Consolidation Accounting
Indian GAAP
Contents
Page 2
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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
Consolidation Accounting – Indian GAAP
Key features:
►
Objective and scope
►
Concept of ‘Group’, ‘Minority Interest’ etc.
►
Control
►
Exclusion from consolidation
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Concept of associate and its accounting
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Concept of joint venture and its accounting
►
Issues in consolidation accounting
►
Auditing of consolidated financial statements
Page 3
Consolidation Accounting – Indian GAAP
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
Page 4
Consolidation Accounting – Indian GAAP
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
Page 5
Consolidation Accounting – Indian GAAP
Accounting for the economics
Control
Consolidation
Significant
Influence
Equity Method
Corporate
relationship
Neither control nor
significant influence
Cost or Fair Value Method
Joint control
Proportionate
consolidation
Page 6
Consolidation Accounting – Indian GAAP
General rule
<20%
Ownership
20% to 50%
Ownership
>50%
Ownership
Control
Consolidate
Significant
Influence
Less than
significant
influence
Page 7
Equity
Accounting
AS-13
Accounting for
Investment
Consolidation Accounting – Indian GAAP
Accounting for share of losses
Subsidiary
Full
Associates
Restricted to the carrying
amount of investment*
Joint Venture
Proportion of their
shares in the venture*
* Unless there is a binding obligation
Page 8
Consolidation Accounting – Indian GAAP
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 ?
Page 9
Consolidation Accounting – Indian GAAP
Control example-1
Company A
Representation
of 3/4 directors
60%
Holding
Company B
Company C
Both B and C will consolidate A in their books as per AS 21, as both the companies
have control over A
Page 10
Consolidation Accounting – Indian GAAP
Control example-2
Company A
100 %
Company B
30 %
100 %
Company C
Company D
Is Company D controlled by Company A ?
Page 11
Consolidation Accounting – Indian GAAP
30 %
Control example-3
Company A
51 %
51 %
Company B
30 %
Company C
Company D
30 %
Is Company D controlled by Company A ?
Page 12
Consolidation Accounting – Indian GAAP
Control example-4
Company A
40 %
40 %
Company B
Company C
60 %
Is Company C controlled by Company A ?
Page 13
Consolidation Accounting – Indian GAAP
Start and end of consolidation
Start
►
Date from which holding subsidiary relationship comes
into existence
End
►
Date upto which holding subsidiary relationship ceases to
exist
Page 14
Consolidation Accounting – Indian GAAP
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
Page 15
Consolidation Accounting – Indian GAAP
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?
Page 16
Consolidation Accounting – Indian GAAP
Calculation of GW and MI –Step by step basis
Acquisition
cost
Oct-01
65
Oct -Dec
% share
holding
22
Jan -Mar
Mar-02
Page 17
87
Own
Share
Minority
Interest
Goodwill
35
60%
50
30
20
60%
30
18
12
80
48
32
35
80
16
-16
6
80
64
16
41
80%
40
32
8
80%
120
96
24
Dec-02
Jan-02
Net
Assets
20%
Consolidation Accounting – Indian GAAP
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
Page 18
Consolidation Accounting – Indian GAAP
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.
Page 19
Consolidation Accounting – Indian GAAP
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
-
Page 20
Consolidation Accounting – Indian GAAP
Goodwill
H 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
Page 21
Consolidation Accounting – Indian GAAP
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
Page 22
Consolidation Accounting – Indian GAAP
Classification of Foreign Entity
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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
23
Page 23
Consolidation Accounting – Indian GAAP
Foreign operations/ subsidiaries
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Appropriate classification of foreign operations is critical for proper
disclosure of assets and liabilities and accounting of translation gains
and losses.
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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
►
►
►
Page 24
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
Consolidation Accounting – Indian GAAP
Significant influence
Significant influence may be exercised in several ways:
►
Representation on the Board of directors
►
Participation in policy making process
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Material intercompany transactions
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Interchange of managerial personnel
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Dependence on technical information
►
Share ownership - 20 % or more
Page 25
Consolidation Accounting – Indian GAAP
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
Page 26
Consolidation Accounting – Indian GAAP
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
Page 27
Consolidation Accounting – Indian GAAP
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
Page 28
Consolidation Accounting – Indian GAAP
AS 27 – Interests in Joint Venture
►
Three Types of Joint Venture:
►
Jointly controlled operations
►
►
►
Jointly controlled assets
►
Oil pipeline
►
Building
Jointly controlled entity
►
Page 29
Manufacture of an aircraft
Separate legal entity
Consolidation Accounting – Indian GAAP
Accounting for JV which is a subsidiary
Company A
Company B
60%
Company JV
(Contractual arrangement
for joint control)
40%
Whether Company should consolidate Company JV as a subsidiary
under AS 21 or a A s a Joint Venture under AS 27?
►
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
Page 30
Consolidation Accounting – Indian GAAP
Inter Group transactions
►
Parent & subsidiary
►
Subsidiary & subsidiary
►
Parent/subsidiary & Associate
►
Parent/subsidiary & JV
►
Associate & Associate
►
JV & JV
►
Associate & JV
Page 31
Consolidation Accounting – Indian GAAP
Other Considerations
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FS should be of same reporting date
►
Not practicable then drawn up to different reporting dates
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Adjustments for significant transactions between those dates
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Difference between reporting dates to be not more than six months
►
Use of uniform accounting policies, else adjusted
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Use of CFS – Associate/Joint Venture
Page 32
Consolidation Accounting – Indian GAAP
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
Page 33
Consolidation Accounting – Indian GAAP
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.
25%
Issue of shares by B at a premium
20%
NAV – Rs.100
B Ltd.
Page 34
A Ltd.
NAV – Rs.150
B Ltd.
Consolidation Accounting – Indian GAAP
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
Page 35
Consolidation Accounting – Indian GAAP
Consolidation- Control
Company A
1 Equity Owner
74%
26%
Widespread
Able to nominate maximum number of directors on the board
Would the single 26% Equity Owner consolidate as per
AS 21?
Page 36
Consolidation Accounting – Indian GAAP
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
Page 37
Consolidation Accounting – Indian GAAP
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
Page 38
Consolidation Accounting – Indian GAAP
Audit of consolidated financial statements
►
Guidance note issued by ICAI deals with the auditing of CFS
►
Guidance covers of the following aspects
Page 39
►
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 Accounting – Indian GAAP
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
Page 40
Consolidation Accounting – Indian GAAP