AS 23 and 27 Consolidation of Associates / Joint Ventures Presentation by: CA Geetha Jayakumar November 15, 2014
General Introduction Companies Act, 2013 2
Consolidated Financial Statements Where a company has one or more subsidiaries, it shall, in addition to standalone financial statements prepare a consolidated financial statement (CFS) of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the AGM of the company along with the laying of its financial statement. Company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in Form AOC I Subsidiary includes associate company and joint venture (Associate means a Company other than a subsidiary company and joint venture company in which the other Company has a significant influence)
Consolidated Financial Statements Manner of consolidation of accounts.- The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards. Provided that in case of a company covered under Sec. 129(3) which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act. Rule 6 of Companies (Accounts) Rules, 2014
Consolidated Financial Statements Preparation of CFS will not be applicable to an Intermediate Wholly Owned Subsidiary, except if its immediate parent is a company incorporated outside India. For Financial Year ending 31 March 2015, if a company does not have any subsidiaries, but only has associates and/or joint ventures, then the company would not have to prepare CFS in respect of such associates and/or joint ventures As per MCA Circular, Schedule lll to the Act read with Accounting Standards does not envisage a company to merely repeat the disclosures made by it under stand-alone accounts when it prepares CFS. In the CFS, a company would need to give all disclosures relevant for the CFS only. MCA Circular dated October 14, 2014
Consolidated Financial Statements Section 2(6) defines associate company. Associate company, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. Explanation - For the purpose of this clause, significant influence means control of at least twenty per cent of total share capital, or of business decisions under an agreement. Section 2 (87) defines subsidiary company. subsidiary company or subsidiary, in relation to any other company (that is to say the holding company), means a company in which the holding company (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:
Accounting Standard 27 Financial Reporting of Interests in Joint Ventures 7
Topics Covered I. Definitions II. Forms of Joint Ventures III. Jointly Controlled Operations IV. Jointly Controlled Assets V. Jointly Controlled Entities VI. Disclosure 8
Scope To be applied in accounting for investment in joint ventures, and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors, regardless of the structure and forms under which the joint venture activities take place Applicable only where CFS is prepared and presented by the venturer
Control 1. Voting Power 50 % or more OR AS 21 2. Power to Compose General Body AS 18 OR 3. Substantial Interest and Power to Direct Financial / Operating Matters 4. Power to govern Fin. and Op. Matters AS 27 5. Power to Participate AS 23 (significant Influence)
Interests in Joint Ventures - Definitions A Joint Venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it Joint control is the contractually agreed sharing of control over an economic activity 11
Interests in Joint Ventures - Definitions Venturer is a party to the Joint Venture and has joint control over that An investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture Proportionate consolidation is a method of accounting whereby a venturer s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is combined line by line with similar items in the venturer s financial statements or reported as separate line items in the venturer s financial statements. 12
Joint Venture is of Three Type : Joint Venture Jointly Controlled Asset ( JCA) No Company is made Jointly Controlled Operation ( JCO) No Company is made Jointly Controlled Entity Company is made
Jointly Controlled Operations No separate entity Each of the venturers use their own assets and incurs its own expenses and liabilities The joint venture agreement provides basis for share of joint revenue and expense No adjustments or consolidation procedures required when CFS is presented Eg: Aircraft manufacture and sale. 14
Jointly Controlled Operations Presentation and Accounting A venturer should recognise in its separate financial statements: The assets that it controls and the liabilities that it incurs; and The expenses that it incurs and its share of the income that it earns from the sales of goods or services by the joint venture. 15
No separate entity Jointly Controlled Assets Joint control or ownership of one or more assets contributed to or acquired for the purpose and dedicated to a joint venture Each of the venturers has control over its share of the future economic benefits through its share of the jointly controlled asset. The joint venture agreement provides basis for share of joint revenue and expense. Each venturer to recognise its share of asset / liability / income / expense in its accounts. No adjustments on CFS Eg: Oil, gas and mineral extraction industry. 16
Jointly Controlled Assets Presentation and Accounting Each venturer should include the following items in its accounting records: Its share of the jointly controlled assets Any liabilities which it has incurred on behalf of the joint venture Its share of income, together with its share of any expenses incurred by the joint venture 17
Jointly Controlled Entities Establishment of a corporation, partnership or any other entity Contractual agreement between venturers establish joint control over the economic activity of the entity Jointly controlled entity maintains its own set of accounts and prepares financial statements. Each venturer contributes cash or other resources to the jointly controlled entity. 18
Jointly Controlled Entities Description A jointly controlled entity controls the assets of the joint venture, incurs liabilities and expenses and earns income. It may enter into contracts in its own name and raise finance for the purposes of the joint venture activity. A jointly controlled entity maintains its own accounting records and prepares and presents financial statements in the same way as other entities. 19
Jointly Controlled Entities Presentation and Accounting A venturer shall recognise its interest in a jointly controlled entity using either proportionate consolidation When investment ceases to be a JCE From the date of cessation, the net assets of the JV after adjusting the goodwill/ capital reserve are treated as investment in the venture 20
Jointly Controlled Entities Transactions between venturer and joint venture When venturer contributes or sells assets to JV, and the asset is retained, then the venturer shall recognise only the portion of gain or loss that is attributable to the interests of the other venturer. When venturer purchases assets from a JV, the venturer shall not recognise its share of profits until it resells the assets to an independent party. 21
Transactions between the venturer and the venture Upon sale of any individual asset to the JV, only proportional gain (that is, interest of other venturers) should be recognised by the venturer Example: in a venture, A has 30% interest, others have the remaining 30%. A sells an asset, having carrying value of Rs 1000 for a price of Rs 1500. In separate financial statements, A would book a gain of Rs 500 In consolidated financial statements, A would book a gain of only 70% of 500 correspondingly, the value of the asset bought will stand reduced in consolidated statements If an asset is sold for a loss If the loss represents impairment, it is booked fully As a loss in separate accounting statements As impairment in consolidated fin statements 22
Contingencies Disclosures A venturer should disclose the aggregate amount of the contingent liabilities, unless the probability of loss is remote, separately from the amount of other contingent liabilities. A venturer discloses the aggregate amount of any capital commitments in respect of its interests in joint ventures separately from other commitments 23
Disclosures A venturer should list and describe interests in significant joint ventures and the proportion of ownership interest held in jointly controlled entities. A venturer which reports its interests in jointly controlled entities using the line by line reporting format for proportionate consolidation or the equity method should disclose the aggregate amounts of each of: Current assets Long term assets Current liabilities Long term liabilities Income and expenses related to its interests in joint ventures. 24
A venturer should disclose a list of all joint ventures and description of interests in significant joint ventures. In respect of jointly controlled entities, the venturer should also disclose the proportion of ownership interest, name and country of incorporation or residence.
Disclosure for Joint Venture 19 INVENTORIES March 201X March 201X (at Lower of Cost or Realisable value) Raw materials and components Raw material overseas goods-in transit Work-in-progress Stores and Spares Loose Tools Finished Goods Finished goods-in transit Stock in Trade Share in Joint Ventures Total Inventories 4,313 4,313 203 203 2,422 2,200 1,693 1,634 43 714 4,148 2,600 614 277 81 24 6,062 4,019 19,579 15,984
Disclosure for Joint Venture Disclosure for discontinuance of accounting for JV Interests in joint ventures- a) During the year, the Company s venture in Tunisia [the Tunisian Indian Fertiliser S.A. (TIFERT)], has commissioned the phosphoric acid plant and commenced production. Pursuant to the shareholders agreement in relation to TIFERT, the day to day operations have been assumed by the Tunisian Partners and the Company has accordingly discontinued proportionate consolidation under Accounting Standard 27 - Financial Reporting of Interests in Joint Ventures and is treating its investment in TIFERT under AS 13 - Accounting for Investments
Information on Joint Venture Entities 32 The particulars of the Company's Joint Venture Entities as at March 31, 2014 including percentage holding and its proportionate share of assets, liabilities, income and expenditure of the Joint Ventures are given below:- S No. 1 Name of the Joint Venture Rane TRW Steering Systems Limited % of Holding 50% As at March 31, 2014 2013-2014 Assets Liabilities Contingent Capital Commitme Income Expenses Liabilities nts 18,578 18,578 1,920 789 30,070 28,844 50% (18,001) (18,001) (2,194) (1,040) (32,304) (30,091) 2 Rane NSK Steering Systems Limited 49% 12,848 12,848 41 150 25,871 24,745 49% (10,179) (10,179) (41) (686) (28,213) (26,436) 3 JMA Rane Marketing Limited 49% 1,248 1,248 - - 2,708 2,576 49% (1,181) (1,181) - - (2,507) (2,351) Note: 1. Figures in bracket relates to the previous year. 2. All the above Joint Venture Entities located in India.
Accounting Standard 23 Accounting for Investments in Associates in Consolidated Financial Statements 29
Topics Covered I. Scope and Definitions II. Significant Influence III. Potential voting rights IV. Methods of Consolidation V. Disclosures 30
Scope To be applied in accounting for investment in associates in the preparation and presentation of consolidated financial statements by an investor.
Definition An associate is an enterprise over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and/or operating policy decisions of the investee but is not control or joint control over those policies.
Definition If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence. Potential equity shares of the investee held by the investor should not be taken into account for determining the voting power of the investor
Significant influence. Representation on the board of directors or equivalent governing body of the investee; Participation in policy-making processes, including participation in decisions about dividends or other distributions; Material transactions between the investor and the investee; Interchange of managerial personnel; or Provision of essential technical information.
Significant influence. The chairman of the investee owns a large, but not necessarily controlling, block of the investee's outstanding stock; the combination of the chairman's substantial shareholding and his position with the investee may preclude the investor from having an ability to influence the investee. Adverse political and economic conditions in the country of existence Opposition by the investee Agreement between investor and investee Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor. Litigation against an investee Severe long-term restrictions impair the investor's ability to repatriate funds
Equity Method Under the equity method, the investment in an associate is initially recognised at cost and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date of acquisition. Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investee arising from changes in the investee's other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences.
Application of Equity Method Interests other than equity interest may form part of net investment. Net investment initially recognized at cost. Carrying amount increased/decreased based on investor s share of profit/loss of investee. Investor s share of profit/loss recognized in investor s profit/loss. Distributions reduce carrying amount. Investor s share of profit/loss reflects present ownership interests and/or other contractual arrangements.
Exceptions to Equity Method If the investment is acquired and held exclusively with a view to its subsequent disposal in the near future; or The associate operates under severe long term restrictions that significantly impair its ability to transfer funds to the investor
Application of Equity Method - Losses If losses exceed interest in associate Interest in associate is carrying amount of investment together with any long-term interests that, in substance, form part of the investor s net investment in the associate. If losses exceed interest in associate, investor should discontinue recognizing its share of further losses unless a legal obligation exists. Future profits recognized only when profits exceed share of losses not recognized. If distribution by associate is in excess of investor s carrying amount, record distribution as income, provided: Distributions are not refundable by agreement or law and Investor is not liable for obligations of associate or committed to provide financial support to the associate
On Acquisition An investment in an associate is accounted for using the equity method from the date on which it becomes an associate. On acquisition of the investment any difference between the cost of the investment and the investor's share of the equity of the associate is described as goodwill or capital reserve as the case may be.
Example -equity method 41 On 1/3/20X1 A buys 30% of B for Rs.300,000 (assume no implicit goodwill). B s profit = Rs.80,000 for the year ended 31/12/20X1 (including 66,667 from March to Dec). On 31/12/20X1 B declared a dividend of Rs.100,000. At 31/12/20X1 the recoverable amount of A s investment in B = Rs.290,000 (ie Rs.300000 minus Rs.30000 plus Rs. 20000).
Example -equity method 42 A Limited holds 22% share of B Limited on 1 st April of the year and the relevant information available on the date of investments are: Cost of investment Rs.33000 and total equity on date of acquisition Rs.200000 Ans: A Ltd s equity will be 22% of Rs.200000 = Rs.44000 Less: Cost of Investment- Capital Reserve Rs.33000 Rs.11000
On Acquisition Therefore: a. goodwill relating to an associate is included in the carrying amount of the investment. However, amortisation of that goodwill is not permitted and is therefore not included in the determination of the investor's share of the associate's profits or losses. b. any excess of the investor's share of the net fair value of the associate's identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment and is instead included as income in the determination of the investor's share of the associate's profit or loss in the period in which the investment is acquired.
Distributions How should distributions, by an equity method investee to an investor in excess of the investor's carrying amount, be recorded? If distributions by an equity method investee to an investor are in excess of the investor's carrying amount, and (1) the distributions are not refundable by agreement or law, and (2) the investor is not liable for the obligations of the investee or otherwise committed to provide financial support to the investee, then cash distributions received in excess of the investment in the investee should be recorded as income.
Disclosures Investment in associates to be listed by proportion of ownership interest / voting power held in each associate Investments to be classified as long-term investments Investor's share of the profits / losses to be disclosed separately Associates where reporting date is different with difference in dates In case of difference in accounting policies between parent and associate, make appropriate adjustments in CFS to account for the difference. Where this is not practicable, the fact should be disclosed along with a brief description of differences in accounting policies. Investor s share of the contingencies and capital commitments of an associate for which it is also contingently liable
Disclosure for Associates An appropriate listing and description of associates including the proportion of ownership interest and, if different, the proportion of voting power held should be disclosed in the consolidated financial statements. Companies Equity shares held % of voting power held As at March 31,2014 As at March 31,2013 As at March 31,2014 As at March 31,2013 Associates Kar Mobiles Limited 886,369 884,369 40% 39% SasMos HET Technologies Private Limited 351,400 351,400 26% 26%
Investments in associates accounted for using the equity method should be classified as long-term investments and disclosed separately in the consolidated balance sheet. The investor s share of the profits or losses of such investments should be disclosed separately in the consolidated statement of profit and loss. The investor s share of any extraordinary or prior period items should also be separately disclosed. Equity accounted associates March 2014 March 2013 (i) Cost of investment [including Rs. 129.96 crores (31.03.2013: Rs117.90 crores) of goodwill (net of capital reserve) arising on consolidation] 698.59 654.99 (ii) Share of post acquisition profit (net of losses) 117.68 259.24 Total 816.27 913.23 IX. Profit after tax before share of Profit/(Loss) of associates and minority interest (VII - VIII) Year ended March 31, 2014 Year ended March 31, 2013 4,501 4,887 X. Share of Profit /(Loss) of associates 174-27 XI. Less: Minority Interest 327 1,023 XII. Profit for the year (IX + X - XI) 4,347 3,837
Thank you for listening Any Questions 48