CA Intermediate · Advanced Accounting

AS 23 Accounting for Investments in Associates in Consolidated Financial Statements: formula sheet

Full chapter guide

Key formulas

Associate: Associate = significant influence + not a subsidiary + not a joint venture; All three parts must hold. If the investee is a subsidiary, AS 21 applies instead.
Significant influence presumption (holding 20% or more): Voting power ≥ 20% (direct + indirect) → significant influence presumed; Rebuttable. The presumption is rebutted if it is clearly shown that the investor does not have significant influence.
Holding below 20%: Voting power < 20% → no significant influence presumed; Rebuttable the other way: if influence is clearly demonstrated, the investee is an associate.
Indirect holding: Voting power = direct holding + holding through subsidiaries; The investor's holding is direct or indirect through subsidiaries. Apply the 20% test to this total.
Equity method: Carrying amount = cost, with goodwill or capital reserve at acquisition identified within the carrying amount, adjusted for share of post-acquisition change in net assets; Cost is the starting point. Goodwill or capital reserve on acquisition is identified and included in the carrying amount, not added to cost. The change in net assets includes the investor's share of profits or losses. Dividends received are not recognised as income in the consolidated statements; they reduce the carrying amount of the investment.
Scope: AS 23 applies in accounting for investments in associates when the investor prepares consolidated financial statements; In the investor's separate financial statements, the investment is accounted for under AS 13.
Goodwill / Capital reserve at acquisition: Cost of investment − Investor's share in equity of associate at acquisition date; Positive result is goodwill. Negative result is capital reserve. Equity means share capital plus reserves and surplus at that date.
Carrying amount at year end: Cost + Share of post-acquisition profit − Share of post-acquisition loss − Dividends received; Cost includes goodwill or capital reserve. Dividends reduce the carrying amount.
Share of profit: Associate's profit after tax (and preference dividend) × Investor's % holding; Use profit after the date of acquisition only. Adjust for the pro-rata period if acquired mid-year.
Share of dividend received: Dividend declared and paid on equity shares × Investor's % holding; Shown as a reduction of the investment, not as income.
Loss limit: Share of losses recognised only until the carrying amount is reduced to zero; Further losses are not recognised, unless the investor has obligations. Later profits are recognised only after the unrecognised losses are recovered.
Carrying amount of the investment (equity method): Cost + share of post-acquisition profits − share of post-acquisition losses − dividends received; Show it in the CFS. The balance cannot go below zero.
Share of associate's profit: Associate's adjusted profit after tax × investor's % holding; Adjust first for policy differences and for any preference dividend.
Unrealised profit on stock held (associate sells to investor): Unrealised profit in closing stock × investor's % holding; Deduct the investor's share once, from the investor's share of profit. The credit is adjusted against the investment or the related asset (the stock held by the investor), depending on presentation. It is not a second deduction. Only the investor's share is eliminated.
Unrealised profit on stock held (investor sells to associate): Unrealised profit in the associate's closing stock × investor's % holding; Eliminate only the investor's share, once, from the investor's share of profit. The credit is adjusted against the investment or the related asset (stock), depending on presentation. It is not a second deduction.
Losses beyond carrying amount: Loss recognised = lower of share of loss and carrying amount before the loss; The excess is not recognised. It is disclosed.
Resumption of profits after unrecognised losses: Recognise share of profit only after: share of profits > share of net losses not recognised; Recognise only the excess over the unrecognised losses.
Presumption of significant influence: Voting power ≥ 20% → presumed significant influence; < 20% → presumed none; Both presumptions can be rebutted, but only if clearly demonstrated. Disclose the reason when the investor holds 20% or more but concludes it has no significant influence, or holds under 20% but concludes it has.
Exclusions from equity method: (a) Held exclusively for disposal in near future; or (b) severe long-term restrictions on transfer of funds → account under AS 13; Learn both conditions. The standard wording is 'held exclusively with a view to disposal in the near future' and 'severe long-term restrictions'.
Carrying amount under equity method: Cost + Share of post-acquisition profits (or − losses) − Dividends received − Impairment loss; Cost includes goodwill, or is net of capital reserve, on acquisition. Dividends reduce the carrying amount.
Goodwill / capital reserve on acquisition: Cost of investment − Investor's share of net assets (equity) of associate at acquisition; A positive result is goodwill. A negative result is capital reserve. Both stay inside the carrying amount.
Impairment loss: Carrying amount − Recoverable amount, if carrying amount is higher; Recoverable amount is the higher of net selling price and value in use (AS 28). Test the whole investment, not goodwill alone.
Losses beyond carrying amount: Stop recognising losses when carrying amount reaches zero; resume only after share of profits equals unrecognised losses; The carrying amount is not taken below zero.

Quick revision

Associate: significant influence, but not a subsidiary or joint venture.
Significant influence means power to take part in financial and operating policy decisions, not to control them.
Presumed when the investor holds 20% or more of voting power, directly or through subsidiaries, unless shown otherwise.
Below 20% is presumed no significant influence unless it can be clearly shown.
Use the equity method in consolidated financial statements. AS 23 applies only where the investor prepares consolidated financial statements.
Carrying amount = cost plus share of post-acquisition profits, less dividends and share of losses.
Goodwill on acquisition is included in the carrying amount of the investment and is identified and disclosed separately. Capital reserve (your share of net assets is more than cost) is also included in the carrying amount and disclosed separately. It is not taken to profit or loss as income.
Dividends received reduce the carrying amount; they are not income in the consolidated statements.
Stop recognising your share of losses when the carrying amount reaches zero. The carrying amount may include long-term interests that form part of the net investment.
Resume recognising profits only after your share of profits equals your share of net losses not recognised.
Eliminate unrealised profits on transactions with the associate, to the extent of the investor's share.
Do not use the equity method if the investment is acquired and held exclusively with a view to its subsequent disposal in the near future, or if the associate operates under severe long-term restrictions that impair transfer of funds.
Use uniform accounting policies for like transactions, adjusting the associate's financial statements where needed. If this is not practicable, disclose that fact and describe the differences briefly.

Common mistakes

Treating 20% as a hard rule. Fix: Say the presumption can be rebutted. Always read the facts for board seats or lack of influence.
Applying the AS 23 equity method in the investor's separate financial statements. Fix: Check which statements the question is about. The equity method under AS 23 is used in consolidated statements. In the investor's separate statements, use AS 13 for the investment.
Adding dividends received to the carrying amount or treating them as income. Fix: Under the equity method, dividends reduce the investment because they are a return of the associate's net assets.
Taking share of the associate's total profits instead of post-acquisition profits. Fix: Profits up to the acquisition date are already in the cost. Take your share only of profits earned after it.
Crediting the dividend received to the CFS profit and loss. Fix: In the CFS, reduce the carrying amount by the dividend. The profit was already counted through the share of profit.
Eliminating 100% of the unrealised profit. Fix: For an associate, eliminate only the investor's percentage share.
Treating any holding below 20% as outside AS 23 without checking facts. Fix: It is only a presumption. Below 20% with clearly demonstrated significant influence, an associate exists. Disclose the reason in either direction: 20% or more with no significant influence, or under 20% with significant influence.
Excluding an associate because of any restriction on dividends. Fix: Only severe long-term restrictions that significantly impair the transfer of funds qualify. A temporary or minor limit does not.

Exam tips

For classification questions, write the 20% presumption and then say it is rebuttable. This is where marks are given.
Always check consolidated versus separate statements first. A question on the investor's separate statements points to AS 13.
In MCQs, look for the trap of an indirect holding through a subsidiary or a sub-20% holding with board seats.
Learn the three-way split: AS 21 subsidiary, AS 23 associate, AS 27 joint venture. Many questions test exactly this boundary.
Use the provision-facts-conclusion layout in short written answers, naming the standard.
Always write a working note showing equity at acquisition, goodwill or capital reserve, share of profit and dividends. This earns step marks even if one number is wrong.
In MCQs, check the date of acquisition and the profit period first. Most traps use total profit.
When the question gives a preference dividend, deduct the associate's preference dividend before taking your share of the profit.