AS 23 Disclosures and Exclusion from Equity Method for CA Inter

Understand AS 23 Disclosures and Exclusion from Equity Method

Key rules to remember

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.

How to solve AS 23 Disclosures and Exclusion from Equity Method questions

1. 1Check that an associate exists: significant influence (20% or more presumed), and the enterprise is not a subsidiary or joint venture.
2. 2Check the two exclusions. Is the shareholding exclusively for near-future sale? Are there severe long-term restrictions on remitting funds? Ordinary restrictions or a short delay do not qualify.
3. 3If an exclusion applies, say that the investment is accounted for under AS 13 and that the equity method is not used. If neither applies, use the equity method in consolidated financial statements. In separate financial statements, use AS 13.
4. 4Compute the carrying amount: cost, plus share of profit, less dividends, less losses. Show goodwill or capital reserve at acquisition inside cost.
5. 5For impairment, compare the whole carrying amount with the recoverable amount. Charge the difference to profit and loss and do not allocate it to goodwill.
6. 6For contingencies, state the investor's share of the associate's contingencies and capital commitments, and any several liability of the investor.
7. 7List the disclosures: the associates, with the proportion of ownership interest and, if different, the proportion of voting power; the methods used to account for them; the goodwill or capital reserve included in the carrying amount; and the reasons for not using the equity method where an associate is excluded. Also 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.
8. 8Write the conclusion as a clear sentence with the standard name.

Quickest way: Two-condition test and impairment single-line

Common mistakes in AS 23 Disclosures and Exclusion from Equity Method

• Treating any holding below 20% as outside AS 23 without checking facts.

  The 20% figure is learnt as a hard rule.

  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.

  Students stop reading at the word restriction.

  Fix: Only severe long-term restrictions that significantly impair the transfer of funds qualify. A temporary or minor limit does not.

• Allocating an impairment loss to goodwill first.

  This is how AS 28 treats a cash generating unit, and students carry it over.

  Fix: Under AS 23, goodwill is not separately recognised. Test the whole carrying amount as one asset and do not allocate the loss.

• Accounting for an excluded investment under the equity method or AS 21.

  Students forget what replaces the equity method.

  Fix: Write that investments covered by the exclusions are accounted for under AS 13.

• Applying the equity method in the investor's separate financial statements.

  Students forget that AS 23 applies to consolidated financial statements.

  Fix: In separate financial statements, account for the investment in an associate under AS 13 on a cost basis. Use the equity method only in consolidated statements.

• Taking the carrying amount below zero when the associate keeps making losses.

  Share of loss is deducted mechanically.

  Fix: Stop recognising losses once the carrying amount is nil. Resume only when your share of later profits equals the unrecognised losses.

• Forgetting to deduct dividends received from the carrying amount.

  Dividends are seen as income, as in cost-based accounting.

  Fix: Under the equity method, a dividend reduces the investment and is not income. Add share of profit, then deduct the dividend.

Worked examples