Accounting Standard 21

Consolidated Financial Statements

(In this Accounting Standard, the standard portions have been set in bold italic type. These should be read in the context of the background material which has been set in normal type, and in the context of the ‘Preface to the Statements of Accounting Standards'.)

Accounting Standard (AS) 21, ‘Consolidated Financial Statements’, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2001. An enterprise that presents consolidated financial statements should prepare and present these statements in accordance with this Standard. The following is the text of the Accounting Standard.

Objective

The objective of this Statement is to lay down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. These statements are intended to present financial information about a parent and its subsidiary(ies) as a single economic entity to show the economic resources controlled by the group, the obligations of the group and results the group achieves with its resources.

Scope

1. This Statement should be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent.

2. This Statement should also be applied in accounting for investments in subsidiaries in the separate financial statements of a parent.

3.In the preparation of consolidated financial statements, other Accounting Standards also apply in the same manner as they apply to the separate financial statements.

4.This Statement does not deal with:

1. methods of accounting for amalgamations and their effects on consolidation, including goodwill arising on amalgamation (see AS 14, Accounting for Amalgamations);
2. accounting for investments in associates (at present governed by AS 13, Accounting for Investments); and
3. accounting for investments in joint ventures (at present governed by AS 13, Accounting for Investments).

Definitions

5. For the purpose of this Statement, the following terms are used with the meanings specified:

Control:

(a) the ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise; or

1. Attention is specifically drawn to paragraph 4.3 of the Preface, according to which accounting standards are intended to apply only to material items.

2. A separate accounting standard on 'Accounting for Investments in Associates', which is being formulated, will specify the requirements relating to accounting for investments in associates.

3. A separate accounting standard on 'Financial Reporting of Interests in Joint Ventures ', which is being formulated, will specify the requirements relating to accounting for investments in joint ventures.

(b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.

A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

A parent is an enterprise that has one or more subsidiaries.

A group is a parent and all its subsidiaries.

Consolidated financial statements are the financial statements of a group presented as those of a single enterprise.

Equity is the residual interest in the assets of an enterprise after deducting all its liabilities.

Minority interest is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent.

6. Consolidated financial statements normally include consolidated balance sheet, consolidated statement of profit and loss, and notes, other statements and explanatory material that form an integral part thereof. Consolidated cash flow statement is presented in case a parent presents its own cash flow statement. The consolidated financial statements are presented, to the extent possible, in the same format as that adopted by the parent for its separate financial statements.

Presentation of Consolidated Financial Statements

7. A parent which presents consolidated financial statements should present these statements in addition to its separate financial statements.

8. Users of the financial statements of a parent are usually concerned with, and need to be informed about, the financial position and results of operations of not only the enterprise itself but also of the group as a whole. This need is served by providing the users -

1. separate financial statements of the parent; and

b.       consolidated financial statements, which present financial information about the group as that of a single enterprise without regard to the legal boundaries of the separate legal entities.

Scope of Consolidated Financial Statements

9. A parent which presents consolidated financial statements should consolidate all subsidiaries, domestic as well as foreign, other than those referred to in paragraph 11.

10. The consolidated financial statements are prepared on the basis of financial statements of parent and all enterprises that are controlled by the parent, other than those subsidiaries excluded for the reasons set out in paragraph 11. Control exists when the parent owns, directly or indirectly through subsidiary(ies), more than one-half of the voting power of an enterprise. Control also exists when an enterprise controls the composition of the board of directors (in the case of a company) or of the corresponding governing body (in case of an enterprise not being a company) so as to obtain economic benefits from its activities. An enterprise may control the composition of the governing bodies of entities such as gratuity trust, provident fund trust etc. Since the objective of control over such entities is not to obtain economic benefits from their activities, these are not considered for the purpose of preparation of consolidated financial statements. For the purpose of this Statement, an enterprise is considered to control the composition of:

(i) the board of directors of a company, if it has the power, without the consent or concurrence of any other person, to appoint or remove all or a majority of directors of that company. An enterprise is deemed to have the power to appoint a director, if any of the following conditions is satisfied:

1. a person cannot be appointed as director without the exercise in his favour by that enterprise of such a power as aforesaid; or
2. a person’s appointment as director follows necessarily from his appointment to a position held by him in that enterprise; or
3. the director is nominated by that enterprise or a subsidiary thereof.

(ii) the governing body of an enterprise that is not a company, if it has the power, without the consent or the concurrence of any other person, to appoint or remove all or a majority of members of the governing body of that other enterprise. An enterprise is deemed to have the power to appoint a member, if any of the following conditions is satisfied:

1. a person cannot be appointed as member of the governing body without the exercise in his favour by that other enterprise of such a power as aforesaid; or
2. a person’s appointment as member of the governing body follows necessarily from his appointment to a position held by him in that other enterprise; or
3. the member of the governing body is nominated by that other enterprise.

11. A subsidiary should be excluded from consolidation when:

(a) control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or

(b) it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent.

In consolidated financial statements, investments in such subsidiaries should be accounted for in accordance with Accounting Standard (AS) 13, Accounting for Investments. The reasons for not consolidating a subsidiary should be disclosed in the consolidated financial statements.

12. Exclusion of a subsidiary from consolidation on the ground that its business activities are dissimilar from those of the other enterprises within the group is not justified because better information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. For example, the disclosures required by Accounting Standard (AS) 17, Segment Reporting, help to explain the significance of different business activities within the group.

Consolidation Procedures

13. In preparing consolidated financial statements, the financial statements of the parent and its subsidiaries should be combined on a line by line basis by adding together like items of assets, liabilities, income and expenses. In order that the consolidated financial statements present financial information about the group as that of a single enterprise, the following steps should be taken:

(a) the cost to the parent of its investment in each subsidiary and the parent's portion of equity of each subsidiary, at the date on which investment in each subsidiary is made, should be eliminated;

(b) any excess of the cost to the parent of its investment in a subsidiary over the parent's portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, should be described as goodwill to be recognised as an asset in the consolidated financial statements;

(c) when the cost to the parent of its investment in a subsidiary is less than the parent's portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference should be treated as a capital reserve in the consolidated financial statements;

(d) minority interests in the net income of consolidated subsidiaries for the reporting period should be identified and adjusted against the income of the group in order to arrive at the net income attributable to the owners of the parent; and

(e) minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated balance sheet separately from liabilities and the equity of the parent's shareholders. Minority interests in the net assets consist of:

1. the amount of equity attributable to minorities at the date on which investment in a subsidiary is made; and
2. the minorities' share of movements in equity since the date the parent-subsidiary relationship came in existence.

Where the carrying amount of the investment in the subsidiary is different from its cost, the carrying amount is considered for the purpose of above computations.

14. The parent's portion of equity in a subsidiary, at the date on which investment is made, is determined on the basis of information contained in the financial statements of the subsidiary as on the date of investment. However, if the financial statements of a subsidiary, as on the date of investment, are not available and if it is impracticable to draw the financial statements of the subsidiary as on that date, financial statements of the subsidiary for the immediately preceding period are used as a basis for consolidation. Adjustments are made to these financial statements for the effects of significant transactions or other events that occur between the date of such financial statements and the date of investment in the subsidiary.

15. If an enterprise makes two or more investments in another enterprise at different dates and eventually obtains control of the other enterprise, the consolidated financial statements are presented only from the date on which holding-subsidiary relationship comes in existence. If two or more investments are made over a period of time, the equity of the subsidiary at the date of investment, for the purposes of paragraph 13 above, is generally determined on a step-by-step basis; however, if small investments are made over a period of time and then an investment is made that results in control, the date of the latest investment, as a practicable measure, may be considered as the date of investment.

16. Intragroup balances and intragroup transactions and resulting unrealised profits should be eliminated in full. Unrealised losses resulting from intragroup transactions should also be eliminated unless cost cannot be recovered.

17. Intragroup balances and intragroup transactions, including sales, expenses and dividends, are eliminated in full. Unrealised profits resulting from intragroup transactions that are included in the carrying amount of assets, such as inventory and fixed assets, are eliminated in full. Unrealised losses resulting from intragroup transactions that are deducted in arriving at the carrying amount of assets are also eliminated unless cost cannot be recovered.

18. The financial statements used in the consolidation should be drawn up to the same reporting date. If it is not practicable to draw up the financial statements of one or more subsidiaries to such date and, accordingly, those financial statements are drawn up to different reporting dates, adjustments should be made for the effects of significant transactions or other events that occur between those dates and the date of the parent's financial statements. In any case, the difference between reporting dates should not be more than six months.

19. The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements are usually drawn up to the same date. When the reporting dates are different, the subsidiary often prepares, for consolidation purposes, statements as at the same date as that of the parent. When it is impracticable to do this, financial statements drawn up to different reporting dates may be used provided the difference in reporting dates is not more than six months. The consistency principle requires that the length of the reporting periods and any difference in the reporting dates should be the same from period to period

20. Consolidated financial statements should be prepared using uniform accounting policies for like transactions and other events in similar circumstances. If it is not practicable to use uniform accounting policies in preparing the consolidated financial statements, that fact should be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.

21. If a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements when they are used in preparing the consolidated financial statements.

22. The results of operations of a subsidiary are included in the consolidated financial statements as from the date on which parent-subsidiary relationship came in existence. The results of operations of a subsidiary with which parent-subsidiary relationship ceases to exist are included in the consolidated statement of profit and loss until the date of cessation of the relationship. The difference between the proceeds from the disposal of investment in a subsidiary and the carrying amount of its assets less liabilities as of the date of disposal is recognised in the consolidated statement of profit and loss as the profit or loss on the disposal of the investment in the subsidiary. In order to ensure the comparability of the financial statements from one accounting period to the next, supplementary information is often provided about the effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date and the results for the reporting period and on the corresponding amounts for the preceding period.

23. An investment in an enterprise should be accounted for in accordance with Accounting Standard (AS) 13, Accounting for Investments, from the date that the enterprise ceases to be a subsidiary and does not become an associate.

24. The carrying amount of the investment at the date that it ceases to be a subsidiary is regarded as cost thereafter.

25. Minority interests should be presented in the consolidated balance sheet separately from liabilities and the equity of the parent's shareholders. Minority interests in the income of the group should also be separately presented.

26. The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the equity of the subsidiary. The excess, and any further losses applicable to the minority, are adjusted against the majority interest except to the extent that the minority has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently reports profits, all such profits are allocated to the majority interest until the minority's share of losses previously absorbed by the majority has been recovered.

27. If a subsidiary has outstanding cumulative preference shares which are held outside the group, the parent computes its share of profits or losses after adjusting for the subsidiary’s preference dividends, whether or not dividends have been declared.

Accounting for Investments in Subsidiaries in a Parent's Separate Financial Statements

28. In a parent's separate financial statements, investments in subsidiaries should be accounted for in accordance with Accounting Standard (AS) 13, Accounting for Investments.

Disclosure

29. In addition to disclosures required by paragraph 11 and 20, following disclosures should be made:

(a) in consolidated financial statements a list of all subsidiaries including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held;

(b) in consolidated financial statements, where applicable:

1. the nature of the relationship between the parent and a subsidiary, if the parent does not own, directly or indirectly through subsidiaries, more than one-half of the voting power of the subsidiary;
2. the effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date, the results for the reporting period and on the corresponding amounts for the preceding period; and
3. the names of the subsidiary(ies) of which reporting date(s) is/are different from that of the parent and the difference in reporting dates.

A separate accounting standard on 'Accounting for Investments in Associates ', which is being formulated, will define the term ‘associate’ and specify the requirements relating to accounting for investments in associates. Until the aforesaid accounting standard comes into effect, AS 13 would continue to apply.

Transitional Provisions

30. On the first occasion that consolidated financial statements are presented, comparative figures for the previous period need not be presented. In all subsequent years full comparative figures for the previous period should be presented in the consolidated financial statements.

Source : The institute of Chartered Accountants of India  

GOVERNMENT OF INDIA

MINISTRY OF LAW, JUSTICE AND COMPANY AFFAIRS

(DEPARTMENT OF COMPANY AFFAIRS)

NOTIFICATION

New Delhi,

Dated: 9-3-2001

G.S.R.167(E).- In exercise of the powers conferred by  sub-clause (ii) of clause (a) section 86 read with clauses (a) and (b) of sub-section (1) of section 642 of the Companies Act, 1956, the Central Government hereby makes the following rules, namely:-

1. Short title and commencement:

(1)    These rules may be called the Companies ((Issue of Share capital with differential voting Rights) Rules, 2001.

(2)    They shall come into force on the date of their publication in the Official Gazette.

2. Definitions:

(1)   In these rules, unless the contexts otherwise requires,-

(a)     “Act” means the Companies Act, 1956 (1 of 1956);

(b)    “differential voting rights” includes rights as to dividend or voting;

(c)     “financial year” means financial year as defined under clause (17) of  section 2 of the Act.

(2)   Words and expressions used and not defined in these rules but defined in the Companies Act, 1956 shall have the same meaning respectively assigned to them in that Act.

3.  Conditions:

Every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if -

1.       The company has distributable profits in terms of Section 205 of the Companies Act, 1956 for preceding three financial years preceding the year in which it was decided to issue such shares.

2.       The company has not defaulted in filing annual accounts and annual returns for three financial years immediately preceding the financial year of the year in which it was decided to issue such share.

3.       the company has not failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend.

4.       The Articles of Association of the company  authorises the issue of shares with differential voting rights.

5.       The company has not been convicted of any offence arising  under, Securities Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange Management Act, 1999.

6.       The company has not defaulted in meeting investors’ grievances.

7.       The company has obtained the approval of share holders in General Meeting by passing resolution as required under the provision of sub-clause (a) of  sub-section (1) of section 94 read with sub-section (2) of the said section.

8.       the listed public company  obtained approval of share holders through Postal Ballot.

9.      The notice of the meeting at which resolution is proposed to be passed is accompanied by an explanatory statement stating –

(a)    the rate of voting rights which the equity share capital with differential voting right shall carry;

(b)   the scale or in proportion to which the voting rights of such class or type of shares will vary;

(c)    the company shall not convert its equity capital with voting rights into equity share capital with differential voting rights and the shares with differential voting rights into equity share capital with voting rights;

(d)   the shares with differential voting rights shall not exceed 25% of the total share capital issued;

(e)    that a member of the company holding any equity share with differential voting rights shall be entitled to bonus shares, right shares of the same class;

(f)     the holders of the equity shares with differential voting rights shall enjoy all others rights to which the holder is entitled to excepting right to vote as indicated in (a) above.

4.

  4.Register:

Every company referred to in rule 3  shall maintain a register as required under section 150 of the Act containing the particulars of differential rights to which the holder is entitled to.   

 ( F.No. 1/13/2000-CL.V)

A.     A.     RAMASWAMY

Joint Secretary to the Government of India.

MINISTRY OF LAW, JUSTICE AND COMPANY AFFAIRS

(DEPARTMENT OF COMPANY AFFAIRS)

  NOTIFICATION  

New Delhi, the 9^th March, 2001

G.S.R. 168(E). – In exercise of the powers conferred by section 642 read with section 252 of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following rules, namely:-  

1. Short title and Commencement:-

  (1)   These rules may be called the Companies (Appointment of the Small Shareholders’ Director) Rules, 2001.

  (2)   They shall come into force on the date of their publication in the Official Gazette.

2.  Definitions:-

In these rules unless the context otherwise requires -

(a)    “Act” means the Companies Act, 1956 (1 of 1956);

 (b)   “Small Shareholder” means a shareholder holding shares of nominal value of twenty thousand rupees or less in a public company to which section 252 of the Act applies.

  3.   Applications:-

 These rules shall apply to public companies having -

  (a)    paid-up capital of five crore rupees or more

  (b)   one thousand or more small shareholders

4.  Manner of election of small shareholders’ director:-

  (1) A company may act suo-moto to elect a small shareholders’ director from amongst small shareholders or upon the notice of small shareholders, who are not less than 1/10^th of total small shareholders and have proposed name of a person who shall also be a small shareholder of the company.

  (2)   Small shareholders intending to propose a person shall leave a notice of their intention with the company at least 14 days before the meeting under the signature of at least 100 small shareholders specifying name, address, shares  held and folio number and particulars of share with differential rights as to dividend and voting, if any, of the  person whose name is being proposed for the post of director and of other small shareholders proposing such person as a candidate for the post of director or small shareholders.

  (3)   A person whose name has been proposed for the post of small shareholders’ director shall sign, and file with the company, his consent in writing to act as a director.

 (4)   The listed public company shall elect small shareholders nominee subject to sub-rules (1), (2) and (3) above through the postal ballot.

  (5)   The unlisted company may appoint such small shareholders’ nominee subject to above conditions if majority of  small shareholders recommend his candidature for the post of director in their meeting.

  (6)   Tenure of such small shareholders’ director shall be for a maximum period of 3 years subject to meeting the requirement of provisions of Companies Act except that he need not have to retire by rotation.

 (7)   On expiry of his tenure, the same person if so desired by small shareholders, may be elected for an another period of 3 years.

  (8)   Such director shall be treated as director for all other purposes except for appointment as whole time director or managing director.

5.   Disqualification:-

  A person shall not be capable of being appointed as small shareholders’   director of a company, if

  (i)   he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;

 (ii)     he is an undischarged insolvent;

 (iii)    he has applied to be adjudicated as an insolvent and his application is pending;

(iv)    he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence

(v)   he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or

 (vi)  an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in  pursuance of that section.

6. Vacation of office:-

A person appointed as small shareholders’ director shall have to vacate the office if -

  (i)   such person so elected, as director of small shareholders ceases to be a small shareholders’ director on and from such date on which he ceased to be a small shareholder;

 (ii)   he has been rendered disqualified by virtue of sub-rule (1) of rule (5);

 (iii) he fails to pay any call in respect of shares of the company held by him, whether alone or jointly with others, within six months from the last date fixed for the payment of the call;

(iv)   he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board;

(v)  he is a partner of any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of section 295;

(vi)  he acts in contravention of section 299

(vii)   he becomes disqualified by an order of Court under section 203;

(viii) he is removed in pursuance of section 284;

7. Restriction on number of directorship:-

No person shall hold office at the same time as small shareholders’ director in more than two companies.

(F.No.1/19/2000-CL.V)

A.     A.     RAMASWAMY

Joint Secretary to the Government of India

The Institute of Chartered Accountants of India (ICAI) has prescribed new standard for calculating earnings per share (EPS) Which it felt would enable improved comparison of performance of a company with that of other enterprise in a given period as well as among different accounting periods for the same company. The new standard, which would be refereed to as Accounting standard 20 defines how net profit and the number of shares to be considered should be calculated for the purpose of arriving at the EPS. In addition, the new standard calls for greater disclosure on methodology employed for calculating the net profit as well as number of shares considered for arriving at the figure for EPS. The standard further states that if the nominal value of share that if the nominal value of share as the result of a share split or consolidation, the calculation of EPS for previous periods should be adjusted accordingly to present a fair picture of earnings. The institute has stated that the new standard would apply to all enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in the Country. The Standard would also apply to all companies, which disclose their EPS even if the shares are not listed. The new standard requires companies to present basic as well as diluted EPS in the statement of profit and loss for each class of shares that has a different right to share in the net profit for period. So far companies had the option to present either of the EPS in their annual statements. Further, Companies will now have to present the EPS even if the amounts disclosed are in negative i.e. if it is a loss. The standard further prescribes that the weighted average number of equity shares should be taken into account for calculating the basic EPS. Also the net profit or loss taken into consideration should be the net profit for the period after deducting preference dividends and attributable tax for the period. The weighted average number of shares during a period, when calculating basic EPS, would reflect that the amount by which the share capital may have varied during the period for reasons such as issue of fresh shares or buy- back of some issued shares SOURCE : ECONOMIC TIMES DATED 17TH MARCH,2001

Circular No.2of2001 New Delhi F.No.225/86/2000/ITA.II dated February9,2000 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes To ALL CCITs All DGITS Subject: - Finance Lease Agreements –Effect of publication of Accounting Standards on allowability of depreciation reg. 1. Under the Income Tax Act, in all leasing transactions, the owner of the asset is entitled to the depreciation of the same is used in the business under section 32 of the Income Tax. The ownership of the asset is determined by the terms of contract between the lessor and the lessee. 2. The Central Board of Direct Taxes vide Instruction No.1978 dated 31st December,1999 (F.No.255/190/98/ITA.II) has laid down the line of investigation in such cases. In cases where assets are factually non-existent, having been created by hawala transaction, the question of allowance of depreciation does not arise. In cases of sale and lease back of assets with out any alteration in the situation of assets and its working, the denial of depreciation claimed has to be considered keeping in view the principle laid down by the Supreme Court in the case of McDowell and company Limited. 3. It has come to the notice of Board that the New Accounting Standard on Leases issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication the allowance of depreciation on assets under the provisions of the Income tax Act. 4. The contents of this Circular may be brought to the notice of all concerned.- (Kamlesh C.Varshney) Under Secretary to the Govt. of India.