Associated Companies in Consolidated Financial Statements

The Institute of Chartered Accountants of India issued Accounting Standard 23 on ‘Accounting for Investments in Associates in Consolidated Financial Statement’ effective in respect of accounting periods commencing on or after 1.4.2002.

The accounting standard sets out principles and procedures on recognising, in the consolidated financial statements the effect of investment in associates on the financial positions and operating results of the group. An associated company is one in which the investor has significant influence but 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.

Broadly, it may be stated that if the investor holds 20% or more of the voting power, it will have the power to exercise significant influence over the investee company. The interest should be a long-term one-temporary acquisition of shares will not make the investee company an associated company.

Equity Method:

In the equity method of accounting, the investment is initially recorded at cost, identifying any goodwill or capital reserve arising at the time of acquisition. The carrying amount of investment is adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the investee. In the consolidated profit and loss account, investor’s share of the results of opera­tions of the investee is shown.

Dividends received from an investee reduce the carrying amount of the investment. But divi­dend proposed by the associate company will not affect the carrying amount of the investment in the books of the investor.

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 income statement. For example revaluation of fixed assets of the investee company may require such an adjustment; an appreciation in the value of fixed assets being recorded through revaluation reserve.


Illustration 1:

R Ltd. acquired on October 1, 2010, 300 lakh shares of Rs 10 each in V Ltd. paying Rs 4,90,000 thousand for the shares. The issued share capital of V Ltd. consisted of 10 crore shares. In 2010-11, it earned a profit of Rs 2,50,000 thousand and on June 16, 2011 it paid a dividend of 15%. During 2011-2012, it suffered a loss of Rs 90,000 thousand.

Show the Investment Account in the books of R Ltd. and also show by means of a memorandum account the value at which the investment account may be shown in the Balance Sheet of R Ltd. on 31st March, 2012 assuming V Ltd. is member of a group.


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