal in the near future7; or

(b) it operates under severe long-term restrictions which

significantly impair its ability to transfer funds to the parent.

In consolidated financial statements, investments in such

subsidiaries should be accounted for in accordance with

Accounting Standard (AS) 13, Accounting for Investments. The

reasons for not consolidating a subsidiary should be disclosed in

the consolidated financial statements.

7 See also Accounting Standards Interpretations (ASIs) 8 and 25, published elsewhere

in this Compendium.

414 AS 21 (issued 2001)

12. Exclusion of a subsidiary from consolidation on the ground that its

business activities are dissimilar from those of the other enterprises within

the group is not justified because better information is provided by

consolidating such subsidiaries and disclosing additional information in the

consolidated financial statements about the different business activities of

subsidiaries. For example, the disclosures required by Accounting

Standard (AS) 17, Segment Reporting, help to explain the significance

of different business activities within the group.

ConsolidationProcedures

13. In preparing consolidated financial statements, the financial

statements of the parent and its subsidiaries should be combined on a

line by line basis by adding together like items of assets, liabilities, income

and expenses8 . In order that the consolidated financial statements

present financial information about the group as that of a single

enterprise, the following steps should be taken:

(a) the cost to the parent of its investment in each subsidiary and

the parent’s portion of equity of each subsidiary, at the date

on which investment in each subsidiary is made, should be

eliminated;

(b) any excess of the cost to the parent of its investment in a

subsidiary over the parent’s portion of equity of the subsidiary,

at the date on which investment in the subsidiary is made,

should be described as goodwill to be recognised as an asset

in the consolidated financial statements;

(c) when the cost to the parent of its investment in a subsidiary is

less than the parent’s portion of equity of the subsidiary, at

the date on which investment in the subsidiary is made, the

difference should be treated as a capital reserve in the

consolidated financial statements;

(d) minority interests in the net income of consolidated subsidiaries

for the reporting period should be identified and adjusted

8 See also Accounting Standards Interpretations (ASIs) 26 and 28, published elsewhere

in this Compendium.

Consolidated Financial Statements 415

against the income of the group in order to arrive at the net

income attributable to the owners of the parent; and

(e) minority interests in the net assets of consolidated subsidiaries

should be identified and presented in the consolidated balance

sheet separately from liabilities and the equity of the parent’s

shareholders. Minority interests in the net assets consist of:

(i) the amount of equity attributable to minorities at the date

on which investment in a subsidiary is made; and

(ii) the minorities’ share of movements in equity since the

date the parent-subsidiary relationship came in existence.

Where the carrying amount of the investment in the subsidiary is

different from its cost, the carrying amount is considered for the

purpose of above computations.

14. The parent’s portion of equity in a subsidiary, at the date on which

investment is made, is determined on the basis of information contained in

the financial statements of the subsidiary as on the date of investment.

However, if the financial statements of a subsidiary, as on the date of

investment, are not available and if it is impracticable to draw the financial

statements of the subsidiary as on that date, financial statements of the

subsidiary for the immediately preceding period are used as a basis for

consolidation. Adjustments are made to these financial statements for the

effects of significant transactions or other events that occur between the

date of such financial statements and the date of investment in the subsidiary.

15. If an enterprise makes two or more investments in another enterprise

at different dates and eventually obtains control of the other enterprise, the

consolidated financial statements are presented only from the date on which

holding-subsidiary relationship comes in existence. If two or more

investments are made over a period of time, the equity of the subsidiary at

the date of investment, for the purposes of paragraph 13 above, is generally

determined on a step-by-step basis; however, if small investments are made

over a period of time and then an investment is made that results in control,

the date of the latest investment, as a practicablemeasure,may be considered

as the date of investment.

16. Intragroup balances and intragroup transactions and resulting

416 AS 21 (issued 2001)

unrealised profits should be eliminated in full. Unrealised losses resulting

fromintragroup transactions should also be eliminated unless cost cannot

be recovered.9

17. Intragroup balances and intragroup transactions, including sales,

expenses and dividends, are eliminated in full. Unrealised profits resulting

from intragroup transactions that are included in the carrying amount of

assets, such as inventory and fixed assets, are eliminated in full. Unrealised

losses resulting from intragroup transactions that are deducted in arriving

at the carrying amount of assets are also eliminated unless cost cannot be

recovered.

18. The financial statements used in the consolidation should be drawn

up to the same reporting date. If it is not practicable to draw up the

financial statements of one or more subsidiaries to such date and,

accordingly, those financial statements are drawn up to different

reporting dates, adjustments should be made for the effects of significant

transactions or other events that occur between those dates and the date

of the parent’s financial statements. In any case, the difference between

reporting dates should not be more than six months.

19. The financial statements of the parent and its subsidiaries used in the

preparation of the consolidated financial statements are usually drawn up to

the same date. When the reporting dates are different, the subsidiary often

prepares, for consolidation purposes, statements as at the same date as that

of the parent. When it is impracticable to do this, financial statements drawn

up to different reporting datesmay be used provided the difference in reporting

dates is not more than six months. The consistency principle requires that

the length of the reporting periods and any difference in the reporting dates

should be the same from period to period.

20. Consolidated financial statements should be prepared

using uniform accounting policies for like transactions and other

events in similar circumstances. If it is not practicable to use uniform

accounting

9 An Announcement titled ‘Elimination of unrealised profits and losses under AS

21, AS 23 and AS 27’ has been issued in July 2004. As per the announcement,

elimination of unrealised profits and losses in respect of transactions between a

parent and its subsidiary(ies) entered into during accounting periods commencing

on or before 31-3-2001, is encouraged, but not required on practical grounds.

Consolidated Financial Statements 417

policies in preparing the consolidated financial statements, that fact

should be disclosed together with the proportions of the items in the

consolidated financial statements to which the different accounting

policies have been applied.

21. If a member of the group uses accounting policies other than those

adopted in the consolidated financial statements for like transactions and

events in similar circumstances, appropriate adjustments are made to

its financial statements when they are used in preparing the consolidated

financial statements.

22. The results of operations of a subsidiary are included in the consolidated

financial statements as fromthe date onwhich parent-subsidiary relationship

came in existence. The results of operations of a subsidiary with which

parent-subsidiary relationship ceases to exist are included in the consolidated

statement of profit and loss until the date of cessation of the relationship.

The difference between the proceeds from the disposal of investment in a

subsidiary and the carrying amount of its assets less liabilities as of the date

of disposal is recognised in the consolidated statement of profit and loss as

the profit or loss on the disposal of the investment in the subsidiary. In order

to ensure the comparability of the financial statements from one accounting

period to the next, supplementary information is often provided about the

effect of the acquisition and disposal of subsidiaries on the financial position

at the reporting date and the results for the reporting period and on the

corresponding amounts for the preceding period.

23. An investment in an enterprise should be accounted for in

accordance with Accounting Standard (AS) 13, Accounting for

Investments, from the date that the enterprise ceases to be a subsidiary

and does not become an associate1 0 .

24. The carrying amount of the investment at the date that it ceases to be

a subsidiary is regarded as cost thereafter.

25. Minority interests should be presented in the consolidated balance

sheet separately from liabilities and the equity of the parent’s

10 Accounting Standard (AS) 23, 'Accounting for Investments in Associates in

Consolidated Financial Statements', which came into effect in respect of accounting

periods commencing on or after 1.4.2002, defines the term ‘associate’ and specifies

the requirements relating to accounting for investments in associates in

Consolidated Financial Statements.

418 AS 21 (issued 2001)

shareholders. Minority interests in the income of the group should also

be separately presented.

26. The losses applicable to the minority in a consolidated subsidiary may

exceed the minority interest in the equity of the subsidiary. The excess, and

any further losses applicable to theminority, are adjusted against themajority

interest except to the extent that theminority has a binding obligation to, and

is able to,make good the losses. If the subsidiary subsequently reports profits,

all such profits are allocated to the majority interest until the minority’s share

of losses previously absorbed by the majority has been recovered.

27. If a subsidiary has outstanding cumulative preference shares which

are held outside the group, the parent computes its share of profits or losses

after adjusting for the subsidiary’s preference dividends, whether or not

dividends have been declared.

Accounting for Investments in Subsidiaries in a

Parent’s Separate Financial Statements

28. In a parent’s separate financial statements, investments in

subsidiaries should be accounted for in accordance with Accounting

Standard (AS) 13, Accounting for Investments.

Disclosure

29. In addition to disclosures required by paragraph 11 and 20,

following disclosures should be made:

(a) in consolidated financial statements a list of all subsidiaries

including the name, country of incorporation or residence,

proportion of ownership interest and, if different, proportion

of voting power held;

(b) in consolidated financial statements, where applicable:

(i) the nature of the relationship between the parent and a

subsidiary, if the parent does not own, directly or

indirectly through subsidiaries, more than one-half of

the voting power of the subsidiary;

Consolidated Financial Statements 419

(ii) 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; and

(iii) the names of the subsidiary(ies) of which reporting

date(s) is/are different from that of the parent and the

difference in reporting dates.

TransitionalProvisions

30. On the first occasion that consolidated financial statements are

presented, comparative figures for the previous period need not be

presented. In all subsequent years full comparative figures for the

previous period should be presented in the consolidated financial

statements.