CA Anuj Agrawal
An Investment is being recognized as an Associate if the investor has significant influence over such entity. Under the current practice an entity shows this type of investment at cost in its separate financial statements and it is being accounted based on Equity Method in “Consolidated Financial Statements”.
As per AS -23 “Accounting for Investments in Associate in Consolidated Financial Statements “ para 11 An investment in an associate is accounted for under the equity method from the date on which it falls within the definition of an associate. On acquisition of the investment any difference between the cost of acquisition and the investor’s share of the equity of the associate is described as goodwill or capital reserve, as the case may be.
To account for any Additional investment into any existing associate, it is being done based on its Net Assets Value (carrying values) of its latest financial statement by simply adding this additional amount into equity accounted values (value upto this additional acquisition) with subsequent changes in the profit/ loss account less any distribution.
Ind-As -28 “Investment in “Associates and Joint Venture” para 32 states that – An investment is accounted for using the equity method from the date on which it becomes an associate or a joint venture. On acquisition of the investment, any difference between the cost of the investment and the entity’s share of the net fair value of the investee’s identifiable assets and liabilities is accounted for as follows:
(a) Goodwill relating to an associate or a joint venture is included in the carrying amount of the investment. Amortisation of that goodwill is not permitted.
(b) Any excess of the entity’s share of the net fair value of the investee’s identifiable assets and liabilities over the cost of the investment is recognised directly in equity as capital reserve in the period in which the investment is acquired.
Appropriate adjustments to the entity’s share of the associate’s or joint venture’s profit or loss after acquisition are made in order to account, for example, for depreciation of the depreciable assets based on their fair values at the acquisition date. Similarly, appropriate adjustments to the entity’s share of the associate’s or joint venture’s profit or loss after acquisition are made for impairment losses such as for goodwill or property, plant and equipment.
Now, after the applicability of Ind-As/ IFRS the situation will be different and there are some areas which one has to looked into while dealing such situation which can be broadly summarized (very simple and in more practical manner) as below-
1. Let’s look at the requirement to show an investment in an associate in Separate Financial Statements which is covered by Ind-As 27 “Separate Financial Statements” para 10 states that investment in an associate, joint venture or subsidiary can be shown at Cost OR as per Ind-As 109, which means that now management has a policy choice (which can be different for each class of investment) to show these investment at cost or as per Ind-As 109 (standard on “Financial Instruments”) i.e. on fair value through PL or OCI (other comprehensive Income),
2. Coming to the requirement to show an investment in Associate in Consolidated Financial Statements which is equity accounted method and it is being done starting from the date of initial recognition of such investment and that will be calculated based on the FAIR VALUE (as defined in Ind-As 113 – “Fair Value Measurement”) of assets and liabilities at the date of such acquisition. Let’s understand what does that means –
a) When an investment is classified/ identified as associate then management needs to identify fair values of assets and liabilities (including contingent consideration, intangibles etc) of the associate and compare the same with the consideration paid and difference will be either Goodwill or Capital reserve (negative goodwill) which will be part of the investment made itself and will not be shown separately. It is interesting to note here that there is nothing called negative Goodwill in IFRS as issued by IASB and such negative Goodwill is being charged to PL , however Indian version of this standard made this CARVE OUT which allows the entities to create reserve for the same in place of transferring it to PL,
b) After the initial recognition, all post acquisition profits/ losses are being taken care and all such payout will be deducted from this investment in order to comply equity accounting subject to the adjustment for identified intangibles/ contingent considerations/ revalued assets etc. which is completely different comparing to current accounting practice related to Equity accounted balances,
3. Standards interpret and suggest (as per normal Industry practices) that each time when there is an additional investment towards such equity accounted investment then management needs to calculate Goodwill specifically for the additional share acquired WITHOUT re-measuring the existing share in such associate which essentially does an incremental adjustment for such additional share acquired with a corresponding additions in Goodwill (or negative Goodwill) unlike in current accounting there is nothing as such which is required to be done each time while acquiring any additional stake in existing associate which remains associate,
4. Now, one can easily visualize that there is a significant use of fair values of associate’s assets & liabilities to be indentified each time while making such investments and then these fair values will make some parallel records/ information which are required to be kept by the Investor entity e.g. any upward fair valuation of assets, identified Intangible assets (like customer lists, brands etc), de-recognized assets, different useful lives of assets (which will make depreciation adjustment each time while taking proportionate share of associate in parent books),
5. Now, at the initial recognition, Goodwill identified will be shown in the notes to accounts and any amortization of such Goodwill is not allowed, However testing for impairment will be done on each time when there is an indication for such instances as defined in Ind-As 36- ‘Impairment of Assets” where Goodwill is not being tested separately but entire carrying amount is used for such impairment analysis,
This gives an overall framework and approach while analyzing certain changes in investment in an associate accordingly. It is worth to be noted that the FAIR VALUE measurement will be important and management needs to keep appropriate resource / records to ensure such transactions are duly complying with the latest accounting standards.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Reader are requested not to take this article as any kind of advise and should evaluate all relevant factors of each individual cases separately.
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