IAS 23

Accounting Standard (AS) 23

(issued 2001)

Accounting for Investments in


Associates in Consolidated


Financial Statements

Contents

OBJECTIVE

SCOPE Paragraphs 1-2

DEFINITIONS 3-6

ACCOUNTING FOR INVESTMENTS –

EQUITY METHOD 7-9

APPLICATION OF THE EQUITY METHOD 10-20

CONTINGENCIES 21

DISCLOSURE 22-25

TRANSITIONAL PROVISIONS 26

The following Accounting Standards Interpretations (ASIs) relate to AS 23:

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

 ASI 16 - Treatment of Proposed Dividend under AS 23

 ASI 17 - Adjustments to the Carrying Amount of Investment

arising from Changes in Equity not Included in the

Statement of Profit and Loss of the Associate

 ASI 18 - Consideration of Potential Equity Shares for

Determining whether an Investee is an Associate

under AS 23

The above Interpretations are published elsewhere in this Compendium.

Accounting Standard (AS) 23

(issued 2001)

Accounting for Investments in

Associates inConsolidated

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) 23, ‘Accounting for Investments in Associates in

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 1-4-2002. An enterprise that presents

consolidated financial statements should account for investments in associates

in the consolidated financial statements in accordance with this Standard.2

The following is the text of the Accounting Standard.

Objective

The objective of this Statement is to set out principles and procedures for

recognising, in the consolidated financial statements, the effects of the

investments in associates on the financial position and operating results of a

group.

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 23 is mandatory if an enterprise presents consolidated financial

statements. In other words, if an enterprise presents consolidated financial

statements, it should account for investments in associates in the consolidated

financial statements in accordance with AS 23 from the date of its coming into

effect, i.e., 1-4-2002 (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.

440 AS 23 (issued 2001)

Scope

1. This Statement should be applied in accounting for investments in

associates in the preparation and presentation of consolidated financial

statements by an investor.

2. This Statement does not deal with accounting for investments in

associates in the preparation and presentation of separate financial statements

by an investor.3

Definitions

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

with the meanings specified:

An associate is an enterprise in which the investor has significant

influence and which is neither a subsidiary nor a joint venture4 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.

Control:

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

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).

3 Accounting Standard (AS) 13, ‘Accounting for Investments’, is applicable for

accounting for investments in associates in the separate financial statements of an

investor.

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

defines the term ‘joint venture’ and specifies the requirements relating to accounting

for investments in joint ventures.

Accounting for Investments in Associates 441

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.

The equity method is a method of accounting whereby the investment is

initially recorded at cost, identifying any goodwill/capital reserve arising

at the time of acquisition. 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. The consolidated statement of profit and

loss reflects the investor’s share of the results of operations of the

investee.5

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

deducting all its liabilities.

4. For the purpose of this Statement, significant influence does not extend

to power to govern the financial and/or operating policies of an enterprise.

Significant influencemay be gained by share ownership, statute or agreement.

As regards share ownership, if an investor holds, directly or indirectly through

subsidiary(ies), 20%ormore of the votingpower of the investee, it is presumed

that the investor has significant influence, unless it can be clearly demonstrated

that this is not the case. Conversely, if the investor holds, directly or indirectly

through subsidiary(ies), less than 20%of the voting power of the investee, it

is presumed that the investor does not have significant influence, unless such

influence can be clearly demonstrated.6 Asubstantial ormajority ownership

by another investor does not necessarily preclude an investor from having

significant influence.

5. The existence of significant influence by an investor is usually evidenced

in one or more of the following ways:

(a) Representation on the board of directors or corresponding

governing body of the investee;

5 See also Accounting Standards Interpretation (ASI) 16, published elsewhere in

this Compendium.

6 See also Accounting Standards Interpretation (ASI) 18, published elsewhere in

this Compendium.

442 AS 23 (issued 2001)

(b) participation in policy making processes;

(c) material transactions between the investor and the investee;

(d) interchange of managerial personnel; or

(e) provision of essential technical information.

6. 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.

Distributions received from an investee reduce the carrying amount of the

investment. Adjustments to the carrying amount may also be necessary for

alterations in the investor’s proportionate interest in the investee arising from

changes in the investee’s equity that have not been included in the statement

of profit and loss. Such changes include those arising from the revaluation

of fixed assets and investments, fromforeign exchange translation differences

and from the adjustment of differences arising on amalgamations.7

Accounting for Investments –EquityMethod

7. An investment in an associate should be accounted for in

consolidated financial statements under the equity method except when:

(a) the investment is acquired and held exclusively with a view

to its subsequent disposal in the near future8; or

(b) the associate operates under severe long-term restrictions that

significantly impair its ability to transfer funds to the investor.

Investments in such associates should be accounted for in accordance

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

reasons for not applying the equity method in accounting for investments

in an associate should be disclosed in the consolidated financial

statements.

7 See also Accounting Standards Interpretation (ASI) 17, published elsewhere in

this Compendium.

8 See also Accounting Standards Interpretation (ASI) 8, published elsewhere in this

Compendium.

Accounting for Investments in Associates 443

8. Recognition of income on the basis of distributions received may not

be an adequate measure of the income earned by an investor on an

investment in an associate because the distributions received may bear

little relationship to the performance of the associate. As the investor

has significant influence over the associate, the investor has a measure

of responsibility for the associate’s performance and, as a result, the

return on its investment. The investor accounts for this stewardship by

extending the scope of its consolidated financial statements to include its

share of results of such an associate and so provides an analysis of

earnings and investment from which more useful ratios can be

calculated. As a result, application of the equity method in

consolidated financial statements provides more informative reporting

of the net assets and net income of the investor.

9. An investor should discontinue the use of the equity method from

the date that:

(a) it ceases to have significant influence in an associate but

retains, either in whole or in part, its investment; or

(b) the use of the equity method is no longer appropriate because

the associate operates under severe long-term restrictions that

significantly impair its ability to transfer funds to the investor.

From the date of discontinuing the use of the equity method, investments

in such associates should be accounted for in accordance with

Accounting Standard (AS) 13, Accounting for Investments. For this

purpose, the carrying amount of the investment at that date should be

regarded as cost thereafter.

Application of theEquityMethod

10. Many of the procedures appropriate for the application of the equity

method are similar to the consolidation procedures set out in

Accounting Standard (AS) 21, Consolidated Financial Statements.

Furthermore, the

broad concepts underlying the consolidation procedures used in the

acquisition of a subsidiary are adopted on the acquisition of an investment

in an associate.

11. An investment in an associate is accounted for under the equitymethod

444 AS 23 (issued 2001)

from the date on which it falls within the definition of an associate. On

acquisition of the investment any difference between the cost of acquisition

and the investor’s share of the equity of the associate is described as goodwill

or capital reserve, as the case may be.

12. Goodwill/capital reserve arising on the acquisition of an associate

by an investor should be included in the carrying amount of investment

in the associate but should be disclosed separately.

13. In using equity method for accounting for investment in an

associate, unrealised profits and losses resulting from transactions

between the investor (or its consolidated subsidiaries) and the associate

should be eliminated to the extent of the investor ’s interest in the

associate. Unrealised losses should not be eliminated if and to the extent

the cost of the transferred asset cannot be recovered.9

14. The most recent available financial statements of the associate are

used by the investor in applying the equity method; they are usually

drawn up to the same date as the financial statements of the investor.

When the reporting dates of the investor and the associate are different,

the associate often prepares, for the use of the investor, statements as at

the same date

as the financial statements of the investor. When it is impracticable to do

this, financial statements drawn up to a different reporting date may be

used. The consistency principle requires that the length of the reporting

periods, and any difference in the reporting dates, are consistent from

period to period.

15. When financial statements with a different reporting date are used,

adjustments aremade for the effects of any significant events or transactions

between the investor (or its consolidated subsidiaries) and the associate that

occur between the date of the associate’s financial statements and the date

of the investor’s consolidated financial statements.

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, while

applying the ‘equity method’, elimination of unrealised profits and losses in respect

of transactions entered into during accounting periods commencing on or before

31-3-2002, is encouraged, but not required on practical grounds.

Accounting for Investments in Associates 445

16. The investor usually prepares consolidated financial statements using

uniform accounting policies for the like transactions and events in similar

circumstances. In case an associate uses accounting policies other than

those adopted for the consolidated financial statements for like transactions

and events in similar circumstances, appropriate adjustments are made to

the associate’s financial statements when they are used by the investor in

applying the equity method. If it is not practicable to do so, that fact is

disclosed along with a brief description of the differences between the

accounting policies.

17. If an associate has outstanding cumulative preference shares held

outside the group, the investor computes its share of profits or losses after

adjusting for the preference dividends whether or not the dividends have

been declared.

18. If, under the equitymethod, an investor’s share of losses of an associate

equals or exceeds the carrying amount of the investment, the investor

ordinarily discontinues recognising its share of further losses and the

investment is reported at nil value. Additional losses are provided for to the

extent that the investor has incurred obligations ormade payments on behalf

of the associate to satisfy obligations of the associate that the investor has

guaranteed or to which the investor is otherwise committed. If the associate

subsequently reports profits, the investor resumes including its share of those

profits only after its share of the profits equals the share of net losses that

have not been recognised.

19. Where an associate presents consolidated financial statements, the

results and net assets to be taken into account are those reported in that

associate’s consolidated financial statements.

20. The carrying amount of investment in an associate should be

reduced to recognise a decline, other than temporary, in the value of

the investment, such reduction being determined and made for each

investment individually.

Contingencies

21. In accordance with Accounting Standard (AS) 4, Contingencies and

446 AS 23 (issued 2001)

Events Occurring After the Balance Sheet Date1 0 , the investor discloses in

the consolidated financial statements:

(a) its share of the contingencies and capital commitments of an

associate for which it is also contingently liable; and

(b) those contingencies that arise because the investor is severally

liable for the liabilities of the associate.

Disclosure

22. In addition to the disclosures required by paragraph 7 and 12, an

appropriate listing and description of associates including the proportion

of ownership interest and, if different, the proportion of voting power

held should be disclosed in the consolidated financial statements.

23. Investments in associates accounted for using the equity method

should be classified as long-term investments and disclosed separately

in the consolidated balance sheet. The investor’s share of the profits or

losses of such investments should be disclosed separately in the

consolidated statement of profit and loss. The investor’s share of any

extraordinary or prior period items should also be separately disclosed.

24. The name(s) of the associate(s) of which reporting date(s) is/are

different from that of the financial statements of an investor and the

differences in reporting dates should be disclosed in the consolidated

financial statements.

25. In case an associate uses accounting policies other than those

adopted for the consolidated financial statements for like transactions

and events in similar circumstances and it is not practicable to make

10 Pursuant to AS 29, Provisions, Contingent Liabilities and Contingent Assets,

becoming mandatory in respect of accounting periods commencing on or after

1.4.2004, all paragraphs of AS 4 that deal with contingencies stand withdrawn except

to the extent they deal with impairment of assets not covered by other Indian

Accounting Standards. Reference may be made to Announcement XX under 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.

Accounting for Investments in Associates 447

appropriate adjustments to the associate’s financial statements, the fact

should be disclosed along with a brief description of the differences

in the accounting policies.

TransitionalProvisions

26. On the first occasion when investment in an associate is accounted

for in consolidated financial statements in accordance with this

Statement, the carrying amount of investment in the associate should

be brought to the amount that would have resulted had the equity method

of accounting been followed as per this Statement since the acquisition

of the associate. The corresponding adjustment in this regard should be

made in the retained earnings in the consolidated financial statements.