Accounting for Associates in Consolidated Financial Statements

Accounting for Associates in Consolidated Financial Statements

AS – 23

Contents

Ø      Applicability & Nature

Ø      Meaning of Associates

Ø      Accounting for Associate

Ø      Important Points

Ø      Same Accounting Policies & Reporting Periods

Ø      Disclosures

Applicability & Nature

            Applicable        :           01-04-2002

            Nature              :           Mandatory*

*Mandatory: AS – 23 is applicable only if consolidated financial statements have been prepared as per AS – 21. In the separate books of investor accounting for associates should be carried as per the provisions of AS – 13. On the basis of above explanation it can be said that AS – 23 can be applied only if application of AS – 21 exists.

Meaning of Associate

            Any Enterprise can be classified as an associate if investor is having significant influence in the enterprise.

Meaning of Significant Influence

            Significant influence is the power to participate in the operating & financial decisions of the enterprise but not to control these decisions.

Example of Participation

(a)                Representation of Board of Directors

(b)               Voting Rights

(c)                Interchange of Technical Information

(d)               Interchange of Managerial Personnel

Note:    In normal situation if any investor is having 20% to 50% voting power of any other enterprise then it will be assumed that the other enterprise is an associate of the investor.

            If any investor is having 20% to 50% share with out power of participation then definition of Associate & Application of AS – 23 should not be made.

Accounting of Associate

Step1: Initial recording should be made on cost basis, identify goodwill / capital reserve on the same date.

(As per AS disclosure of investment in associates should be made in CFS at cost at the time of purchase of Investment but share in equity & goodwill / capital reserve should also be made disclosed in CFS on the same date)

Example: A Ltd purchased 40% share of B Ltd on 1-1-99. Cost of investment is of Rs 10,00,000. Following position is available as on 1-1-99:-

                                    Equity Share Capital                 2500000

                                    P&L A/c                                    400000

                                    General Reserve                         200000

                                    Capital Reserve                          300000

                                    Revaluation Reserve                   100000

                                                                                    3500000

Disclose Investment in CFS on the date of Investment.

Sol:

W.N.1             Calculation of Goodwill / Capital Reserve

                        Cost of Investment                                1000000

            Less:    Share in Equity (3500000 x 40%)         1400000

                                                                                    (400000)

CFS (A Ltd + B Ltd)

	Investment in B Ltd Share in Equity                   1400000 Less: Capital Reserve         (400000)    1000000

Example: With the help of same example disclose investment in CFS assuming that cost of Investment is of Rs. 1600000

Sol:

W.N.1             Calculation of Goodwill / Capital Reserve

                        Cost of Investment                                1600000

            Less:    Share in Equity (3500000 x 40%)         1400000

                        Goodwill                                                200000

CFS (A Ltd + B Ltd)

	Investment in B Ltd Share in Equity                   1400000 Add: Goodwill                      200000    1600000

Step2: Adjust post acquisition changes in cost of investment by post acquisition profits or losses. (In case of post profit value of investment will be increased in the asset side & revaluation reserve should be created in liabilities side. If situation is in loss then value of investment should be reduced and amount of reduction should be adjusted first against revaluation reserve & in the absence of revaluation reserve Consolidated P&L A/c should be used.)

Example:          D.O.A              1-1-99

                        COI (30%)                  200000

                        Position of Associate

                        Equity Share Capital                 200000

                        Reserve                                    400000

During 99 Associate has earned a profit of Rs 80000. Disclose investment in CFS as on 31-12-99.

Sol:                                                                       CFS

Investment Revaluation Reserve          24000	Investment in Associate Share in Equity                   180000 Add: Goodwill                      20000 Add: Increase in Equity        24000      224000 (80000 x 30%)

Example: Same above example. Assuming Loss during 99 of Rs 80000.

Sol:                                                                       CFS

Consolidated P&L A/c Less: Loss due to reduction             (24000)	Investment in Associate Share in Equity                   180000 Add: Goodwill                      20000 Less: Decrease in Equity     (24000)      176000 (80000 x 30%)

Step3: Actual distribution received should be deducted out of share in equity. (If any associate has proposed any dividend during the period then amount of proposed dividend should be ignored.)

Example:          D.O.A                          1-1-2004

                        COI                             500000

                        % of Investment            40%

                        Position of Associate

                        Equity Share Capital                 1000000

                        Reserve & Surplus                      800000

During 04 the associate company has earned a profit of Rs 5 Lakh out of which Rs 2 Lakh have been proposed / paid.

Sol:

 CFS (Proposed)

Investment Revaluation Reserve       200000	Investment in B Ltd Share in Equity                   720000 Less: Capital Reserve        (220000) Add: Increase in Equity      200000        700000 (500000 x 40%)

CFS (Paid)

Investment Revaluation Reserve       120000	Investment in B Ltd Share in Equity                   720000 Less: Capital Reserve        (220000) Add: Increase in Equity      120000        620000 (300000 x 40%)

Important Points

(1)               If any associate company is having losses then investor party can recognize share in losses to the extent of cost of Investment.

If any loss is higher than cost of investment then such loss can’t be written off out of Consolidated P&L A/c.

(2)               If any associate is having preference share capital then share in equity should be calculated only after providing preference dividend.

(3)               If any associate company is having different accounting policies which are not used by the investor party in the preparation of CFS then it is the responsibility of associate company to provide required amounts to the investor for consolidation purpose otherwise reasons should be disclosed.

(4)               Accounting period of associate company & investor party should be same for the purpose of consolidation. If in case period are different, it is the responsibility of associate company to provide required information to the investor otherwise reasons should be disclosed.

(5)               Investment in Associate should be long term investment otherwise application of AS – 23 is not required.

Disclosures

(1)               Classify Investment as long term investments.

(2)               Accounting period & accounting policies should be disclosed.

�lr� ��ompletion of intangible the enterprise should be able to use or sell intangible.

Future economic benefit should be measured by suitable assumption.

Financial Resources should be proper to complete the asset.

There will be proper system to record the cost during development phase.

lB's� ��nore'>(3)               Journal Entries

(i)         Cash/Bank/Grant Receivable                Dr

                                    To Govt Grant

(ii)        Grant A/c                                             Dr

                                    To Deferred Grant A/c (It is transferred to reserve &surplus)

(iii)       Deferred Grant A/c                               Dr

                                    To P&L A/c

Refund of Grant:

                        Deferred Grant A/c (O/s Bal)                Dr

                        P&L A/c (which is already used)           Dr

                                                To Cash/Bank/Grant Receivable

Note: At the time of refund of grant total benefit should be reversed in the current period in total irrespective the effect of these transaction on current year profits.

Disclosure:

(i)      Accounting policy should be disclosed separately in relation to classification of nature of grant.

(ii)    If any refund has been made during the period then amount of refund should be also disclosed.

Difference between AS/IAS/US GAAP:

            If any grant is related to promoter’s contributions then accounting of such grant should be made as capital profits as per as-12. The same grant should be recognized as revenue profits as per other statements. Revenue profits should be recognized on deferred basis as per management intention.

Valuation of Inventory

Valuation of Inventory

AS – 2

Contents

Ø      Applicability & Nature

Ø      Meaning of Inventory

Ø      Valuation of Inventory

Ø      Steps in Valuation Procedure.

Ø      Valuation Method

Ø      Important Points

Ø      Disclosures

Applicability & Nature

            Applicable        :           01-04-1999 (Revised)

            Nature              :           Mandatory for all

Meaning of Inventory

 

Held for Sale                Held in production process                   Held for consumption

Finished Goods                  Work in Process                            Raw Material & Supplies

Meaning of Supplies

            As per AS – 2, stock of loosed tools or spare parts should also be covered under the accounting principle of AS. The main condition for the application of AS – 2 of these stocks is only the common use in the production departments. As per ASI – 2 if any spare part is related to a particular fixed assets rather than common use, amount of such spare parts should not be covered under the accounting principle of AS – 2 but principle of AS – 10 should be applied.

Valuation of Inventory

            Cash or NRV whichever is lower.

Note: As per AS if any stock is to be valued at NRV then loss on valuation should be written off in P&L A/c of the same year.

Steps in Valuation Procedure

Step1: Cost Calculation

Step2: NRV Calculation

Step3: Comparison

Cost Calculation

Finished Goods: Purchase Price of Raw Material + Direct Wages + Factory Overheads = Total Cost

WIP: Purchase Price of Raw Material + Direct Wages + Factory Overheads = Total Cost

Raw Material: Purchase Price of Raw Material = Total Cost

Meaning / Calculation of Purchase Price of Raw Material

            In the calculation of purchase price of material all the expenses should be included which are directly incurred for the purchase of material. For Example: Purchase price, Taxes & duty, Freight inward, Material handlings charges or any other expense related to purchase. In the calculation of purchase price amount of trade discount & refundable taxes or duties should not be included.

Meaning of Direct Wages

            Amount of direct wages can be used directly from payroll sheets which are prepared in factory premises at the time of payment of wages.

Meaning of Factory Overheads

Variable Overhead

            Variable overhead are always per unit fixed & amount of these overhead will be changed by change in production units. Amount of variable expenses should be calculated on the basis of actual production because these expenses are always incurred according to the size of production.

Fixed Overhead

            Situation 1:  Actual Production is lower than Normal Production

                                    If any enterprise has produced lower no of units than normal capacity, per unit fixed overhead should be calculated on the basis of normal capacity & such rate should be applied on actual production. If any amount remain unallocated then such amount should be transferred to P&L a/c. but can’t be included as a part of production cost.

Example:          Fixed Overhead                        Rs. 2,00,000

                        Normal Production                   10,000 units

                        Actual Production                     8,000 units

                        Calculate production cost

Sol:      2,00,000 / 10,000 = Rs 20 per unit

            Production cost = 8,000 x Rs 20/- = Rs 1,60,000

            Situation 2:  Actual Production is higher than Normal Production

                                    If actual production is higher than normal production, the total amount of actual expenses should be included as a part of production cost and rate per unit should not be calculated by normal production.

Important note: In the calculation of cost of inventories only factory cost is considered and amount of administration overhead or selling overhead should not be considered in the calculation of cost.

NRV Calculation

            Net Realizable Value = Market Price – Estimated cost to complete sale

[Comment: In the calculation of NRV the entire cost which is expected to complete the sale should be deducted because market value is not comparable directly to factory cost. Amount of administrative expense & selling overhead which are expected to be incurred should be deducted out of market value to convert such price equal to factory cost.]

Comparison

(1)        Finished Goods

Example           Material                                    2,00,000

                        Wages                                      1,00,000

                        Factory Overhead (Variable)    1,00,000

                                                                        4,00,000

                        Factory Overhead (Fixed)        4,00,000

                        Normal Capacity                      1,00,000 units

                        Actual Capacity                        80,000 units

            Out of 80,000 units, the enterprise has sold the 70,000 units. Calculate value of 10,000 units which are held in the stocks assuming market price Rs 50 per unit & estimated cost to complete the sale of Rs 25,000.

Sol:      Calculation of Fixed cost

            Material                                   2,00,000

            Wages                                      1,00,000

            Factory Overhead (V)              1,00,000

            Factory Overhead (F)               3,20,000 (400000 / 100000 x 80000)

                                                            7,20,000

            Cost of 10000 units = 720000 / 80000 x 10000 = Rs 90,000

            NRV    =          500000 – 25000 = Rs 4,75,000

Valuation          = Cost or NRV whichever is lower

                        = Rs 90,000

(2)        Raw Material

Example:          Finished goods are valued at cost.

                        Raw Material (10000)              Rs 10/- Cost

                        Raw Material                            Rs 8/- S.P.

Valuation of RM           ?

Comments: In the given case valuation of raw material should be carried at cost only even if market price of such material is lower than cost. Raw material are purchased only for consumption purpose and after consumption such material will be converted into finished goods which are valued at cost. It means that there is no loss on finished goods due to which loss can’t be recorded on direct material.

Example:          Finished goods are valued at NRV

                        Raw Material (cost)                  Rs 10/-

            (i)         Market Price                            Rs 12/-

            (ii)        Market Price                            Rs 8/-

Comments: Finished goods are valued at NRV due to which valuation of raw material should be made as per valuation principle. In the first case valuation should be carried at Rs 10 per unit because cost is lower. In second case valuation should be made at market price because cost is higher.

(3)        Working in Process

                        Valuation of WIP should always be made at cost because market price estimation may not be accurate for these goods.

Important Points

(1)               If any enterprise is having units of contract sale then independent market price should be ignored for the valuation of contract sale of unit. Valuation of these units should be considered only by contract price.

(2)               As per AS – 2 interest can’t be capitalized in the cost of inventory because such amount is not related to production but interest can be capitalized in the cost of inventory as per the provision of AS – 16.

Valuation Method

FIFO

Weighted Average

Retail Value (For Mall)

Example:          Retail Value

Particulars                    RV                   Cost

Op. Stock                    10000                2000

Purchase                      50000              25000

                                    60000              27000

Retail Value Sold = Rs 50000

Stock value      =          25000 / 50000 x 10000 = Rs 5000

Avg base          =          27000 / 60000 x 10000 = Rs 4500

Disclosures

(1)               Accounting policy should be disclosed. (FIFO / Weighted Avg / Retail Value)

(2)               If any stock has been valued at NRV then description of such stock should also given in the note to accounts.

n styl9us-� ��:4'>                                               Should not be recognized separately

By fair value (subject to conditions                                            and should be included in Goodwill

specified below)

(ii)                Fair value of intangible asset can be recognized by active market or latest transaction price.

(iii)               If active market is available then full amount of intangible asset should be recognized.

(iv)              If latest transaction price is used for recognition then cost can be recognized to the extent by which capital reserve is not created. (The above provision can be applicable only for amalgamation in the nature of purchase)

Purchased by Govt Grant

            If any intangible asset is purchased by Govt grant then cost of intangible asset can be recorded by net approach or gross approach specified in AS – 12.

Balance Sheet (Disclosure) [Net Approach]

                                                                                                Intangible Asset            xxxx

                                                                                                Less: Grant                   xxxx     xxxx    

Balance Sheet (Disclosure) [Gross Approach]

Deferred Grant                         xxxx                                         Intangible Asset            xxxx

                                                                                                (Full amount)

Internally Generated Intangible Asset

            If any intangible asset is generated internally by the enterprise, then it is generated under two different phases.

1)      Research Phase: Research phase is the planed investigation carried by enterprise to create new application of business activities. Research activities may include invention of new products, production techniques, technical system or any other finding for cost saving or future benefits to enterprise. (All the expenses during research phase should be written off in P&L a/c immediately because it is not certain during research phase that any result will be obtained or not from research.)

2)      Development Phase: Development phase is the verified application of research activities and all the expenses during the development phase should be capitalized in the cost of intangible asset. Before capitalizing the expenditure during development phase the following conditions should be satisfied.

• Technical should be available with the enterprise.


• The Enterprise is having intention to complete the intangible assets for use or sell.


• After completion of intangible the enterprise should be able to use or sell intangible.


• Future economic benefit should be measured by suitable assumption.


• Financial Resources should be proper to complete the asset.


• There will be proper system to record the cost during development phase.

lB's� ��nore'>(3)               Journal Entries

(i)         Cash/Bank/Grant Receivable                Dr

                                    To Govt Grant

(ii)        Grant A/c                                             Dr

                                    To Deferred Grant A/c (It is transferred to reserve &surplus)

(iii)       Deferred Grant A/c                               Dr

                                    To P&L A/c

Refund of Grant:

                        Deferred Grant A/c (O/s Bal)                Dr

                        P&L A/c (which is already used)           Dr

                                                To Cash/Bank/Grant Receivable

Note: At the time of refund of grant total benefit should be reversed in the current period in total irrespective the effect of these transaction on current year profits.

Disclosure:

(i)      Accounting policy should be disclosed separately in relation to classification of nature of grant.

(ii)    If any refund has been made during the period then amount of refund should be also disclosed.

Difference between AS/IAS/US GAAP:

            If any grant is related to promoter’s contributions then accounting of such grant should be made as capital profits as per as-12. The same grant should be recognized as revenue profits as per other statements. Revenue profits should be recognized on deferred basis as per management intention.