Date: 18 December 2020

CONSOLIDATED AND SEPARATE FINANCIAL

STATEMENTS

Faculty: CA ACHAL JAIN

18 December 2020 © The Institute of Chartered Accountants of India 1

 Interaction between Ind-AS110, 111, 112 & Ind-AS 28

Does the investor control

an entity by itself

Yes No

Consolidation in accordance Does the investor have joint

with Ind AS 110 control over an
arrangement?

Disclosures in accordance with Yes No

Ind AS 112

Joint Classify joint Joint Does the investor

Operation arrangement in Venture Yes have significant No
accordance with Ind influence over an
AS 111 entity?

Account for assets, liabilities, revenue and Account for interest under the equity Financial
expenses method Instrument

Disclosures in accordance with Disclosures in accordance Disclosures in

Ind AS 112 & other relevant with Ind AS 112 accordance with Ind AS
Ind AS 109

18 December 2020 © The Institute of Chartered Accountants of India 2

 Ind-AS 110- Scope, exemption and exceptions

Exemption from preapring consolidated financial statements

for a parent if:
Ind ASExemption
32 from preapring consolidated financialInd AS 109 for a parent if:
statements Ind AS 107

► it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and all its other owners,
including those not otherwise entitled to vote, have been informed about, and do not object to, the parent
not presenting CFS;
► its debt/ equity instruments are not traded in a public market;
Recognition
it did not file/in the process of filing,
Measurem
its financial statements with a securities commission or other
►
Offsetting & de-
ent of
Classification regulatory
financialorganisation for therecognition
purpose of issuing any class of instruments in a public market; and
financial
as Liability v/s ► asset &
its ultimate or any intermediateofparent produces CFS that are available for public use and comply with Ind- Disclosures
financial
assets &
Equity AS financial assets &
financial
liability financial
liabilities
Scope exclusion liabilities

► Post employment benefit plans ( for e.g. Gratuity trust) and other long-term employee benefit plan to
which Ind-AS 19 applies

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© The Institute of Chartered Accountants of India
 Financial statements
Individual financial statements are prepared by an entity that does not have a subsidiary, an associate or a
joint venture’s interest in a joint venture

Separate financial statements are statements of an investor where investments in the subsidiary, joint
venture and associate are accounted for at cost or in accordance with Ind AS 109, Financial Instruments

Consolidated financial statements are the financial statements of a group in which the assets, liabilities,
Recognition
equity, income and cash flows of the parent and its subsidiaries are presented as those of a single entity.
Measurem
Offsetting
Financial statements & de-is applied for investments in joint ventures and associates
in which equity method ent of
Classification financial recognition
and there is no subsidiary are technically called 'Economic Entity Financial Statements'. However, in India,
financial
as Liability v/s asset & of financial
the 'Economic Entity Financial Statements' (EEFS) are also termed as Consolidated
assets &
assets & Financial Statements.
Equity financial financial
liability financial
liabilities
liabilities

18 December 2020 4
© The Institute of Chartered Accountants of India
Key definitions
Parent
An entity that controls one or more entities.

Subsidiary
An entity that is controlled by another entity

Control over an investee

An investor controls an investee when the investor is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its power over
the investee

Non-controlling interest
Equity in a subsidiary not attributable, directly or indirectly, to a parent.

Power
Existing rights that give the current ability to direct the relevant activities.

Substantive rights are those rights that an investor holds that gives it current ability to direct the
investee’s relevant activities. In order for a right to be substantive, the holder must have the practical
ability to exercise the right
18 December 2020 © The Institute of Chartered Accountants of India 5
Key definitions

Protective rights
Rights designed to protect the interest of the party holding those rights without giving that
party power over the entity to which those rights relate.
An investor that only holds protective rights, which meet this definition, has no power over
an investee and consequently does not control the investee.

Relevant activities
For the purpose of this Ind AS, relevant activities are activities of the investee that
Recognition
Measurem
significantly affect the investee’s returns
Offsetting & de-
ent of
Classification financial recognition
financial
Separate
as LiabilityVehicle
v/s asset & of financial
assets &
financial
Equity identifiable
A separately assets &
financial structure, including separate legal entitiesfinancial
or entities
liability financial
recognised by statute, regardless of whether those entities have a legal personality.
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Key definitions

An associate is an entity over which the investor has significant influence.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is
not control or joint control of those policies.

Equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted
thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or
loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its
share of the investee’s other comprehensive income.

18 December 2020 © The Institute of Chartered Accountants of India 7

 Key definitions

Joint arrangement is an arrangement of which two or more parties have joint control

Joint control is the contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the parties sharing
control.

A joint arrangement whereby the parties that have joint control of the arrangement have rights to
the assets, and obligations for the liabilities, relating to the arrangement.
Recognition
Measurem
Offsetting & de-
A joint venture is a joint arrangement whereby the parties that have joint control ent of of the
Classification financial recognition
arrangement have rights to the net assets of the arrangement. financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
A joint venturer is a party to a joint venture financial
that has joint control of that joint venture.
liability financial
liabilities
liabilities

18 December 2020 8
© The Institute of Chartered Accountants of India
Investment entity

• An entity that:
• (a) obtains funds from one or more investors for purpose of providing
those
• investor(s) with investment management services;
• (b) commits to its investor(s) that its business purpose is to invest funds
solely for returns from capital appreciation, investment income, or both;
and
• (c) measures and evaluates performance of substantially all of its
investments
• on a fair value basis.

18 December 2020 © The Institute of Chartered Accountants of India 9

 Assessing control

18 December 2020 © The Institute of Chartered Accountants of India

10
Assessing control
Returns Linkage (Delegated rights)
Power Evaluate whether the investor
Assess whether the investor
Determine which party if any, has has the ability to use its power
is exposed or has rights to
power, that is, the current ability to to affect the investor’s returns
variable returns from its
direct relevant activities. Power from its involvement with the
involvement with the
arises from the rights which may investee applicable. Determine
investee. Returns can be
include whether the investor is a
positive, negative, or both.
 Voting rights principal or an agent
Example of returns include considering
 Potential voting rights (e.g.
 Dividends
Options or convertible  Scope of its authority
 Remuneration
instruments)  Rights held by other parties
 Residual interest
 Rights to appoint key personnel (Rights to remove a decision-
 Tax benefits
 Decision making rights within a maker)
 Economies of scale, cost
management contract.  Remuneration
savings, scarce product,
 De-facto control  Exposure to variability from
proprietary knowledge,
 Casting vote other interests
However power does not arise from synergies.
protective rights.

Understand purpose and design of investee

Continuous assessment

18 December 2020 © The Institute of Chartered Accountants of India 11

 New definition of control
Identifying relevant activities

Relevant activities are those that significantly affect the investee‘s returns
▪Examples:
• Establishing operating, capital and financing policies
• Determining funding structure or obtaining funding
• Appointing, remunerating, and terminating employment of service providers or key management personnel
▪Understand purpose and design of the investee
▪If two investors direct different relevant activities
• Identify which investor can direct the activities that most significantly affect returns
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Potential voting rights

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities
Out-of-the-money (but not deeply) Judgement will be needed to assess whether cost of paying more than fair
value is worth the potential benefits of exercise including exposures to variable returns that are associated with
exercising that option
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© The Institute of Chartered Accountants of India
Power – Protective rights

▪Protective rights do not give power

▪ When are rights merely protective rights?
•Fundamental changes in the activities of an investee
•Only apply in exceptional circumstances
▪Examples of protective rights include the right to:
•Restrict an investee from undertaking
Recognition activities that could significantly change the credit risk of
Measurem
Offsetting & de-
the investee ent of
Classification financial recognition
financial
as Liability v/s •Approve
assetan&investee’s capital
ofexpenditures
financial (greater than the amount spent in the ordinary
assets &
Equity financial assets &
business) financial
liability financial
liabilities
▪Protective rights do not prevent liabilities
another investor from having control

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© The Institute of Chartered Accountants of India
Power – De facto control

▪An investor may have the power with less than half of the voting rights
▪ Consider facts and circumstances:
• Contractual rights arising from other arrangements
• Size of the investor’s holding of voting rights relative to the size and dispersion of other
vote holders
•Voting rights (absolute amount)
•Voting rights relative to other vote holders
•Number of other vote holders that would need to act together
▪Potential voting rights Recognition
▪Additional facts & circumstances
Offsetting & de-
Measurem
• Voting patterns at previous shareholders ent of
Classification financial recognition meetings
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 15
© The Institute of Chartered Accountants of India
Power – De facto control
Examples 1 and 2
Example 1 Example 2

52% widely dispersed

1% 1% 1% 26% 26%

Recognition
Measurem
Offsetting & de-
A B ent of
Classification financial recognition C D
48% financial
as Liability v/s asset & of financial 45%
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

A has power C does not have power

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© The Institute of Chartered Accountants of India
Power – De facto control
Examples 3 and 4
Example 3 Example 4

50% widely dispersed, 50% widely dispersed,

half turn up at AGM half turn up at AGM
5% 5% 5% 4% 4% 4%

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
J K L financial M
as Liability v/s asset
35% &
of financial 38% assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 17
© The Institute of Chartered Accountants of India
 Definition of control- Assessing Returns

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 18
© The Institute of Chartered Accountants of India
Definition of control
Assessing returns

Returns can be only positive, only negative or positive and negative,

but must have the potential to vary as a result of the investee’s
performance
▪Examples:
•Dividends, distributions of economic benefits, changes in the value of an investment
•Remuneration, fees, residual interests, tax benefits, exposure from providing support
• Synergies, cost savings, economies of scale, scarce resources, proprietary
Recognition
knowledge Measurem
Offsetting & de-
▪Other
Classification
parties may also share
financial
in the returns, e.g. NCI
recognition
ent of
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 19
© The Institute of Chartered Accountants of India
 Is there a link between power & returns?

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 20
© The Institute of Chartered Accountants of India
Investment entities
Documents that indicate entity’s objective are:
• memorandum
• publications distributed by the entity and
• other corporate or partnership documents.

Entity may also participate in many investment related activities

Recognition
For assessing ‘Investment
Offsetting
entity’, an entity also has to consider some Measurem
& de- typical
characteristics asfinancial
Classification declared below (however absence of any characteristicent
recognition
of not
does
financial
necessarily
as Liability v/s disqualify
asset an
& entity from being an investment entity)
of financial
assets &
Equity financial assets &
financial
a. Whether it has financial
more than one investment
liability liabilities
liabilities
b. whether it has more than one investor
c. Whether its Investors are not related parties of the entity
d. Whether it has ownership interests in the form of equity or similar interest

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© The Institute of Chartered Accountants of India
 Continuous assessment

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Continuous assessment

• Reassess if facts and circumstances suggest change to one of criteria of control

• Examples:
• Changes to how activities are directed
• Changes in exposure to variable returns
• Market conditions change:
• If affect one of control criteria – re-evaluate control
• If do not affect one of control criteria – no re-evaluation
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 23
© The Institute of Chartered Accountants of India
 Accounting requirements-
Consolidation procedures

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 24
© The Institute of Chartered Accountants of India
What is a ‘group’?

Group
Parent

Control Control

Recognition
Measurem
Offsetting & de-
Classification financial Indianrecognition Foreignent of
financial
as Liability v/s asset & of financial Fellow
subsidiary subsidiary
assets &
Equity financial assets & subsidiaries financial
liability financial
liabilities
liabilities

18 December 2020 25
© The Institute of Chartered Accountants of India
Financial statements prepared by parent

Separate financial statements Consolidated financial statements

► investments accounted for at: ► financial statements of a group

► cost, or
► parent and subsidiaries presented
Recognition as a single economic entity
► in accordance Measurem
Offsetting with Ind AS 109
& de-
ent of
Classification financial recognition
consolidated balance sheet financial
as Liability v/s asset & of financial
assets &
Components
Equity of financial assets &
consolidated statement of profit or loss and other comprehensive income
financial
liability financial
consolidated liabilities
liabilities
consolidated statement of changes in equity
financial
consolidated statement of cash flows
statements
notes comprising significant accounting policies and other explanatory information
18 December 2020 26
© The Institute of Chartered Accountants of India
 Accounting requirements -Consolidation Procedures

▪Mostly the same however relevant Ind AS to be followed:

•Ind AS 103 explains how to account for any related goodwill
•Ind AS 12 Income Taxes applies to temporary differences that arise from the elimination of profits and losses
resulting from intragroup transactions

▪ Measurement:
• From the date it gains control until the date when the entity ceases to control the subsidiary. Potential voting rights
are not considered, unless it gives access to the returns.
Recognition
• Combine like items of assets, liabilities, equity,
Offsetting
Measurem
& de- income, expenses and cash flows of the parent with those of its
subsidiaries. ent of
Classification financial recognition
financial
• asoffset (eliminate)
Liability v/s the carrying
asset & amount of the parent's investment in each subsidiary and the parent's portion of
financial
assets &
equity
Equity of each subsidiary
financial assets &
financial
• eliminate in full intragroup assets and liabilities, equity, income, expensesliabilities
liability financial and cashflows relating to transactions
liabilities
between entities of the group (profits or losses resulting from intragroup transactions that are recognized in assets,
such as inventory and fixed assets, are eliminated in full).
• Uniform accounting policies

18 December 2020 27
© The Institute of Chartered Accountants of India
Accounting requirements -Consolidation Procedures
▪ Subsidiary’s losses allocated between the parent and NCI, even if this results in
deficit NCI balance.
▪ NCI presented in the consolidated balance sheet within equity, separately from
the equity of the owners of the parent.
▪ Profit/loss attributable to NCI in the group P&L separately presented.
▪ Changes in the ownership interest of a subsidiary not resulting in loss of control
accounted for as an equity transaction and do not impact Goodwill/ P&L.
▪ In calculating the gain/loss arising from the loss of control, retained interest in
the former subsidiary is measured at its fair value at the date when control is
lost.
▪ Intra-group balances and transactions, including income, expenses and
dividends, are eliminated in full. Deferred tax should be calculated on
temporary differences that arise from the elimination of profits and losses
resulting from intra-group transactions.
18 December 2020 © The Institute of Chartered Accountants of India 28
Features of consolidated financial statements

Single
economic Different reporting date of subsidiary
entity

Co- Uniform ► Step I: Prepare special statements of subsidiary

terminous accounting
year ends as at the same date as the group
policies
General
features of
consolidated ► Step II: If step I is impracticable, use financial
financial statements of subsidiary subject to:
statements
Elimination Elimination ► difference ≤ 3 months
of of intra-
► adjustments for effects of significant
unrealised group
profits balances transactions/ events between these dates
Elimination of
intra-group
transactions

18 December 2020 © The Institute of Chartered Accountants of India 29

Reporting date
Example
Query
▪ Parent is preparing its Ind AS consolidated financial statements (CFS) for the year ended 31 March 20X8. the financial year of one of its
subsidiary ends on 31 December 20X7. In February 20X8, the subsidiary sold a property held at cost and realizing substantial profit which
is material to the CFS of the parent.
Response
▪ Parent should obtain additional information for subsidiary, such as a reporting package or appropriately prepared management
accounts, covering:
▪ the 3 month period from 1 January 20X8 to 31 March 20X8
▪ the comparative 3 months period from 1 January 20X7 to 31 March 20X7.
▪ Subsidiary's financial statements should be adjusted for consolidation purposes by adding its results for the current 3 months period
and deducting those for the comparative period.
▪ If this is impracticable then subsidiary's financial statements may be used without including this comprehensive additional information.
However, in that situation adjustments should still be made for the property sale in February 20X8 and for any other significant
transactions or events of the subsidiary occurring during 1 January 20X8 to 31 March 20X8.

18 December 2020 © The Institute of Chartered Accountants of India 30

Substance of consolidation

replaced with

WHAT IT ► parent’s share of subsidiary’s:

Cost of investment ACTUALLY ► net assets (at fair value) as at the
REPRESENTS
end of reporting date
► post acquisition reserves
Consolidated financial
Separate financial statements of parent +
statements of parent
► goodwill/ gain on bargain purchase
on date of acquisition
❑ equity in subsidiary not attributable to parent
❑ known as non-controlling interests (NCI)
❑ presented as a separate line item within equity

18 December 2020 © The Institute of Chartered Accountants of India 31

Overview of the technique

Separate statement of financial position Consolidated statement of

financial position
Parent Subsidiary

Net assets xxx + xxx + consolidation xxx

adjustments
Recognition
Measurem
Offsetting & de-
ent of
Issued capital
Classification xxx
financial recognition xxx parent’s Issued Capital
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
Reserves xxx financial
liability financial xxx to be calculated
liabilities
liabilities

18 December 2020 32
© The Institute of Chartered Accountants of India
 Overview of the technique

Consolidated statement of profit or loss

Revenue [Parent + Subsidiary (100%) – intra-group items] xxx

↓ ↓
Profit for the period (CONTROL) xxx
Recognition
Measurem
Offsetting & de-
OWNERSHIP ent of
Classification financial recognition
financial
Owners (equityv/s
as Liability holders) asset
of the&parent of financial xxx
assets &
Equity financial assets &
NCI (….% of subsidiary’s profit financial
liabilityafter tax) financial
liabilities
Profit for the period liabilities xxx

18 December 2020 33
© The Institute of Chartered Accountants of India
 Intra-group balances

Eliminated on consolidation
Example

Adjustments on Consolidated statement of

Parent Subsidiary
consolidation financial position

Dr. Cr.
Recognition
Receivables Measurem
Offsetting & de-
ent of
receivable from financial
Classification
Amounts recognition
financial
as Liability v/s
subsidiary asset & 100 of financial 100
assets &
-
Equity financial assets &
financial
Payables liability financial
liabilities
liabilities
Amounts payable to parent 100 100 -

18 December 2020 34
© The Institute of Chartered Accountants of India
Accounting requirements - Consolidation Procedures

Changes in the proportion held by NCI

▪ When the proportion of the equity held by NCI changes, an entity shall
adjust the carrying amounts of the controlling and non-controlling
interests to reflect the changes in their relative interests in the
subsidiary. Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
▪ The entity shall recognize directly in equity any difference between the
as Liability v/s
Equity
asset &
financial
of financial
assets &
assets &
financial
amount by which the non-controlling interests are adjusted and fair
liability financial
liabilities
liabilities
value of the consideration paid or received, and attribute it to the
owners of the parent.
18 December 2020 35
© The Institute of Chartered Accountants of India
 Example
As at 31 December 2015
Non-current assets: Parent Subsidiary
Tangible assets 2,000 500
Investment in Subsidiary 1,000
Net current assets 2,000 500
––––––– –––––––
5,000 1,000
Recognition ––––––– ––––––
Measurem
Issued capital Offsetting & de- 500 1,000
Retained earnings ent 4,500
of
Classification financial recognition –––––––
financial
–––––––
as Liability v/s asset & of financial
assets &
5,000 1,000
Equity financial assets &
financial
––––––– –––––––
financial
Further information: liability liabilities
liabilities
Parent bought 100% of Subsidiary on 31 December 2015.

18 December 2020 36
© The Institute of Chartered Accountants of India
 Solution
Consolidated balance sheet

$
Non-current assets:
Tangible assets (2,000 + 500) 2,500
Cost of investment has disappeared
Net current assets (2,000 + 500) 2,500
Recognition
Measurem
Offsetting & de-
5,000 ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
IssuedEquity
capital financial 500 Issued
assets &capital of Parent
financial
Retained earnings liability 4,500financial liabilities
liabilities
5,000

18 December 2020 37
© The Institute of Chartered Accountants of India
Period of consolidation
Results of operations of subsidiary

1 April 2014 Date of acquisition Date of disposal

31 March 2015 31 March 2016

considered in goodwill/
Recognition Reserves & Reserves & surplus ignored
Measurem
Offsetting gain or bargain & de- surplus ent of
Classification financial purchase recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
Consolidated R&S NCI liabilities
liabilities

Consolidated R&S NCI

18 December 2020 38
© The Institute of Chartered Accountants of India
 Goodwill/ Capital Reserve

In layman’s term, goodwill is difference between:

a. value of business taken as a whole
b. fair value of separate net assets

Goodwill/ gain on bargain purchase is determined under Ind AS 103 as follows:

Particulars Amount (INR)
Fair value of consideration xxx
Recognition
Amount of NCI Measurem xxx
Offsetting & de-
Less: Classification
Fair value of net assetsfinancial
at acquisition ent of xxx
recognition
financial
Goodwill (if positive)
as Liability v/s asset & of financial
assets & xxx
Capital reserve
Equity(if negative) financial assets &
financial
liability financial
liabilities
liabilities
Gain on bargain purchase arises in extremely rare circumstances

18 December 2020 39
© The Institute of Chartered Accountants of India
 Example 1
At 31 December 2015
Parent Subsidiary
$ $
Non-current assets
Tangible assets 1000 800
Investment in Subsidiary 1200
Net current assets 400 200
-------- --------
Recognition
2600 1000& de- Measurem
Offsetting ent of
Classification financial-------- ------
recognition
financial
Issuedas
capital
Liability v/s asset 100
& 900of financial
assets &
Equity
Retained earnings financial
2500 100assets & financial
liability financial
--------- ------- liabilities
liabilities
2600 1000
Further information: ----------- -------
▪Parent bought 100% of Subsidiary on the 31 December 2015.
▪Subsidiary’s reserves are $100 at the date of acquisition.
18 December 2020 40
© The Institute of Chartered Accountants of India
 Solution 1
Consolidated balance sheet
$
Non-current assets:
Goodwill (W2) 200
Tangible assets 1,800
Net current assets 600
–––––
Recognition
2,600 Measurem
Offsetting & de-
ent of
Classification financial –––––
recognition
financial
as capital
Issued Liability v/s asset & of financial
100 assets &
Equity financial assets &
Retained earnings (W3) liability 2,500 financial
financial
liabilities
–––––
liabilities
2,600
–––––

18 December 2020 41
© The Institute of Chartered Accountants of India
Solution 1
WORKINGS
(1) Subsidiary’s net assets End of reporting Acquisition
period $
$
Issued capital 900 900
Retained earnings 100 100
——— ———
1,000 1,000
——— ———
(2) Goodwill Solution 1 $
Cost 1,200
Non-controlling interest –
Less: Net assets on acquisition (W1) (1,000)
———
200
(3) Retained earnings $
Parent (as given) 2,500
Share of Subsidiary (W1) –
100% × (100 – 100) ----------
2,500
18 December 2020 © The Institute of Chartered Accountants of India 42
 Example 2 At 31 December 2015
Parent Subsidiary
Non-current assets $ $
Tangible assets 1400 1000
Investment in Subsidiary 1200
Net current assets 700 600
-------- --------
3300 1600
-------- --------
Issued capital 100 900
Retained earnings 3200 700
-------- --------
3300 1600
Further information: --------- --------
▪ Parent bought 100% of Subsidiary two years ago.
▪ Subsidiary’s reserves were $100 at the date of acquisition.
▪ Goodwill has been impaired by $80 since the date of acquisition.
18 December 2020 © The Institute of Chartered Accountants of India 43
 Solution 2
Consolidated balance sheet

$
Non-current assets:
Goodwill (W2) 120
Tangible assets 2,400
Net current assets 1,300
––––––
Recognition
Measurem
Offsetting 3,820& de-
ent of
Classification financial recognition
–––––– financial
Issuedas Liability
capital v/s asset & of financial
100 assets &
Equity financial assets &
Retained earnings (W3) 3,720financial financial
liability liabilities
––––––liabilities
3,820
––––––

18 December 2020 44
© The Institute of Chartered Accountants of India
 Solution 2

WORKING
1. Subsidiary’s net assets
End of reporting Acquisition
period
$ $
Issued capital 900 900
Retained earnings 700 100
–––––– ––––––
1,600
Recognition 1,000
––––––& de- –––––– Measurem
2. GoodwillOffsetting $ ent of
Classification financial recognition
Cost 1,200 financial
as Liability v/s asset & of financial
Non-controlling interest – assets &
Equity financial assets &
Less: Net assets on acquisition (100% × 1,000) (1,000) financial
liability financial
------- liabilities
liabilities
200
Impaired 80
---------
As an asset 120
45
18 December 2020 © The Institute of Chartered Accountants of India
 Solution 2

3. Retained earnings
$
Parent (as given) 3,200
Share of Subsidiary (W1) 100% (700 – 100) 600

Goodwill written off (W2) (80)

–––––
Recognition
3,720 Measurem
Offsetting & de-
ent of
Classification financial recognition
––––– financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 46
© The Institute of Chartered Accountants of India
 Non-controlling interest (NCI)

Measurement of NCI

proportionate share
Methods of subsidiary’s fair value
identifiable net assets
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability impairment*
Goodwill v/s asset & of financial
not allocated to NCI allocated
assets & to NCI
Equity financial assets &
financial
liability financial
liabilities
liabilities
Election of method on transaction-by-transaction basis

* goodwill amortisation not allowed

18 December 2020 © The Institute of Chartered Accountants of India 47

 Example 3

• A Ltd. acquired 60% equity shares of B Ltd. for INR 60 lacs

• At the date of acquisition:

– Fair value of net assets of B Ltd. is INR 80 lacs

– Fair value of NCI is INR 45 lacs

Calculate goodwill if NCI measured using:
a. proportionate interest method Recognition
b. fair value method Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
Goodwill (when NCI measured at proportionate interest)financial
= INR 12 lacs financial
liability liabilities
Goodwill (when NCI measured at fair value) = INR 25 lacsliabilities

18 December 2020 48
© The Institute of Chartered Accountants of India
 Example 4
Parent Subsidiary
$ $
Non-current assets Further information:
Tangible assets 1,000 600 ▪ Parent bought 80% of
Investment in Subsidiary 1,200 – Subsidiary two years ago.
Net current assets 500 600
▪ Subsidiary’s reserves were
–––––– --------
2,700 1200
$150 at the date of
–––––– --------
acquisition.
Issued capital 100 50 ▪ Goodwill has been impaired
Retained earnings 2600 1150 by $200 since the date of
–––––– --------- acquisition.
2,700 1,200
▪ Non-controlling interest is
–––––– ---------
valued at the proportionate
share of the subsidiary’s
identifiable net assets

18 December 2020 © The Institute of Chartered Accountants of India 49

Solution 4

Consolidated Balance Sheet

$
Non-current assets:
Goodwill (W2) 840
Tangible assets 1,600
Net current assets 1,100
––––––
3,540
Recognition
––––––
& de-
Measurem
Offsetting
Equity attributable to owners of their parent recognition ent of
Classification
Issued capital financial 100 financial
as Liability v/s asset & of financial
Retained earnings (W4) 3,200
assets &
assets &
Equity financial
––––––
financial
financial
liability liabilities
3,300
liabilities
Non-controlling interest (W3) 240
––––––
3,540

18 December 2020 50
© The Institute of Chartered Accountants of India
 Solution 4

WORKINGS
1. Subsidiary’s net assets End of
reporting Acquisition
period
$ $

Issued capital 50 50
Retained earnings 1,150
Recognition 150
–––––– Measurem
Offsetting & de- ––––––
1,200 200 ent of
Classification financial recognition
–––––– financial
as Liability v/s asset & ––––––
of financial
assets &
2. Goodwill
Equity financial assets &
financial
liability financial $
Cost liabilities
liabilities 1,200
Non-controlling interest (200 × 20%) 40
Less:Net assets on acquisition (100%) (200)
--------
1,040
18 December 2020 -------- © The Institute of Chartered Accountants of India 51
Solution 4

To retained earnings
(via statement of profit or loss and other comprehensive income) 200
Asset in the balance sheet 840

• Non-controlling interest $
Share of net assets (20% × 1,200 (W1)) 240
——
Recognition
• Retained earnings $ Measurem
Offsetting & de-
Parent (as given) 2,600 ent of
Classification financial recognition
Share of subsidiary 80% × (1,150 – 150) (W1) 800 financial
as Liability v/s asset & of financial
Goodwill Equity
impairment (200) assets &
financial assets &
financial
liability financial ——
liabilities
liabilities 3,200
——

18 December 2020 52
© The Institute of Chartered Accountants of India
Example 5
Parent Subsidiary
Non-current assets $ $
Tangible assets 1,000 600
Investment in Subsidiary 1,200 -
Net current assets 500 600
–––––– ––––––
2,700 1,200
–––––– ––––––
Issued capital ($1 shares) 100 50
Retained earnings 2,600 1,150
–––––– ––––––
2,700 1,200
–––––– ––––––
Further information:
1. Parent bought 80% of Subsidiary two years ago.
2. Subsidiary’s reserves were $150 at the date of acquisition.
3. Goodwill has been impaired by $200 since date of acquisition.
4. Non-controlling interest is valued at fair value on acquisition. The market
price of a share in the subsidiary at the date of acquisition was $29.60

18 December 2020 © The Institute of Chartered Accountants of India 53

 Solution

Consolidated balance sheet

$
Non-current assets:
Goodwill (W2) 1,096
Tangible assets 1,600
Net current assets 1,100
Recognition
–––––– Measurem
Offsetting & de-
3,796 ent of
Classification financial recognition
–––––– financial
as Liability v/s asset & of financial
assets &
Issued capital
Equity financial assets &
100 financial
financial
Retained earnings (W4) liability 3,240 liabilities
liabilities
Non-controlling interest (W3) 456
––––––
3,796
18 December 2020 54
© The Institute of Chartered Accountants of India
Solution
WORKINGS
1. Subsidiary’s net assets
Reporting date Acquisition
$ $
Issued capital 50 50
Retained earnings 1,150 150
–––––– ––––––
1,200 200
–––––– ––––––
2. Goodwill Recognition
Measurem
Offsetting & de- $
ent of
Cost Classification financial recognition 1,200 financial
asvalue
Add: Fair Liability v/s
of non-controlling asset
interest& of financial 296 assets &
20% of 50 shares) financial
Equity
[10 shares (i.e. × $29.60] assets &
financial
Less: Net assets on acquisition (100%)liability financial (200)
–––––
liabilities
liabilities
–
1,296
–––––
–
Impaired 200
Goodwill recognized 1,096 55
18 December 2020 © The Institute of Chartered Accountants of India
Solution
Of the goodwill impaired, 80% is debited to consolidated retained earnings and 20% is debited to non-controlling interest.

3. 3. Non-controlling interest $
Fair value on acquisition (W2) 296
Add: Share of post-acquisition profits (1,000 × 20%) 200
Less: Share of goodwill impaired (200 × 20%) (40)
–––––
456
Recognition
Measurem
4. 4. Retained earnings Offsetting & de- $
ent of
ParentClassification
(as given) financial recognition2,600
financial
Share as Liability v/s
of Subsidiary asset– &
(80% × (1,150 150) (W1)) of financial 800
assets &
impairment (200 ×financial
Goodwill Equity 80%) assets & (160) financial
liability financial
––––– liabilities
liabilities
3,240
–––––

18 December 2020 56
© The Institute of Chartered Accountants of India
Fair value of consideration - cost of acquisition
Fair value

FV of other
• Acquisition accounted at FV Cash/ cash
purchase
equivalents
consideration
• Acquisition costs - expensed

Deferred consideration Contingent consideration

► Cost of acquisition is present ➢ Cost of acquisition includes FV

value of consideration of contingent consideration
► No impact of deferred Recognition ► If settlement in cash-
consideration in goodwill Measuremrecognise liability
Offsetting & de-
computation ent of► If settlement in equity-
Classification financial recognition
► Finance costs (post-
financial recognise equity
as Liability v/s asset & of financial
acquisition expense) assets &
► Contingent consideration
Equity financial assets &
financialrecognised as liability measured
liability financial
liabilities
at FV at each reporting date
liabilities
(changes recognised in P&L)

18 December 2020 57
© The Institute of Chartered Accountants of India
 Example

Parent acquired 60% of Subsidiary on 1 January 2015 for $100,000 cash payable immediately and $121,000 after
two years. The fair value of Subsidiary’s net assets at acquisition amounted to $300,000. Parent’s cost of capital is
10%. The deferred consideration was completely ignored when preparing group accounts as at 31 December 2015.

Non-controlling interest is measured at the proportionate share of identifiable net assets.

Required:
Calculate the goodwill arising on acquisition and show how the deferred consideration should be accounted for in
Recognition
Parent’s consolidated financial statements. Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 58
© The Institute of Chartered Accountants of India
 Solution

Cost of investment in Subsidiary at acquisition: $100,000 + $121,000/1.21 = $200,000

Goodwill $000
Cost 200
Non-controlling interest (40% * 300,000) 120
Less: Net assets acquired (300)
20
Deferred consideration
Double entry at 1 January: Recognition
Dr Cost of Investment in Subsidiary Measurem
Offsetting & de- $100,000
Cr Deferred consideration $100,000 ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
On 31 December, due to unwinding of discount, the deferred consideration will equal $121,000/1.1 =
assets &
110,000
Equity financial assets &
financial
Dr Group retained earnings liability $10,000
financial
liabilities
Cr Deferred consideration liabilities
$10,000

In the consolidated balance sheet, the cost of investment in Subsidiary will be replaced by the goodwill of $20,000. The deferred consideration
will equal $110,000.
18 December 2020 59
© The Institute of Chartered Accountants of India
 Unrealised profit

Eliminated on consolidation
• Sale of goods by parent to subsidiary
– Reduce consolidated retained earnings
– Reduce inventory
Recognition
• Sale of goods by subsidiary to parent & de-
Measurem
Offsetting ent of
– as
Reduce
Classification
Liability v/s
net assets
financial
asset &
of subsidiary
recognition
of financial
financial
assets &
– Reduce
Equity inventory
financial
liability
assets &
financial
financial
liabilities
liabilities

18 December 2020 60
© The Institute of Chartered Accountants of India
 Example

Parent owns 80% of Subsidiary. During the current accounting period, Parent transferred goods to
Subsidiary for $4,000, which earned Parent a profit of $1,000. These goods were included in
Subsidiary’s inventory at the end of the reporting period.

Required:
Show the adjustment in the consolidated Recognition
balance sheet.
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 61
© The Institute of Chartered Accountants of India
Solution

Dr Retained earnings $1,000

Cr Inventory $1,000

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 62
© The Institute of Chartered Accountants of India
 Example

Parent owns 80% of Subsidiary. During the current accounting period, Subsidiary sold goods to Parent for $18,000
which earned Subsidiary a profit of $6,000. At the end of the reporting period, half of these goods are included in
Parent’s inventory.

At the end of the reporting period, Parent’s accounts showed retained profits of $100,000 and Subsidiary’s
accounts showed net assets of $75,000, including retained profits of $65,000. Subsidiary had retained profits of
$20,000 at acquisition.
Recognition
Measurem
Offsetting & de-
Required: ent of
Classification financial recognition
financial
Showasthe adjustment
Liability v/s to eliminate
asset & unrealized profits in the consolidated financial statements.
of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 63
© The Institute of Chartered Accountants of India
Solution

Dr Retained earnings (1/2 × 6,000) $3,000

Cr Inventory $3,000

WORKING
1. Subsidiary’s net assets Reporting date Acquisition date

Recognition
Measurem
Offsetting & de- $ $
ent of
Issued capital
Classification financial recognition 10,000 financial
as Liability v/s asset & of financial 10,000
assets &
Retained earnings
Equity financial assets &
financial
Per the question liability
65,000 financial
liabilities 20,000
Unrealized profit (3,000) liabilities 62,000
———
——— ———
72,000 30,000
——— ———
18 December 2020 64
© The Institute of Chartered Accountants of India
 Solution

2. Non-controlling interest

Share of net assets (including the unrealized profit)

(20% × 72,000) $14,400
————
3. Retained earnings
$
Recognition
Measurem
Parent (as given) Offsetting 100,000
& de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
Share of Equity
Subsidiary (including unrealized profit) assets &
financial assets &
financial
80% × (62,000 – 20,000) liability 33,600
financial
liabilities
liabilities
———
133,600
———

18 December 2020 65
© The Institute of Chartered Accountants of India
Example

Whale owns 75% of Porpoise. The profit or loss for each company for the year ended 31 March 2016 is
as follows:

Whale Porpoise
$ $
Revenue 120,000 70,000
Cost of sales (80,000) (50,000)
Gross profit Recognition
40,000 20,000
Measurem
Offsetting & de-
ent of
Classification financial recognition
During the year Porpoise made sales to Whale amounting to $30,000. $15,000 of these financial
sales were in
as Liability v/syear end.asset of financial
inventory at the Profit&made on the year-end inventory items amounted to $2,000.
assets &
Equity financial assets &
financial
liability financial
Required: liabilities
liabilities
Calculate group revenue, cost of sales and gross profit.

18 December 2020 66
© The Institute of Chartered Accountants of India
 Solution

Seller adjustment

Whale Porpoise Adjustment Consolidated

$ $ $ $
Revenue 120,000 70,000 (30,000) 160,000
Cost of sales – per question (80,000) (50,000) 30,000
– unrealised profit (2,000) (102,000)

Gross profit 40,000 18,000Recognition 58,000 Measurem

Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 67
© The Institute of Chartered Accountants of India
 Non-current asset transfers

Eliminated on consolidation

Adjustments needed

Recognition
Measurem
Offsetting & de-
Sellingrecognition
company ent of
Buying company
Classification financial financial
as Liability v/s asset & of financial
eliminate profit adjust assets &
Equity financial assets &
depreciation
financial
liability financial
liabilities
liabilities

18 December 2020 68
© The Institute of Chartered Accountants of India
 Example

Parent owns 80% of Subsidiary. Parent transferred an asset to Subsidiary at a value of $15,000 on 1
January 2015. The original cost to Parent was $20,000 and the accumulated depreciation at the date of
transfer was $8,000. The asset had a useful life of 5 years when originally acquired, with a residual
value of zero. The useful life at the date of transfer remains at 3 years. Full allowance is made for
depreciation in the year of purchase and none in the year of sale.

Required:
Recognition
Calculate the adjustment for the consolidated balance sheet at 31 December
& de-
2015.
Measurem
Offsetting ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 69
© The Institute of Chartered Accountants of India
 Solution

With transfer Without transfer Adjustment

$ $ $
Cost 15,000 20,000
Accumulated depreciation
(15,000/3 years) (5,000) *(12,000)
–––––– ––––––
10,000 8,000 2,000
–––––– Recognition
––––––
Charge for the year 5,000
Measurem
Offsetting 4,000 & de- 1,000 ent of
Classification ––––––
financial ––––––
recognition
Profit on disposal financial
as Liability v/s asset & of financial
Proceeds 15,000 assets &
CarryingEquity
amount financial assets &
financial
(20,000 – 8,000) liability
(12,000) financial
liabilities
–––––– liabilities
3,000 – 3,000

18 December 2020 70
© The Institute of Chartered Accountants of India
Solution

Dr Parent profit or loss – profit on disposal 3,000

Cr Non-current assets 3,000
and

Dr Non-current assets 1,000

Cr Subsidiary profit or loss – depreciation 1,000
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
* Accumulated
Equity depreciation of
financial$12,000 is calculated
assets as&3 years @ 20% per annum based on the original cost of
financial
$20,000. liability financial
liabilities
liabilities

18 December 2020 71
© The Institute of Chartered Accountants of India
Example

Parent owns 80% of subsidiary. Parent transferred a non-current asset to subsidiary on 1 January 2015 at a value of
$15,000. The asset originally cost Parent $20,000 and depreciation to the date of transfer was $8,000. The asset
had a useful life of 5 years when originally acquired, with a residual value of zero. The useful life at the date of
transfer remains at 3 years. A full year’s depreciation charge is made in the year of acquisition and none in the year
of disposal. Total depreciation for 2014 was $700,000 for parent and $500,000 for subsidiary.

Required:
Show the adjustments required for the above Recognition
transaction in the consolidated statement
Measuremof profit or loss for the
& de-
year ended 31 DecemberOffsetting
2015. ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 72
© The Institute of Chartered Accountants of India
Solution

Parent Subsidiary Adjustment Consolidated

$ $ $ $

Per question 700,000 500,000 1,200,000

Asset unrealized profit
[15,000 – (20,000 – 8,000)] 3,000 3,000
Depreciation adjustment Recognition
Measurem
(15,000/3 years) – 4,000 Offsetting (1,000)
& de- (1,000)
ent of
Classification financial recognition
————– financial
as Liability v/s asset & of financial
1,202,000 assets &
Equity financial assets &
————– financial
liability financial
liabilities
liabilities
This depreciation adjustment would be part of the
.
profit after tax of subsidiary and would therefore
be shared with the non-controlling interest

18 December 2020 73
© The Institute of Chartered Accountants of India
Example
Elimination of unrealised profits or losses in full where transactions are between
subsidiaries with non-controlling interests
The rationale for full elimination of unrealised profits or losses, even where the related transactions are between
subsidiary entities with non-controlling interests, might not initially be obvious.

However, transactions between subsidiaries included in the consolidation are wholly within the control of the
parent company, whether or not the subsidiaries are wholly owned. All of a subsidiary’s assets and liabilities and
transactions between subsidiaries are brought into the consolidation in full – again, whether or not they are wholly
owned.

Therefore, because the group includes 100% of each subsidiary’s assets and liabilities, intra-group transactions that
give rise to profits or losses that are unrealised at the balance sheet date are wholly unrealised to the group and
do not represent any increase or decrease in the group’s net assets.

They should, therefore, be eliminated in full, even where the transactions involve subsidiaries with non-controlling
interests.

The rules apply equally to any profit that might be included in the group’s non-current assets as a result of one
group company selling assets to another group company at a profit.

18 December 2020 © The Institute of Chartered Accountants of India 74

 Example

Attributing earnings between controlling and non-controlling interests

If there are contractual arrangements that determine the attribution of earnings, such as a profit-sharing
agreement, the attribution specified by the arrangement should be considered if it is determined to be
substantive.

If there are no such contractual arrangements, the relative ownership interests in the entity should be used if the
Recognition
parent’s ownership and the non-controlling interest’s ownership in the assets and liabilities are proportional.
Measurem
Offsetting & de-
ent of
Classification financial recognition
For example, if the controlling interest owns 60% of entity A and the non-controlling interest owns 40%, 60% of the
financial
as Liability v/s asset & of financial
earnings should be allocated to the controlling interest
assets
and 40% to the non-controlling
&
assets interest.
&
Equity financial financial
liability financial
If, however, the parties have a contractual arrangement liabilities
liabilitiesspecifying a 50/50 split of the earnings, 50% of the
earnings should be allocated to the controlling interest and 50% to the non-controlling interest, provided the
contractual arrangement is substantive.

18 December 2020 75
© The Institute of Chartered Accountants of India
 Example

Profit attributable to non-controlling interest subsequent to acquisition

If A parent entity acquires a 60% subsidiary for INR 300 million at the beginning of the year. The fair value of the
subsidiary’s identifiable net assets at the date of acquisition is INR 370 million. In its first year after purchase, the
subsidiary’s income statement, as it is included in the group’s consolidated financial statements (that is, after all
consolidation adjustments, such as the amortisation of intangible assets), is as follows:.
Recognition INR Million Measurem
Profit before tax Offsetting & de- 26 ent of
Classification financial recognition
Tax (1) financial
as Liability v/syear asset & of financial
Profit for the 25 assets &
Equity financial assets &
Profit attributable to NCI (40% X 25) financial
liability financial 10 liabilities
liabilities 15
Profit attributable to parent's equity holders
25

18 December 2020 76
© The Institute of Chartered Accountants of India
 Example

Sale of a 20% interest in a wholly owned subsidiary

Entity A sells a 20% interest in a wholly owned subsidiary to outside investors for INR 200 million in cash. It still
maintains an 80% controlling interest in the subsidiary. The carrying value of the subsidiary’s net assets is INR 600
million, including goodwill of INR 130 million from the subsidiary’s initial acquisition.

The accounting entry recorded on the disposal date for the 20% interest sold is as follows:
Recognition
Measurem
Offsetting & de-
INR million ent of
Dr CashClassification financial recognition
financial
as Liability
Cr NCI (20% v/s M)
X INR 600 asset & of 200
financial
120 assets &
Equity financial assets &
Cr Equity financial
liability financial 80
liabilities
liabilities
The carrying value of the 20% non-controlling interest that is recognised is calculated as the proportionate interest
in the subsidiary’s carrying value/net assets.

18 December 2020 77
© The Institute of Chartered Accountants of India
 Example

Acquisition of a further 20% interest in a subsidiary

Entity A acquired 60% of entity B some years ago for INR 3,000. At the time, entity B’s fair value was INR 5,000. It had net
assets with a fair value of INR 3,000 (which, for the purposes of this example, was the same as book value). Goodwill of
INR 1,200 was recorded (being INR 3,000 − (60% × INR 3,000)). On 1 July 20X5, entity A acquires a further 20% interest in
entity B, taking its holding to 80%. At that time, entity B’s fair value is INR 10,000, and entity A pays INR 2,000 for the 20%
interest. At the time of the acquisition, the fair value of entity B’s net assets is INR 6,000 and the carrying amount of the
non-controlling interest is INR 2,000.

The accounting entry recorded for the acquisitionRecognition

of the non-controlling interest is asMeasurem
follows:
Offsetting & de-
ent of
Classification financial recognition INR
Dr as
NCILiability v/s financial
asset & of financial
1,000
Dr Equity assets &
Equity financial assets &
1,000 financial
Cr Cash liability financial
2,000 liabilities
liabilities
The carrying value of the 20% non-controlling interest that is eliminated is calculated at the proportionate
interest in the non-controlling interest’s carrying value.

18 December 2020 78
© The Institute of Chartered Accountants of India
 Example
Acquisition of a further 40% interest in a subsidiary

A parent entity acquires a 60% subsidiary for INR 300 million at the beginning of the year. The fair value of the
subsidiary’s identifiable net assets at the date of acquisition is INR 370 million. In its first year after purchase, the
subsidiary’s income statement, as it is included in the group’s consolidated financial statements (that is, after all
consolidation adjustments, such as the amortisation of intangible assets), is as follows:
INR million
Profit before tax 26
Tax (1)
Profit for the year Recognition 25 Measurem
Offsetting & de-
Profit attributable to NCI (40% X INR 25 M) 10 ent of
Classification financial recognition
Profit attributable 15 financial
as Liability v/s to parent's
asset equity
& holders of financial
assets &
Equity financial assets &
financial
The non-controlling interest liability financial
at the date of acquisition is stated at either: liabilities
liabilities
▪ the initial amount of C200 million, if the parent entity recognises the non-controlling interest at fair value
which, assuming there is no control premium, is calculated as follows (40% × (C300m/60%)); or
▪ the initial amount of C148 million, if the parent entity recognises the non-controlling interest at its
proportionate share of the acquiree’s net assets at acquisition (calculated as 40% × C370m).
18 December 2020 79
© The Institute of Chartered Accountants of India
 Example

Acquisition of a further 40% interest in a subsidiary

The non-controlling interest’s share of changes in equity at the year end (which are all due to the profit for the
year) is C10 million. Depending on the basis used for the initial recognition, the non-controlling interest will be
carried at C210 million or C158 million at the end of the first year after the subsidiary’s purchase. The parent entity
now acquires the remaining 40% interest in the subsidiary for C280 million.

The accounting entry recorded for the purchase of the non-controlling interest is as follows (if NCI was initially
Recognition
recorded at fair value): Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial INR million
Dr NCI Equity assets &
financial assets
210 &
Dr Equity financial
liability financial
70 liabilities
Cr Cash liabilities
280

18 December 2020 80
© The Institute of Chartered Accountants of India
Example

Acquisition of a further 40% interest in a subsidiary

The accounting entry recorded for the purchase of the non-controlling interest is as follows (if NCI was initially
recorded at the proportionate share of the acquiree’s identifiable net assets):
INR million
Dr NCI 158
Dr Equity 122
Recognition
Cr Cash Measurem
Offsetting & de- 280
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
The purchase of the 40% non-controlling interestfinancial financial interest’s equity where
results in a larger reduction of the controlling
liability liabilities identifiable net assets.
the non-controlling interest was initially recordedliabilities
as the proportionate share of the acquiree’s

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© The Institute of Chartered Accountants of India
 Accounting requirements -Consolidation Procedures
Loss of control
• If a parent loses control of a subsidiary, it shall:
– derognize:
➢ the assets (including any goodwill) and liabilities of a subsidiary at their carrying amounts at the date when control is lost;
and
➢ the carrying amount of any NCI in the former subsidiary at the date when control is lost (including any components of OCI
attributable to them).

– recognize:
➢ the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of
Recognition
control; Measurem
Offsetting & de-
➢ if the transaction, event or circumstances ent of a distribution of shares of the
that resulted in the loss of control involves
recognition
Classification financial financial
subsidiary to owners in their capacityof
as financial
owners, that distribution; and
as Liability v/s asset & assets &
➢ any
Equity investment retained
financial in the former subsidiary
assets & at its fair value at the date when control is lost.
financial
liability financial
liabilities
liabilities
– reclassify to profit or loss, or transfer directly to retained earnings if required by other Ind AS, the amounts
recognized in OCI in relation to the subsidiary.

– recognize any resulting difference as a gain or loss in profit or loss attributable to the parent.
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© The Institute of Chartered Accountants of India
Accounting requirements -Consolidation Procedures

Loss of control
• If a parent loses control of a subsidiary, the parent shall account for all amounts previously recognized in
OCI in relation to that subsidiary on the same basis as would be required if the parent had directly disposed
of the related assets or liabilities.

• Therefore, if a gain or loss previously recognized in OCI would be reclassified to profit or loss on disposal of
related assets or liabilities, the parent shall reclassify the gain or loss from equity to profit or loss (as a
Recognition
reclassification adjustment) when it loses control Measurem
Offsetting & de- of the subsidiary.
ent of
Classification financial recognition
financial
Liability v/s asset & of financial
• If a revaluation surplus previously recognized in OCI would be transferred directly
as assets &to retained earnings on
financial assets &
theEquity
disposal of the asset, the parent shall transfer the revaluation surplus directly
financialto retained earnings when
liability financial
it loses control of the subsidiary. liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Accounting requirements -Consolidation Procedures

Example - Loss of control

• A parent sells an 85% interest in a wholly owned subsidiary. The relevant details are as follows:
• After the sale, the parent accounts for its remaining 15% interest as an FVTOCI investment
• The subsidiary did not recognize any amounts in OCI
• Net assets of the subsidiary before the disposal are INR 5000
• Cash proceeds from the sale of 85% interests are INR 7500 and
• The fair value of 15% interest retained byRecognition
the parent is INR 1300. Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
• TheLiability
as parentv/s
accountsasset
for the& disposal of an
of85% interest as follows:
financial
assets &
Equity financial assets &
• Debit FVTOCI Investments INR 1300
financial
liability financial
• Debit Bank liabilities
INR 7500
liabilities
• Credit Net assets of subsidiary derecognized (summarized) INR 5000
• Gain on loss of control of subsidiary INR 3800

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© The Institute of Chartered Accountants of India
 Joint arrangements
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Joint arrangements
Definition

A joint arrangement is an arrangement over which two or more parties have joint control

• A joint arrangement is either a joint operation or a joint venture and has

the following characteristics:
– The parties are bound by a contractual arrangement
– That contractual arrangementRecognition
gives two or more of those parties joint control of
the arrangement Measurem
Offsetting & de-
ent of
• Contractualfinancial
Classification arrangement defines recognition
the terms financial
as Liability–v/sOften, but
asset of financial
not &always, in writing assets &
Equity financial assets &
– Documented discussions financial
liability financial
liabilities
– Law or articles of association liabilities

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© The Institute of Chartered Accountants of India
Joint arrangements
Joint control

Joint control is the contractually agreed sharing of control of an arrangement , which exists only when the
decisions about the relevant activities require the unanimous consent of the parties sharing control

• Control (as defined by Ind AS 110): the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
Recognition
investee Measurem
Offsetting & de-
ent of
Classification financial recognition
• Relevant activities:
as Liability v/s asset &
the activities of the
of financial
financial
arrangement that significantly affect the investee’s returns
assets &
Equity financial assets &
financial
• Unanimous consent: financialthe arrangement and two or more parties must agree to
liability no single party controls liabilities
share control liabilities

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© The Institute of Chartered Accountants of India
Joint arrangements
Joint control

Does the contractual arrangement give all the parties

(or a group of the parties) control of the arrangement
collectively? No
Outside the scope of
Ind AS 111
Yes
(not a joint
arrangement)
Do the decisions about the relevant activities require
the unanimous consent of all the parties that
Recognition
collectively control the arrangement?
& de- No Measurem
Offsetting ent of
Classification financial recognition
financial
as Liability v/s asset & Yes
of financial
assets &
Equity financial assets &
financialJoint operation
liability financial
liabilities
liabilities
Joint Arrangement
Joint venture

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© The Institute of Chartered Accountants of India
Joint arrangements
Joint control - Examples

Example 1 Example 2 Example 3

Requirement 75% vote to direct 75% vote to direct Majority vote to direct
relevant activities relevant activities relevant activities

Party A 50% 50% 35%

Party B 30% Recognition25% 35%
Measurem
Offsetting & de-
Party C 20% 25% Widely
ent of dispersed
Classification financial recognition
financial
asConclusion
Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Joint arrangements
Joint control - Examples

Example 1 Example 2 Example 3

Requirement 75% vote to direct 75% vote to direct Majority vote to
relevant activities relevant activities direct relevant
activities
Party A 50% 50% 35%
Party B 30% Recognition 25% 35%
Measurem
Offsetting 20% & de-
Party C 25% Widely dispersed
ent of
Classification financial recognition
financial
Conclusion
as Liability v/s asset & Even though A ofcan
financial
assets &
Equity assets
financial block any decision, A& financial
financial
liability does not control B, liabilities
liabilities
because A needs B to
agree = joint control
between A and B.

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© The Institute of Chartered Accountants of India
Joint arrangements
Joint control - Examples

Example 1 Example 2 Example 3

Requirement 75% vote to direct 75% vote to direct Majority vote to
relevant activities relevant activities direct relevant
activities
Party A 50% 50% 35%
Party B 30% 25% 35%
Recognition
Party C 20% 25% Measurem
Widely dispersed
Offsetting & de-
ent of
Conclusion
Classification Even though A canrecognition
financial No control (or joint financial
as Liability v/s asset & any decision,ofAfinancial
block control) because assets &
Equity does not control B,assets
financial &
multiple financial
because A needs B financial
liability to combinations could liabilities
liabilities
agree = joint control be used to reach
between A and B. agreement

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© The Institute of Chartered Accountants of India
Joint arrangements
Joint control - Examples

Example 1 Example 2 Example 3

Requirement 75% vote to direct 75% vote to direct Majority vote to
relevant activities relevant activities direct relevant
activities
Party A 50% 50% 35%
Party B 30% 25% 35%
Party C 20% Recognition 25% Widely dispersed
Measurem
Offsetting & de-
Conclusion ent of (or joint
Classification financialEven though Arecognition
can No control (or joint No control
financial
as Liability v/s asset &block any decision, A control) because
of financial control) because
Equity financialdoes not controlassets
B, &multiple multiple &
assets
financial
liability because A needsfinancial
B to combinations could combinations could
liabilities
agree = joint control
liabilitiesbe used to reach be used to reach
between A and B. agreement agreement

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© The Institute of Chartered Accountants of India
 Classification of a joint arrangement

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Classification of a joint arrangement

Legal form of Does the legal form of the separate vehicle give
the separate the parties rights to the assets, and obligations for
liabilities, relating to the arrangement? Yes
vehicle

No

Contractual Do the contractual terms of the arrangement

specify that the parties have rights to the assets,
terms of the and obligations for the liabilities, relating to the Joint operation
arrangement Yes
arrangement?
Recognition No Measurem
Offsetting & de-
Is the arrangement designed so that ent of
Classification financial recognition
Other facts & financial
• The parties have rights to substantially all of the
as Liability v/s asset & of financial
economic benefits of the JA?
circumstances assets &
Equity financial assets & Yes
• The JA depends on the parties on a continuousfinancial
liability financial
basis for settling the liabilities? liabilities
liabilities
No

Joint venture

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© The Institute of Chartered Accountants of India
Classification of a joint arrangement
Legal form

► Classification of a joint arrangement

Legal form
Joint Operations Joint Ventures
Without a separate vehicle, the joint To be a joint venture, there must be a
arrangement is a joint operation separate vehicle
Parties have rights to the assets and Parties have rights to the net assets of the
obligations for the liabilities of the arrangement
Recognition
arrangement & de-
Measurem
Offsetting ent of
The legal form of
Classification the separate vehiclerecognition
financial does The legal form of the separate vehicle
financial
not confer
as Liability v/s separation
asset & between the parties
of financialcauses it to be considered in its own right
assets &
and
Equity the separate vehicle
financial (e.g., general assets & (e.g., corporation) financial
partnership) liability financial
liabilities
liabilities
• Separate vehicle: A separately identifiable financial structure, including separate
legal entities or entities recognised by statute, regardless of whether those
entities have a legal personality

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© The Institute of Chartered Accountants of India
Classification of a joint arrangement
Legal form - Example

• Fact pattern:
– A and B jointly establish a new corporation (C) in which each party has a 50%
ownership interest
– Incorporation enables the separation of C from A and B
– Assets and liabilities of C are the assets and liabilities of the incorporated entity
– Legal form of the separate vehicle indicates that the parties have rights to the net
assets of the arrangement
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
• as Analysis:
Liability v/s asset & of financial
assets &
Equity financial assets &
– Joint venture or Joint operation? financial
financial
liability liabilities
liabilities

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© The Institute of Chartered Accountants of India
Classification of a joint arrangement
Examples of contractual terms

Joint Operations Joint Ventures

Assets •Share all interests in the assets in a Do not have interests (i.e., no rights,
specified proportion title, or ownership) in the assets of the
•Hold assets of the arrangement as arrangement
tenants in common in a specified
proportion
•Have rights to all of the economic
benefits generated by the assets
Recognition
Measurem
Offsetting & de-
ent of
Liabilities financial
Classification recognitioncosts
•Share all liabilities, obligations, •Are not liable forfinancial
the debts and
as Liability v/s asset of financial
and &expenses in a specified obligations of the arrangement
assets &
Equity financial assets &
proportion •Liabilities to the financial
arrangement do not
liability financial
•Have liabilities for claims raised by
liabilities
exceed the parties’ investment in the
liabilities
third parties or to customers of the arrangement
arrangement •Creditors do not have any recourse
against any party in for debts or
obligations
18 December 2020 97
© The Institute of Chartered Accountants of India
Classification of a joint arrangement
Contractual terms - Example

(Continued)
• Fact pattern:
– A and B modify the features of C through their contractual arrangement so that each has an interest in the assets
of C and each is liable for the liabilities of C in a specified proportion

Recognition
Measurem
• Analysis: Offsetting & de-
ent of
– Joint venture orfinancial
Classification Joint operation? recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Classification of a joint arrangement
Facts and circumstances

• Facts and circumstances might indicate a joint operation if they result in

the parties having:
– Rights to the assets
– Obligations for the liabilities

• This may happen when there is:

Recognition
– RestrictionsOffsetting
on customers Measurem
& de-
ent of
– Commitments
Classification to purchase all the output
financial produced
recognition
financial
– Expectations
as Liability v/s asset
to fund of financial
& losses by venturers assets &
Equity assets &
financial settle liabilities of the arrangement
– Venturers continuously financial
financial
liability liabilities
– Designed to operate at breakeven liabilities
– Consider purpose and design
• Commitment upon default or guarantee is not determinative of being a joint
operation
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© The Institute of Chartered Accountants of India
Classification of a joint arrangement
Facts and circumstances - Example

(Continued)
• Fact pattern:
– Neither the legal form or contractual arrangement provide rights to assets and
liabilities of the arrangement to the venturers; however
– A and B agreed to purchase all the output produced by C in a ratio of 50:50
– C cannot sell any of the output to third parties, unless this is approved by A and B
(expected to be uncommon) Recognition
Measurem
& de-
– Price of the output sold is designed to cover expenses incurred by C (intended
Offsetting ent of to
operate at financial
Classification break-even level) recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Example - Telecom

Fact pattern:
• A & B establish New Co.
• Transfer all tower equipment to New Co.
• A & B have direct rights to assets/liabilities based on their proportionate shareholding
• All New Co’s decisions are unanimously made by A & B
Recognition
Measurem
Offsetting & de-
Ind AS 111 financial ent of
Classification recognition
Jointv/s
as Liability Operation because
asset & A & B have direct rights to the assets/liabilities financial
of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Variation in the Example

• A & B do not have direct rights to assets / liabilities of New Co. based on their proportionate shareholding
• Network capacity will be shared by A & B only.
• Operated at breakeven level

Ind AS 111 Recognition

Measurem
Offsetting
Joint operations or Joint venture? & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Accounting treatment

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Accounting for joint operations

► For a joint operation, the joint operator recognises its:

Assets Liabilities
(including its share of jointly (including its share of jointly
held assets) incurred liabilities)

Recognition
Measurem
Offsetting
Revenue & de-
Share of the revenue from the ent of Expenses
Classificationfrom thefinancial
sale of its share of recognition
sale of the output obtained financial
(including its share of jointly
as Liability v/sthe output
asset & from the
arising of financial
assets &
Equity financial from
assets & the joint operation incurred expenses)
joint operation financial
liability financial
liabilities
liabilities
► The recognition and measurement (including impairment considerations) for each of
these items shall be done in accordance with the applicable Ind ASs

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© The Institute of Chartered Accountants of India
 Accounting treatment
Proportionate consolidation vs. joint operation

• When is accounting for a joint operation the same as ‘proportionate consolidation’?

– Equal rights to all assets all liabilities – probably same

– Rights to a specified percentage of certain assets and differing rights (and percentages) to other assets, and
different obligations for various liabilities – likely to be a difference

– Nature of assets and liabilities might change

Recognition
Measurem
• Assets - same
Offsetting nature as recognised
& de- by joint operatorentORof (for example)
Classification financial recognition
reimbursement
as Liability v/s asset &
right? of financial financial
assets &
• Liabilitiesfinancial
Equity assets &
- same nature as recognised by joint operator financialOR (for example)
liability financial
cash due to joint operation? liabilities
liabilities

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© The Institute of Chartered Accountants of India
Accounting treatment
Joint Operation Example

Fact pattern:
► D & E establish New Co. (F)

► The legal form of the separate vehicle does not confer separation between the parties

► D and E each own 50% of the equity (e.g., shares) in F. However, as per the contractual terms of the joint
arrangement:
Recognition
► D has the rights to all of Building No. 1 and the Measurem
obligation to pay all the third party debt in F.
Offsetting & de-
► D and E have rights to all other assets in F, ent
and obligations for all other liabilities in ofproportion to their equity
F in
Classification financial recognition
interests financial
as Liability v/s(i.e., 50%)
asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Accounting treatment
Joint Operation Example (continued)

F’s balance sheet is as follows (in CU’s):

Liabilities and Equity Assets
Debt 120 Cash 20
Employee obligation 50 Building 1 120
Equity 70 Building 2 100
240 240
Under Ind AS 111, D would record the following in its financial statements. This likely will
Recognition
differ from the amounts recorded using proportionate consolidation.
Measurem
Offsetting & de-
ent of
Classification financial recognition
Liabilities and Equity Assets
financial
as Liability v/s asset & of financial
assets &
Equity Debt financial 120&
assets Cash 10
financial
liability financial
Employee obligation 25 Building 1 liabilities 120
liabilities
Equity 35 Building 2 50
180 180

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© The Institute of Chartered Accountants of India
 Accounting treatment
Joint Operation- Determining the relevant Ind AS

Joint operators are required to recognise their rights to assets and their obligations for liabilities in
accordance with the relevant Ind AS:
A Joint operator will need to carefully analyse the nature of its rights to assets when determining
the appropriate accounting.

For example, a Joint operator would recognise its share of an asset in accordance with Ind AS 16 Plant, Property and
Equipment, or Ind AS 38 Intangible Assets,Recognition
as applicable. When the contractual terms of the joint operation provide
a joint operator with a right to use an asset, not
Offsetting a share of the asset itself, theMeasurem
& de- Joint operator would consider
determining Whether
Classification the Arrangement Contains
financial a Lease in accordance with Indent
recognition
of
AS 17.
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Disposal of Joint Arrangement

• Ind AS 111 requires the equity method

• The application of the equity method continues to be covered in Ind AS
28, however it has below exemptions:
– if the entity is a parent that is exempt from preparing CFSs by the scope exception
in Ind AS 110, or
– When an investment in an associate or a joint venture, is held by, or is held
Recognition
indirectly through, an entity that is a venture Measurem
Offsetting & de- capital organisation, or a mutual fund,
unit trust and similar entities including investment-linked insurance funds, entthe
of
Classification financial recognition
entity may elect to measure investments financialat
in those associates and joint ventures
as Liability v/s asset & of financial
fair value through profit or loss in accordance with Ind AS 109. assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Disposal of Joint Arrangement

• Disposal of interest in a joint operation

When an entity disposes of its interest in a joint operation, it ceases to account for the rights
to assets and obligations for liabilities, and recognises any gain or loss as of the disposal
date.

• Disposal of interest in a joint Recognition

venture Measurem
Offsetting & de-
When an entity disposes of its interest in a joint venture, it ceases toent useofthe equity method
Classification financial recognition
as of that date. It also de-recognises its interest and recognises anyfinancial
of financial
gain or loss upon sale.
as Liability v/s asset & assets &
Equity financial assets &
financial
In both the cases, an entity is not required financial
liability to restate its financial statements as if it never held the
liabilities
liabilities
interest in the disposed joint operation / joint venture

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© The Institute of Chartered Accountants of India
 Continuous reassessment

Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
Continuous reassessment

• Accounting for arrangements pre-Ind AS 111 changed mostly in line with

changes in ownership interest or changes in contractual arrangements
• Due to revised definition of control, management also needs to reassess
upon changes in facts and circumstances, in addition to the above, for
example:
– Changes in how activities are directed
– Changes in legal form Recognition
Measurem
Offsetting & de-
– Changes in other facts and circumstances (such as changes in how the ent output
of of
financial
Classification the joint recognition
operation is sold or how liabilities of the operation are settled)
of financial
financial
as Liability v/s asset & assets &
• Reassessment
Equity required even ifassets
financial steps&are predetermined financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Associates
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 What do you mean by an ‘associate’?
An associate is an entity over which an investor has…….

What is a Significant influence

?
Power to participate in financial and operating policy decisions of
investee
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial General presumption
assets &
Equity financial assets &
► 20% or more voting rights
financial
liability financial
constitute significant
liabilities
not control/ liabilities
joint control influence
converse also true

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© The Institute of Chartered Accountants of India
Significant influence

• Indicators:

a) representation on the board of directors or equivalent governing body of the

investee;

b) participation in policy-making processes, including participation in decisions about

dividends or other distributions;
Recognition
Measurem
Offsetting & de-
ent of
c) material transactions
Classification financial between the investor and the investee;
recognition
financial
as Liability v/s asset & of financial
assets &
assets &
interchangefinancial
d) Equity of managerial personnel; or financial
liability financial
liabilities
liabilities
e) provision of essential technical information.

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© The Institute of Chartered Accountants of India
Significant influence
Potential voting rights

Can arise through share warrants, call options, debt or equity instruments that are
convertible into ordinary shares, etc.

• Currently exercisable or currently convertible are to be considered for

the assessment.

• Potential voting rights are not currently exercisable when , for example, they can not
be exercised or converted until a future date or until the occurrence of a future event.

• Potential voting rights held by other investors also need to be considered

for evaluation.

• Intention and the financial ability to exercise or convert to be ignored.

• Ceasing to have significant influence

18 December 2020 © The Institute of Chartered Accountants of India 116

Overview of accounting

Associate Joint arrangement

Joint venture
Recognition Joint operation
Measurem
& de-
ent of
recognition
financial
of financial
assets &
assets &
financial
financial
liabilities
liabilities
Ind AS 28 Ind AS 111

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© The Institute of Chartered Accountants of India
 Exemptions to equity accounting

• The application of the equity method continues to be covered in Ind AS 28, however it
has below exemptions:

– if the entity is a parent that is exempt from preparing CFSs by the scope exception in
Ind AS 110, or
Recognition
Measurem
& de-
– When an investment in an associate
Offsetting or a joint venture, is held ent
recognition
by, ofor is held indirectly
Classification financial financial fund, unit trust
through,
as Liability v/s an entity
asset that
& is a venture capital organisation, or a mutual
of financial
assets &
and similar entities
Equity financialincluding investment-linked insurance funds,
assets & the entity may elect
financial
liability financial
to measure investments in thoseliabilities
associates and joint ventures at fair value through
liabilities
profit or loss in accordance with Ind AS 109.

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© The Institute of Chartered Accountants of India
 ► wholly-owned; or partially-owned as long as other shareholders have no
Status of objection
investor ► debt/ equity not traded on public market
► not filed its financial statements with a recognised stock exchange

Recognition
Status of ultimate Measurem
Offsetting & de-
(or intermediate) ent of
Classification financial ► presents consolidated
recognition financial statements in accordance with Ind AS
financial
as Liability v/s parent
asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities
Measured at cost or as per Ind AS 109

Associate classified as held for sale accounted for under Ind AS 105

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© The Institute of Chartered Accountants of India
Equity method of accounting

• The equity method is a method of accounting whereby the investment is initially

recognized at cost and adjusted thereafter for the post-acquisition change in the
investor's share of net assets of the investee. The profit or loss of the investor
includes the investor's share of the profit or loss of the investee.
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Equity method of accounting

► no line-by-line consolidation
► share of net assets included in consolidated balance sheet in one line
► share of profits (after tax) included in consolidated statement of profit or loss in one line

Treatment in consolidated balance sheet

► include cost of investment +/- share of post-acquisition P&L – impairment loss (if any)
► eliminate investment in separate financial statements
Recognition
► include post acquisition reserves Measurem
Offsetting & de-
► share of net assets in excess of cost ofrecognitioninvestments included in profit orent of
loss
Classification financial financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
Treatment in consolidated statement of profit or loss financial
liability financial
liabilities
liabilities
► include share of profits (after tax)
► eliminate dividend income

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© The Institute of Chartered Accountants of India
 Equity method of accounting
• Initially recorded at cost and thereafter adjusted for:

• Investor’s share of post acquisition profit or loss;

• Distributions from the investee

• Changes in the investor’s proportionate interest in the investee recorded in other

comprehensive income Recognition
Measurem
Offsetting & de-
ent of
• Fair value adjustments,
Classification financial if any. recognition financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
• When potential voting rights exist only present ownership interests
financialare considered.
liability financial
liabilities
liabilities
• Outstanding cumulative preference shares that are held by parties other than the investor and
classified as equity, the investor computes its share of profits or losses after adjusting for the
dividends on such shares, whether or not the dividends have been declared.
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© The Institute of Chartered Accountants of India
Equity method of accounting

Date of commencing the use of the equity method

• From the date when the investment fallswithin the definition of an associate.

Recording the initial investment:

• Cost – net fair value of the identifiable assets and liabilities = Goodwill (not presented
separately)/ income recognizedRecognition
in the income statement in the period in which the
Measurem
investment is acquired.
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
Goodwill
Equity neither amortized
financial nor tested
assets & separately for impairment.
assets & Instead, entire
financial
carrying amount liability
of investment is tested
financial for impairment under Ind AS 36 as a single
liabilities
asset whenever there is an indication. liabilities

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© The Institute of Chartered Accountants of India
 Example

Parent acquired, during the current year, a 40% holding in Associate for INR 18,600. Goodwill on acquisition was
calculated as INR 1,000 and there has been no impairment of goodwill during the year. The fair value of Associate’s
net assets at the year end is INR 48,000.

Required:
Calculate the investment in associate to be included in the consolidated balance sheet and state the amount of
Associate’s profits to be included in the consolidated statement of profit or loss for the current year.
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Solution
Net assets on acquisition INR
Cost of investment 18,600
Less: Goodwill (1,000)
–––––––
40% of Associate’s net assets on acquisition 17,600
Gross up to 100% × 100/40
–––––––
44,000
–––––––
Investment in associate Recognition
Measurem
Cost of investment Offsetting & de- 18,600 ent of
Plus: profits (48,000 – 44,000) recognition
40% of post-acquisitionfinancial
Classification 1,600 financial
as Impairment
Less: Liability v/sloss recognised
asset & of financial 0 assets &
Equity financial assets & ––––––– financial
liability financial
20,200 liabilities
liabilities
–––––––
Income from associate
included in consolidated statement of profit or loss
40% of post-acquisition profits (48,000 – 44,000) 1,600
––––––– 125
18 December 2020 © The Institute of Chartered Accountants of India
 Accounting policies and year ends

Accounting policies Year ends

▪should be uniform ► should be same

► Ind AS 28 allows an ► if different

investor to not adopt
uniform accounting ► prepare special financial statements of associate as at the same date as the
Recognition
policies, in case of Offsetting
an investor Measurem
& de-
associate, if it is financial ent of
Classification if impracticable to do so, adjust for
► recognition effects of significant transactions/
financial
impracticable
Liability v/s to do asset
so. & ofevents between these dates (difference
assets &≤ 3 months)
as financial
► Equity
Impracticability financial assets &
financial
exemption exists only liability
for financial
liabilities
an associate and not for liabilities
joint venture

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© The Institute of Chartered Accountants of India
Inter-company items

Inter-company balances

► no elimination

Inter-company transactions

► dividend- eliminated Recognition

Measurem
► Offsetting
others- no elimination & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
Unrealised profit financial
liability financial
liabilities
liabilities
► eliminated to extent of investor’s interest

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© The Institute of Chartered Accountants of India
 Equity method of accounting
Associates with net asset deficiencies
• If an investor's share of losses of an associate equals or exceeds its interest in the associate,
the investor discontinues recognising its share of further losses.

• The interest in an associate is the carrying amount of the investment in the associate under
the equity method together with any long-term interests that, in substance, form part of the
investor's net.

• Losses recognized under the equity method in excess of the investor's investment in ordinary
Recognition of the investor's interest in an associate in the
shares are applied to the other components Measurem
Offsetting & de-
reverse order of their seniority (i.e., priority in liquidation). ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
• AfterEquity
the investor's interest
financial is reduced
assets to
& zero, additional losses are provided for, and a
financial
liability is recognized,
liabilityonly to the extent
financialthat the investor has incurred legal or constructive
liabilities
obligations or made payments on behalf of the associate.
liabilities

• If the associate subsequently reports profits, the investor resumes recognizing its share of
those profits only after its share of the profits equals the share of losses not recognized.
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© The Institute of Chartered Accountants of India
 Equity method of accounting

Discontinuing the use of equity method:

When the investor ceases to have significant influence
Apply Ind AS 109 from that date provided the associate has not become subsidiary
or joint venture.

Discontinue when the investment is classified as held for sale under Ind AS
105 Recognition
Measurem
Measurement as at the date of discontinuing
Offsetting & de- the use of equity method:
ent of
Measure at fair value.
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
Fair value of the retained interest and financial
proceeds from the disposalfinancial
of the part interest –
liability
carrying amount of investment = Recognized liabilities in profit or loss.
liabilities

Amount recognized in OCI should be recycled to the Statement of P&L.

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© The Institute of Chartered Accountants of India
 Disclosures Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

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© The Institute of Chartered Accountants of India
 Disclosure requirements

• Disclosures requirements are governed by Ind AS 112

• Disclosures should enable users to understand:

– Nature of, and risks associated with, involvement with other entities
– Financial effects of that involvement on financial position, financial performance,
and cash flows
– Significant judgments and assumptions (and changes thereto) made by the investor
in determining whether it controls another entity
Recognition
Measurem
Offsetting & de-
ent of
Classification• subsidiaries withrecognition
For financial material NCI interests, summarised
financial financial
as Liability v/s information
asset & of financial
assets &
assets &
Equity – financial
Name of the subsidiary financial
liability financial
– Principal place of business
liabilities
liabilities
– Proportion of ownership interests held by non-controlling interests
– Summarised financial information about the subsidiary, etc
• Disclosures for structured entities
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© The Institute of Chartered Accountants of India
 Disclosure requirements

• The significant judgements and assumptions made (and changes to those

judgements and assumptions) in determining that:-

➢ it has control of another entity (as described in Ind AS 110.5 and Ind
AS 110.6);
Recognition
Measurem
➢ Offsetting
it controls another entity
& de-even though it holds less than half of the
ent of
Classification financial recognition
voting rights of the other entity; financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
financial
➢ it is an agent or a principal (Ind AS 110.B58-B72). liabilities
liability
liabilities

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© The Institute of Chartered Accountants of India
Disclosure requirements

• An entity shall disclose information that enables users of consolidated

financial statements
a) to understand:
(i) the composition of the group; and
(ii) the interest that NCI has in the group’s activities and cash flows; and
Recognition
Measurem
b) to evaluate: Offsetting & de-
ent of
i.
Classification financialand extent ofrecognition
the nature significant restrictions on its ability to
financial
as Liability v/s access or use
asset & assets, andofsettle liabilities, of the group; assets &
financial
Equity ii. the nature assets
financialof, and changes in, the& risks associated with interests in
financial
liability financial
consolidated structured entities; liabilities
liabilities
iii. the consequences of changes in ownership interest in a subsidiary
that do not result in a loss of control;
iv. the consequences of losing control of a subsidiary during the
reporting period
18 December 2020 133
© The Institute of Chartered Accountants of India
Disclosure requirements

For each subsidiary that has NCI which is material to the reporting entity:-
▪ the name of the subsidiary;
▪ the principal place of business (and country of incorporation if
different from the principal place of business) of the subsidiary;
▪ the proportion of ownership interests as well as voting rights (if not the
same as ownership interests) held Recognition
by NCI;
Measurem
▪ the profit or loss allocated to NCI of that
Offsetting subsidiary during the period;
& de-
ent of
Classification financial recognition
▪ accumulated NCI of that subsidiaryofatfinancial
the end of the period; financial
as Liability v/s asset & assets &
▪ summarised
Equity financial
financialinformation about the subsidiary (see Ind ASfinancial
assets &
liability financial
112.B10). liabilities
liabilities

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© The Institute of Chartered Accountants of India
Disclosure requirements

➢ Significant restrictions (e.g. statutory, contractual and regulatory restrictions) o ability to

access or use the assets and settle the liabilities of the group, such as:-
▪ those that restrict the ability of a parent or its subsidiaries to transfer cash or other
assets to (or from) other entities within the group;
▪ guarantees or other requirements that may restrict dividends and other capital
distributions being paid, or loans and advances being made or repaid, to (or from) other
Recognition
entities within the group; Measurem
Offsetting & de-
ent of
➢ The nature and
Classification extent to which protective
financial recognition rights of NCIs can significantly restrict the
financial
entity’s
as Liability v/s ability asset
to access
& or use theof assets
financialand settle the liabilities of the group (such as
assets &
assets &
when a parentfinancial
Equity is obliged to settle liabilities
financial
of a subsidiary before settling its own liabilities,
financial
liability liabilities
or approval of NCIs is required either to access the assets or to settle
liabilities the liabilities of a
subsidiary); and
➢ The carrying amounts in the consolidated financial statements of the assets and liabilities
to which those restrictions apply.
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© The Institute of Chartered Accountants of India
Disclosure requirements

• Significant judgements and assumptions made in determining that the

reporting entity meets the definition of an investment entity
• If it does not exhibit one or more of the typical characteristics of an
investment entity, description of why it nevertheless meets the definition
of an investment entity
• Fact of change in status, reasons for the change and impact on the
financial statements
Recognition
Measurem
• FactOffsetting
that the entity has applied& de- the exception to consolidation
ent of
Classification financial recognition
• Explicit or implicit financial support provided to entitiesfinancial
of financial
that it controls
as Liability v/s asset & assets &
Equity • Nature and
financial extent of any significant
assets & restrictions on the ability of investees
financial
to transfer financial
liabilityfunds to the investment entity. liabilities
liabilities
• Other disclosures as given in Ind AS 112.19A to 19G.

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© The Institute of Chartered Accountants of India
 Thank You
Recognition
Measurem
Offsetting & de-
ent of
Classification financial recognition
financial
as Liability v/s asset & of financial
assets &
Equity financial assets &
financial
liability financial
liabilities
liabilities

18 December 2020 137

© The Institute of Chartered Accountants of India