CA Sandesh Mundra

PRACTICAL ASPECTS in

Consolidation of Accounts

CA Sandesh Mundra

Background

Not mandatory under the Companies Act, 1956 –which prescribes for a Statement under section 212

Thus the Financial performance and net worth of the group as a whole can-not be known to the stakeholders

SEBI made consolidation mandatory for listedcompanies AS 21 provides guidelines for consolidation

CA Sandesh Mundra

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 would be as per AS-13– Follow other AS in CFS, as applicable

CA Sandesh Mundra

Applicability Effective in respect of accounting periods commencing on or after April 01, 2001 Applicable to enterprises that present consolidatedfinancial statements:-

– Mandatory for listed entities– Optional for other entities

CA Sandesh Mundra

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

CA Sandesh Mundra

Key Definitions…

Subsidiary– Enterprise controlled by another enterprise

Control– The ownership, directly or indirectly through subsidiary (ies), ofmore 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 asto obtain economic benefits from its activities

(Control is established where there is power to appoint all ormajority of directors/members without the consent orconcurrence of any other person)

CA Sandesh Mundra

...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

CA Sandesh Mundra

What includes in CFS?

• Balance Sheet

• Profit and Loss A/c. Use Same format;e.g. Schedule VI

• Notes, other statements and explanatorymaterial that form an integral part thereof

• Cash flow statement

CA Sandesh Mundra

Consolidate results of all subsidiaries (domestic /Foreign)

ScopeSubsidiary – Corporate or Non-Corporate – ControlPrerequisite

Exceptions:– Gratuity Trust, Provident Fund Trust – Not held for economic benefits definition of Control (supra)Section 25 Company or a Charitable Trust?

CA Sandesh Mundra

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 forExclusion

Exclusion when activities are dissimilar?

CA Sandesh Mundra

Consolidation procedures… Line by line consolidation

Elimination of parent’s investments and parent’s portion of equity determining goodwill (cost of investments > parent’s portion of equity);

or

capital reserve (cost of investments < parent’s portion ofequity) arising on date of investment

CA Sandesh Mundra

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?

CA Sandesh Mundra

...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

CA Sandesh Mundra

Consolidation procedures…

Elimination of intra group transactions includingsales, expenses, dividends, and unrealized profits onsale of stocks / assets.

Eliminate unrealized losses unless cost cannot berecovered.

(Unrealized profits and loss on transactions relatingto periods prior to April 2001 may not beeliminated if not practicable to determine)

CA Sandesh Mundra

…Consolidation procedures

Same reporting date for financial statements used inconsolidation; orIf date of reporting differs, 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

CA Sandesh Mundra

Disposal of stake in subsidiary

Results to be included in the consolidated profit andloss account upto the date parent subsidiary

relationship ceases to exist.

Difference between proceeds from investmentsdisposal and equity on the date of disposal recognised

in the consolidated profit and loss account

CA Sandesh Mundra

Disclosures… List of all subsidiaries including name, country of incorporation,proportion of ownership interest and, if different, the proportionof voting power

The nature of relationship between parent and subsidiary, ifparent does not own one-half of the voting power

The effect of the acquisition and disposal of subsidiaries on thefinancial position at the reporting date, the results for thereporting period and on the corresponding amounts for thepreceding period

The names of the subsidiaries of which the reporting dates aredifferent from that of the parent and the difference in reportingdates

CA Sandesh Mundra

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 shouldbe considered at the time of acquisition of theinvestment

CA Sandesh Mundra

ASI 15

All the notes of separate FS of parent andsubsidiaries need not be included in the notes to CFS.

Notes necessary for presenting a true andfair view of CFS notes involving items which are material

Additional statutory information if material

CA Sandesh Mundra

ASI 24 Control

Enterprise is controlled by two enterprises– Investment– Composition of Board

Consolidation to be done by both

CA Sandesh Mundra

Key difference between the def’n of subsidiary as per The Companies Act, 1956 and as per AS-21

AS-21 includes non-corporate entities to be defined as subsidiaries.

AS-21 requires ownership of more than 50% of voting power and not more than 50% of nominal value of shares.

As per AS-21, Control by way of composition of BOD should be to obtain economic benefits from from the activities of the entity.

CA Sandesh Mundra

AS-23 – Accounting for Investment of Associates in CFS An associate is an enterprise in which the investor has

significant influence and which is neither a subsidiary nor a joint venture 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

As regards share ownership, if an investor holds, directly or indirectly through subsidiary(ies), 20%ormore of the voting power of the investee, it is presumed

that the investor has significant influence, unless it can be clearly demonstrated that this is not the case.

CA Sandesh Mundra

AS 23 continued….. As regards share ownership, if an investor holds, directly or

indirectly through subsidiary(ies), 20%ormore of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated

that this is not the case.

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.

CA Sandesh Mundra

AS-27 – Financial Reporting of Interests in Joint Ventures A joint venture is a contractual arrangement whereby two or more

parties undertake an economic activity, which is subject to joint control.

Joint control is the contractually agreed sharing of control over aneconomic activity.

In its consolidated financial statements, a venturer should reportits interest in a jointly controlled entity using proportionateconsolidation except(a) an interest in a jointly controlled entity which is acquired andheld exclusively with a view to its subsequent disposal in thenear future5; and(b) an interest in a jointly controlled entity which operates undersevere long-term restrictions that significantly impair itsability to transfer funds to the venturer.

CA Sandesh Mundra

Poser 1

M/s Urea Corporation Ltd sold all its three subsidiaries at different dates during the year. Whether is it required to present CFS?

As per Para 22 of AS-21 – results of operations of subsidiaries where the relationship has ceased during the year are included in CFS profits till the date of cessation. Thus even if the company is a parent at any time during the year the preparation of CFS becomes compulsory.

CA Sandesh Mundra

Poser 2 M/s Bottles International Ltd has 100 subsidiaries. It

is preparing CFS, would it be still required to attach all subsidiaries FS as per Section 212 of The Companies Act, 1956?

Central Government has issued a circular giving guidelines for applications seeking exemptions from the requirement of Section 212. Those parents which are not granted exemption will have to attach the financials of all the subsidiaries.

CA Sandesh Mundra

Poser 3

M/s HLS Ltd and M/s LHS Ltd each hold 50% equity in M/s HLHS Ltd. Each company exercises control over the board every alternate year.

Subsidiaries should not be consolidated when there are long term restrictions which hinder control. Thus Joint Venture accounting needs to be followed as per AS-27.

CA Sandesh Mundra

Poser 4

M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS?

Intention to control is not relevant in AS-21, hence M/s ICAI Ltd will have to consolidate M/s ICSI Ltd.

CA Sandesh Mundra

Poser 4

M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS?

Intention to control is not relevant in AS-21, hence M/s ICAI Ltd will have to consolidate M/s ICSI Ltd.

CA Sandesh Mundra

Poser 4

M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS?

Intention to control is not relevant in AS-21, hence M/s ICAI Ltd will have to consolidate M/s ICSI Ltd.

CA Sandesh Mundra

Poser 5

M/s Gujarat Ltd owns 60% in M/s Ahmedabad Ltd. M/s Ahmedabad Ltd owns 60% in M/s AMC Ltd. Thus indirectly M/s Gujarat Ltd owns 36% shares in M/s AMC Ltd. Is M/s AMC Ltd subsidiary of M/s Gujarat Ltd as per AS-21?

As per AS-21 an enterprise becomes a subsidiary if more than one-half of voting power directly or indirectly is held by another enterprise. Thus if a resolution is put to vote in M/s AMC Ltd, M/s Gujarat Ltd because of its control over M/s Ahmedabad Ltd will be able to pass that resolution.

CA Sandesh Mundra

Poser 6 M/s Sonia Ltd A has four wholly owned

subsidiaries which own 25% each in M/s Manmohan Ltd. Whether equity accounting would b required by the intermediary subsidiaries and then consolidated by M/s Sonia Ltd, or would it directly consolidate?

M/s Sonia Ltd is exercising the control of voting power indirectly. Hence it can directly consolidate M/s Manmohan Ltd.

CA Sandesh Mundra

Poser 7

M/s China Ltd acquired 60% equity in M/s Hongkong Ltd on 31-03-2004. However due to control restrictions it could not consolidate the entity. But w.e.f 1-4-2008 all restrictions have gone . How should be the goodwill calculation be done?

As per para 22 of AS-21, “ The result of operations of a subsidiary are included in CFS from the date on which the parent-subs relationship came into existence. Thus calculation of goodwill would be with reference to the date of acquisition i.e. 31-03-2004 and not with reference to the date on which the subsidiary came out of restriction.

CA Sandesh Mundra

Poser 8

M/s ISI Ltd is completely funded by M/s Pakistan Ltd, although it is not owning any equity/control whether directly or indirectly as per AS-21. Would it be required to consolidate the same?

This is the concept of SPV – Special Purpose Vehicles which has not been taken into consideration under the Indian GAAP. However under IAS 27- ability to direct / dominate the decision making of an enterprise by other enterprise for its own benefits is one of the criteria under which the enterprises would have to be consolidated.

CA Sandesh Mundra

Consolidation of subsidiary where full provision is made for diminution

The fact that entry for diminution has been passed does not effect the position with regard to consolidation as long as the entity Is legally satisfying the control criteria as laid down under AS – 21.

CA Sandesh Mundra

Consolidation by preference share holder Under the Indian Companies Act, preference

share holders are entitled to vote if dividends are not paid for a particular period of time, which in exceptional situtation may give them more than 50% voting power.

Since such control is temporary in nature the control criteria of AS-21 is not satified.

CA Sandesh Mundra

THANK YOU…………