as 23 and 27 consolidation of associates / joint...
TRANSCRIPT
AS 23 and 27 –
Consolidation of Associates
/ Joint Ventures
Presentation by:
CA Geetha Jayakumar
November 15, 2014
2
General Introduction
Companies Act, 2013
Consolidated Financial Statements
Where a company has one or more subsidiaries, it shall, in addition
to standalone financial statements prepare a consolidated financial
statement (CFS) of the company and of all the subsidiaries in the
same form and manner as that of its own which shall also be laid
before the AGM of the company along with the laying of its financial
statement.
Company shall also attach along with its financial statement, a
separate statement containing the salient features of the financial
statement of its subsidiary or subsidiaries in Form AOC I
‘Subsidiary’ includes ‘associate company’ and ‘joint venture’
(Associate means a Company other than a subsidiary company and
joint venture company in which the other Company has a significant
influence)
Consolidated Financial Statements…
Manner of consolidation of accounts.-
The consolidation of financial statements of the company
shall be made in accordance with the provisions of Schedule
III of the Act and the applicable accounting standards.
Provided that in case of a company covered under Sec.
129(3) which is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be
sufficient if the company complies with provisions on
consolidated financial statements provided in Schedule III of
the Act.
Rule 6 of Companies (Accounts) Rules, 2014
Preparation of CFS will not be applicable to an Intermediate
Wholly Owned Subsidiary, except if its immediate parent is a
company incorporated outside India.
For Financial Year ending 31 March 2015, if a company does
not have any subsidiaries, but only has associates and/or joint
ventures, then the company would not have to prepare CFS in
respect of such associates and/or joint ventures
As per MCA Circular, Schedule lll to the Act read with
Accounting Standards does not envisage a company to merely
repeat the disclosures made by it under stand-alone accounts
when it prepares CFS.
In the CFS, a company would need to give all disclosures
relevant for the CFS only.
Consolidated Financial Statements…
MCA Circular dated October 14, 2014
Consolidated Financial Statements
Section 2(6) defines associate company.
Associate company, in relation to another company, means a company in
which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a
joint venture company.
Explanation - For the purpose of this clause, significant influence means
control of at least twenty per cent of total share capital, or of business
decisions under an agreement.
Section 2 (87) defines subsidiary company.
“subsidiary company” or “subsidiary”, in relation to any other company (that
is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either
at its own or together with one or more of its subsidiary companies:
7
Accounting Standard 27
Financial Reporting of
Interests in Joint Ventures
8
Topics Covered
I. Definitions
II. Forms of Joint Ventures
III. Jointly Controlled Operations
IV. Jointly Controlled Assets
V. Jointly Controlled Entities
VI. Disclosure
Scope
To be applied in accounting for investment in joint ventures,
and the reporting of joint venture assets, liabilities, income and
expenses in the financial statements of venturers and
investors, regardless of the structure and forms under which
the joint venture activities take place
Applicable only where CFS is prepared and presented by the
venturer
Control
1. Voting Power 50 % or more
OR AS 21
2. Power to Compose General Body AS 18
OR
3. Substantial Interest and
Power to Direct Financial /
Operating Matters
4. Power to govern Fin. and Op. Matters AS 27
5. Power to Participate AS 23
(significant Influence)
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Interests in Joint Ventures - Definitions
A Joint Venture is a contractual arrangement whereby
two or more parties undertake an economic activity
which is subject to joint control
Control is the power to govern the financial and
operating policies of an economic activity so as to
obtain benefits from it
Joint control is the contractually agreed sharing of
control over an economic activity
12
Interests in Joint Ventures - Definitions
Venturer is a party to the Joint Venture and has joint
control over that
An investor in a joint venture is a party to a joint venture
and does not have joint control over that joint venture
Proportionate consolidation is a method of accounting
whereby a venturer’s share of each of the assets, liabilities,
income and expenses of a jointly controlled entity is
combined line by line with similar items in the venturer’s
financial statements or reported as separate line items in
the venturer’s financial statements.
Joint Venture is of Three Type :
Joint Venture
Jointly Controlled Asset ( JCA) No Company is made
Jointly Controlled Operation ( JCO) No Company is made
Jointly Controlled Entity Company is made
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Jointly Controlled Operations
No separate entity
Each of the venturers use their own assets and
incurs its own expenses and liabilities
The joint venture agreement provides basis for
share of joint revenue and expense
No adjustments or consolidation procedures
required when CFS is presented
Eg: Aircraft manufacture and sale.
15
Jointly Controlled Operations
Presentation and Accounting
A venturer should recognise in its separate financial statements:
The assets that it controls and the liabilities that it incurs; and
The expenses that it incurs and its share of the income that it earns from the sales of goods or services by the joint venture.
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Jointly Controlled Assets
No separate entity
Joint control or ownership of one or more assets contributed to
or acquired for the purpose and dedicated to a joint venture
Each of the venturers has control over its share of the future
economic benefits through its share of the jointly controlled
asset.
The joint venture agreement provides basis for share of joint
revenue and expense. Each venturer to recognise its share
of asset / liability / income / expense in its accounts. No adjustments on CFS
Eg: Oil, gas and mineral extraction industry.
17
Jointly Controlled Assets
Presentation and Accounting
Each venturer should include the following items in its accounting records:
Its share of the jointly controlled assets
Any liabilities which it has incurred on behalf of the joint venture
Its share of income, together with its share of any expenses incurred by the joint venture
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Jointly Controlled Entities
Establishment of a corporation, partnership or any
other entity
Contractual agreement between venturers establish
joint control over the economic activity of the entity
Jointly controlled entity maintains its own set of
accounts and prepares financial statements.
Each venturer contributes cash or other resources to
the jointly controlled entity.
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Jointly Controlled Entities
Description
A jointly controlled entity controls the assets of the
joint venture, incurs liabilities and expenses and
earns income. It may enter into contracts in its own
name and raise finance for the purposes of the
joint venture activity.
A jointly controlled entity maintains its own
accounting records and prepares and presents
financial statements in the same way as other
entities.
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Jointly Controlled Entities
Presentation and Accounting
A venturer shall recognise its interest in a jointly
controlled entity using either proportionate consolidation
When investment ceases to be a JCE – From the date of
cessation, the net assets of the JV after adjusting the
goodwill/ capital reserve are treated as investment in the
venture
21
Jointly Controlled Entities
Transactions between venturer and joint venture
When venturer contributes or sells assets to JV, and
the asset is retained, then the venturer shall recognise
only the portion of gain or loss that is attributable to the
interests of the other venturer.
When venturer purchases assets from a JV, the
venturer shall not recognise its share of profits until it
resells the assets to an independent party.
Transactions between the venturer and the
venture
Upon sale of any individual asset to the JV, only proportional gain
(that is, interest of other venturers) should be recognised by the
venturer
– Example: in a venture, A has 30% interest, others have the
remaining 30%. A sells an asset, having carrying value of Rs 1000 for
a price of Rs 1500.
• In separate financial statements, A would book a gain of Rs 500
• In consolidated financial statements, A would book a gain of only 70% of
500 – correspondingly, the value of the asset bought will stand reduced in
consolidated statements
If an asset is sold for a loss – If the loss represents impairment, it is
booked fully
– As a loss in separate accounting statements
– As impairment in consolidated fin statements
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23
Disclosures
Contingencies
A venturer should disclose the aggregate amount of the contingent liabilities, unless the probability of loss is remote, separately from the amount of other contingent liabilities.
A venturer discloses the aggregate amount of any capital commitments in respect of its interests in joint ventures separately from other commitments
24
Disclosures
A venturer should list and describe interests in
significant joint ventures and the proportion of ownership interest held in jointly controlled entities.
A venturer which reports its interests in jointly controlled entities using the line by line reporting format for proportionate consolidation or the equity method should disclose the aggregate amounts of each of:
Current assets
Long term assets
Current liabilities
Long term liabilities
Income and expenses related to its interests in joint ventures.
A venturer should disclose a list of all joint ventures and description of interests in significant joint ventures. In respect of jointly controlled entities, the venturer should also disclose the proportion of ownership interest, name and country of incorporation or residence.
Disclosure for Joint Venture
19 INVENTORIES March 201X March 201X
(at Lower of Cost or Realisable value)
Raw materials and components
4,313
4,313
Raw material overseas goods-in transit
203
203
Work-in-progress
2,422
2,200
Stores and Spares
1,693
1,634
Loose Tools
43
714
Finished Goods
4,148
2,600
Finished goods-in transit
614
277
Stock in Trade
81
24
Share in Joint Ventures
6,062
4,019
Total Inventories
19,579
15,984
Disclosure for discontinuance of accounting for JV
Interests in joint ventures-
a) During the year, the Company’s venture in Tunisia [the Tunisian Indian
Fertiliser S.A. (TIFERT)], has commissioned the phosphoric acid plant and
commenced production. Pursuant to the shareholders’ agreement in relation to
TIFERT, the day to day operations have been assumed by the Tunisian
Partners and the Company has accordingly discontinued proportionate
consolidation under Accounting Standard 27 - “Financial Reporting of Interests
in Joint Ventures” and is treating its investment in TIFERT under AS 13 -
“Accounting for Investments
Disclosure for Joint Venture
32 Information on Joint Venture Entities
The particulars of the Company's Joint Venture Entities as at March 31, 2014 including percentage holding and its proportionate share of assets, liabilities, income and expenditure of the Joint Ventures are given below:-
S No. Name of the Joint
Venture
As at March 31, 2014 2013-2014
% of Holding
Assets Liabilities Contingent Liabilities
Capital Commitme
nts Income Expenses
1 Rane TRW Steering Systems Limited
50%
18,578
18,578
1,920
789
30,070
28,844
50%
(18,001)
(18,001)
(2,194)
(1,040)
(32,304)
(30,091)
2 Rane NSK Steering Systems Limited
49%
12,848
12,848
41
150
25,871
24,745
49%
(10,179)
(10,179)
(41)
(686)
(28,213)
(26,436)
3 JMA Rane Marketing Limited
49%
1,248
1,248
-
-
2,708
2,576
49%
(1,181)
(1,181)
-
-
(2,507)
(2,351)
Note:
1. Figures in bracket relates to the previous year.
2. All the above Joint Venture Entities located in India.
29
Accounting Standard 23
Accounting for Investments
in Associates in Consolidated
Financial Statements
30
Topics Covered
I. Scope and Definitions
II. Significant Influence
III. Potential voting rights
IV. Methods of Consolidation
V. Disclosures
Scope
To be applied in accounting for investment in
associates in the preparation and presentation of
consolidated financial statements by an investor.
Definition
An associate is an enterprise over which the investor
has significant influence and that is neither a subsidiary
nor an interest in a joint venture.
Significant influence is the power to participate in
the financial and/or operating policy decisions of the
investee but is not control or joint control over those
policies.
Definition
If an investor holds, directly or indirectly (eg through subsidiaries),
20 per cent or more 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.
Conversely, if the investor holds, directly or indirectly (eg through
subsidiaries), less than 20 per cent 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.
A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
Potential equity shares of the investee held by the investor should
not be taken into account for determining the voting power of the
investor
Significant influence….
Representation on the board of directors or equivalent
governing body of the investee;
Participation in policy-making processes, including
participation in decisions about dividends or other
distributions;
Material transactions between the investor and the
investee;
Interchange of managerial personnel; or
Provision of essential technical information.
Significant influence….
The chairman of the investee owns a large, but not necessarily controlling,
block of the investee's outstanding stock; the combination of the chairman's
substantial shareholding and his position with the investee may preclude the
investor from having an ability to influence the investee.
Adverse political and economic conditions in the country of existence
Opposition by the investee
Agreement between investor and investee
Majority ownership of the investee is concentrated among a small group of
shareholders who operate the investee without regard to the views of the
investor.
Litigation against an investee
Severe long-term restrictions impair the investor's ability to repatriate funds
Equity Method
Under the equity method, the investment in an associate is
initially recognised at cost and the carrying amount is increased or
decreased to recognise the investor's share of the profit or loss of
the investee after the date of acquisition.
Adjustments to the carrying amount may also be necessary for
changes in the investor's proportionate interest in the investee
arising from changes in the investee's other comprehensive income.
Such changes include those arising from the revaluation of property,
plant and equipment and from foreign exchange translation
differences.
Application of Equity Method
Interests other than equity interest may form part of net
investment.
Net investment initially recognized at cost.
Carrying amount increased/decreased based on
investor’s share of profit/loss of investee.
Investor’s share of profit/loss recognized in investor’s
profit/loss.
Distributions reduce carrying amount.
Investor’s share of profit/loss reflects present ownership
interests and/or other contractual arrangements.
Exceptions to Equity Method
If the investment is acquired and held exclusively with a
view to its subsequent disposal in the near future; or
The associate operates under severe long term
restrictions that significantly impair its ability to transfer
funds to the investor
Application of Equity Method - Losses
If losses exceed interest in associate
Interest in associate is carrying amount of investment together with
any long-term interests that, in substance, form part of the investor’s
net investment in the associate.
If losses exceed interest in associate, investor should discontinue
recognizing its share of further losses unless a legal obligation
exists.
Future profits recognized only when profits exceed share of losses
not recognized.
If distribution by associate is in excess of investor’s carrying amount,
record distribution as income, provided:
Distributions are not refundable by agreement or law and
Investor is not liable for obligations of associate or committed to
provide financial support to the associate
On Acquisition
An investment in an associate is accounted for using the
equity method from the date on which it becomes an
associate. On acquisition of the investment any
difference between the cost of the investment and the
investor's share of the equity of the associate is
described as goodwill or capital reserve as the case may
be.
Example -equity method
On 1/3/20X1 A buys 30% of B for Rs.300,000 (assume
no implicit goodwill).
B’s profit = Rs.80,000 for the year ended 31/12/20X1
(including 66,667 from March to Dec).
On 31/12/20X1 B declared a dividend of Rs.100,000.
At 31/12/20X1 the recoverable amount of A’s
investment in B = Rs.290,000 (ie Rs.300000 minus
Rs.30000 plus Rs. 20000).
41
Example -equity method
A Limited holds 22% share of B Limited on 1st April of
the year and the relevant information available on the
date of investments are: Cost of investment Rs.33000
and total equity on date of acquisition Rs.200000
Ans:
A Ltd’s equity will be 22% of Rs.200000 = Rs.44000
Less: Cost of Investment- Rs.33000
Capital Reserve Rs.11000
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On Acquisition
Therefore:
a. goodwill relating to an associate is included in the
carrying amount of the investment. However,
amortisation of that goodwill is not permitted and is
therefore not included in the determination of the
investor's share of the associate's profits or losses.
b. any excess of the investor's share of the net fair value of
the associate's identifiable assets, liabilities and
contingent liabilities over the cost of the investment is
excluded from the carrying amount of the investment and
is instead included as income in the determination of the
investor's share of the associate's profit or loss in the
period in which the investment is acquired.
Distributions
How should distributions, by an equity method investee
to an investor in excess of the investor's carrying
amount, be recorded?
If distributions by an equity method investee to an
investor are in excess of the investor's carrying amount,
and (1) the distributions are not refundable by agreement
or law, and (2) the investor is not liable for the obligations
of the investee or otherwise committed to provide
financial support to the investee, then cash distributions
received in excess of the investment in the investee
should be recorded as income.
Disclosures
• Investment in associates to be listed by proportion of ownership
interest / voting power held in each associate
• Investments to be classified as long-term investments
• Investor's share of the profits / losses to be disclosed separately
• Associates where reporting date is different with difference in
dates
• In case of difference in accounting policies between parent and
associate, make appropriate adjustments in CFS to account for
the difference. Where this is not practicable, the fact should be
disclosed along with a brief description of differences in
accounting policies.
• Investor’s share of the contingencies and capital commitments of
an associate for which it is also contingently liable
Disclosure for Associates
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.
Companies Equity shares held % of voting power
held
As at March
31,2014
As at March
31,2013
As at
March
31,2014
As at
March
31,2013
Associates
Kar Mobiles Limited 886,369 884,369 40% 39%
SasMos HET Technologies Private Limited
351,400 351,400 26% 26%
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.
Year ended March
31, 2014
Year ended March 31,
2013
IX. Profit after tax before share of Profit/(Loss) of associates and minority interest (VII - VIII)
4,501 4,887
X. Share of Profit /(Loss) of associates 174 -27
XI. Less: Minority Interest 327 1,023
XII. Profit for the year (IX + X - XI) 4,347 3,837
Equity accounted associates March 2014 March 2013
(i) Cost of investment
[including Rs. 129.96 crores (31.03.2013: Rs117.90 crores) of
goodwill (net of capital reserve) arising on consolidation]
698.59 654.99
(ii) Share of post acquisition profit (net of losses) 117.68 259.24
Total 816.27 913.23
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