Consolidation Accounting Indian GAAP. Consolidation Accounting – Indian GAAPPage 2 Contents ► AS 21 – Consolidated Financial Statements ► AS 23 – Accounting

Consolidation Accounting

Indian GAAP

Consolidation Accounting – Indian GAAPPage 2

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


Key features:

► Objective and scope

► Concept of ‘Group’, ‘Minority Interest’ etc.

► Control

► Exclusion from consolidation

► Concept of associate and its accounting

► Concept of joint venture and its accounting

► Issues in consolidation accounting

► Auditing of consolidated financial statements


Consolidation requirements

► Legal 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 entity


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 ratios


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

Control


General rule

<20% Ownership

20% to 50% Ownership

>50% Ownership

Control

Consolidate

Significant Influence

Equity

Accounting

Less than significant influence

AS-13 Accounting for

Investment


Accounting for share of losses

FullFull

Restricted to the carrying amount of investment*Restricted to the carrying amount of investment*

Proportion of their shares in the venture* Proportion of their shares in the venture* Joint VentureJoint Venture

AssociatesAssociates

SubsidiarySubsidiary

* Unless there is a binding obligation


Control

► Three Criteria:► Direct ownership of more than half of the voting power► Indirect 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 ?


Control example-1

Company B

Company A

Company C

60% Holding60% Holding

Representationof 3/4 directorsRepresentationof 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


Control example-2

Is Company D controlled by Company A ?

Company A

Company B

Company D

Company C

100 % 100 %

30 %30 %


Is Company D controlled by Company A ?

Company A

Company B

Company D

Company C

51 % 51 %

30 %30 %

Control example-3


Is Company C controlled by Company A ?

Company A

Company B

Company C

40 %

40 %

60 %

Control example-4


Start and end of consolidation

► Date from which holding subsidiary relationship comes into existence

► Date upto which holding subsidiary relationship ceases to exist

Start

End


Steps to consolidate

► Eliminate cost of investment and related equity accounts

► Identify 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 transactions


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?


Calculation of GW and MI –Step by step basis

Acquisition

cost% share

holdingNet Assets

Own Share

Minority Interest Goodwill

Oct-01 65 60% 50 30 20 35

Oct -Dec 60% 30 18 12

Dec-02 80 48 32 35

Jan-02 22 20% 80 16 -16 6

80 64 16 41

Jan -Mar 80% 40 32 8

Mar-02 87 80% 120 96 24 41


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 acquisition


Amortisation of goodwill

Issue► Whether 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.


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 -


GoodwillH 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 Goodwill


Goodwill – other issues

► Determination 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 interest


23

Classification of Foreign Entity

► As 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 subjective


Foreign operations/ subsidiaries

► Appropriate 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 rate► Translation gain or loss is accounted in foreign currency translation reserve.► Goodwill/capital reserve of non-integral operations - Closing rate


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


AS 23 – Investments in associates

► Goodwill/Capital Reserve – included in carrying amount of investment and to be disclosed separately

► Outstanding cumulative preference shares held outside the group – preference dividend to be adjusted whether declared or not

► Carrying amount of investments – reduce to recognise a decline other than temporary


AS 23 – Investments in Associates

► Treatment of Proposed Dividend

► Consideration 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 equity


Adjustments to the carrying amount of Investment arising from changes in equity

Adjustments 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 premium


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 entity


Company A Company B

Company JV(Contractual arrangement for joint control)

60%60% 40%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 JV


Inter Group transactions

► Parent & subsidiary

► Subsidiary & subsidiary

► Parent/subsidiary & Associate

► Parent/subsidiary & JV

► Associate & Associate

► JV & JV

► Associate & JV


Other Considerations

► FS should be of same reporting date

► Not practicable then drawn up to different reporting dates

► Adjustments 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 Venture


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 consolidation


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%25%NAV – Rs.100NAV – Rs.100

A Ltd.

B Ltd.

20%20%NAV – Rs.150NAV – Rs.150

Issue of shares by B at a premiumIssue of shares by B at a premium


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 ESOP


Widespread

1 Equity Owner

Company A

74%74%26%26%

Able to nominate maximum number of directors on the board

Consolidation- Control

Would the single 26% Equity Owner consolidate as per AS 21?


Key issues

► Subsidiaries 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


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 subsidiaries


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


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 together

► Adjustment for pre-acquisition net worth of subsidiaries

► Other adjustments e.g. accumulated amortization of goodwill, stock reserve

► Minority interest reconciliation

► Goodwill reconciliation

► Investment reconciliation

Documents

Consolidation Accounting Indian GAAP. Consolidation Accounting – Indian GAAPPage 2 Contents ► AS 21 – Consolidated Financial Statements ► AS 23 – Accounting