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Advanced Accounting · AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

AS 23 Scope, Definitions and Significant Influence for CA Inter

Updated 4 October 2026 · Fact-checked

AS 23 applies when an investor prepares consolidated financial statements and holds investments in associates. An associate is an enterprise in which the investor has significant influence, and which is neither a subsidiary nor a joint venture. Holding 20% or more of voting power is presumed to give significant influence, unless shown otherwise.

Understand AS 23 Scope, Definitions and Significant Influence

AS 23 deals with how an investor accounts for its investments in associates in consolidated financial statements. It uses the equity method. This page covers only scope, definitions and the test for significant influence. The mechanics of the equity method come in the next topics.

An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Significant influence is the power to participate in the financial and/or operating policy decisions of the investee, but not control over those policies. It is a lower level than control.

The ladder is simple. Control (AS 21) makes the investee a subsidiary, so you consolidate line by line. Joint control (AS 27) makes it a joint venture. Significant influence (AS 23) makes it an associate, so you use the equity method. Below that, the investment is just an investment under AS 13.

The starting test is voting power. If the investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed to have significant influence. The presumption can be rebutted if you can clearly show it does not have such influence. If it holds less than 20%, it is presumed not to have significant influence, unless that influence can be clearly demonstrated. A majority holding by another investor does not by itself stop the investor from having significant influence.

Significant influence is usually shown by things like representation on the board of directors, participation in policy-making, material transactions between investor and investee, interchange of managerial personnel, or dependence on technical information. Judge the facts, not just the percentage.

Under the equity method, the investment is first recorded at cost. Goodwill or capital reserve arising on acquisition is identified by comparing cost with the investor's share of the investee's equity at the date of acquisition of the investment. The carrying amount equals cost, which includes any goodwill and reflects any capital reserve. Goodwill is not added to cost separately. Goodwill arises when cost is more than the investor's share of the investee's equity at that date. Capital reserve arises when cost is less. The carrying amount is then adjusted for the investor's share of the post-acquisition change in the net assets of the investee. This change includes the investee's profits or losses. Dividends received are not recognised as income in the consolidated statements; they reduce the carrying amount of the investment. In the consolidated statement of profit and loss, the investor's share of the investee's profit or loss is shown.

Key rules to remember

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.

How to solve AS 23 Scope, Definitions and Significant Influence questions

Use this order for any question asking whether an investee is an associate or which standard applies.

  1. 1Check whether you are dealing with consolidated financial statements. AS 23 and the equity method apply when the investor prepares them. In the investor's separate financial statements, account for the investment under AS 13.
  2. 2Work out the investor's voting power. Add its direct holding and the holding of its subsidiaries.
  3. 3Test for control first (AS 21): ownership of more than one-half of the voting power, or control of the composition of the board of directors so as to obtain economic benefits from its activities. If control exists, the investee is a subsidiary.
  4. 4Test for joint control (AS 27) if there is a contractual arrangement for shared control. If so, it is a joint venture.
  5. 5Apply the 20% presumption. At 20% or more, presume significant influence. Below 20%, presume none.
  6. 6Look for other facts that rebut the presumption: board seats, policy participation, material transactions, managerial interchange, technical dependence.
  7. 7State the conclusion clearly: associate, subsidiary, joint venture or simple investment. Name the standard that applies.
  8. 8If it is an associate, say that the equity method is used in consolidated statements.

Quickest way: Percentage first, then facts

When to use it: Use this for MCQs and short written parts that ask you to classify an investee.

  1. Compute total voting power including through subsidiaries.
  2. More than 50% voting power ordinarily means subsidiary under AS 21, subject to the exclusion for temporary control or severe long-term restrictions. At 50% or less, test control of the board and joint control first; if neither exists, 20% or more presumes an associate unless rebutted.
  3. Below 20% means not an associate, unless the question shows board representation or similar influence.
  4. In a written answer, use three lines: provision, facts, conclusion. Mention the 20% presumption and the standard by name to earn step marks.

Common mistakes in AS 23 Scope, Definitions and Significant Influence

  • Treating 20% as a hard rule.

    Students memorise the number and forget it is only a presumption.

    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.

    Students think any investment in an associate uses the equity method.

    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.

  • Ignoring indirect holdings.

    Only the direct holding is read from the question.

    Fix: Add the holding of the investor's subsidiaries to the direct holding before applying the 20% test.

  • Calling an investee with a 30% stake an associate when the investor controls the board.

    The percentage test is applied without checking control.

    Fix: Test for control under AS 21 first. Control of the composition of the board so as to obtain economic benefits from the investee's activities makes it a subsidiary even below 50%.

  • Confusing significant influence with control.

    Both involve influence over policies.

    Fix: Remember that significant influence is only participation in policy decisions. Control is the power to govern them.

Worked examples

Example 1

P Ltd prepares consolidated financial statements. It holds 15% of the voting power of X Ltd directly. Its subsidiary S Ltd holds another 8% of X Ltd. P Ltd has no board representation in X Ltd and no other link. Is X Ltd an associate of P Ltd?

Show the solution
  1. Total voting power = direct 15% + through subsidiary 8% = 23%.
  2. 23% is above 20%, so significant influence is presumed.
  3. X Ltd is not a subsidiary because P Ltd does not hold more than 50% and does not control the board.
  4. The presumption can be rebutted only if P Ltd clearly shows it has no significant influence. The question gives no such evidence.
  5. So X Ltd is an associate and P Ltd uses the equity method in its consolidated statements.

Answer: X Ltd is an associate of P Ltd. Its holding is 23% including S Ltd's shares, so significant influence is presumed. The equity method under AS 23 applies in the consolidated financial statements.

Example 2

A Ltd holds 18% of the voting power of B Ltd. It has the right to appoint two of the seven directors of B Ltd and supplies most of B Ltd's technical know-how. A Ltd prepares consolidated statements. Decide how B Ltd is treated.

Show the solution
  1. Voting power is 18%, below 20%. So no significant influence is presumed.
  2. The presumption can be overcome if influence is clearly demonstrated.
  3. A Ltd appoints two directors, so it takes part in policy decisions through board representation.
  4. A Ltd also provides essential technical information, which shows dependence of B Ltd.
  5. A Ltd does not hold more than 50% and does not control the board, since it appoints only two of seven directors. B Ltd is not a subsidiary.
  6. These facts clearly demonstrate significant influence, so B Ltd is an associate.

Answer: B Ltd is an associate of A Ltd despite the 18% holding. Board representation and technical dependence demonstrate significant influence. A Ltd applies the equity method under AS 23 in its consolidated statements.

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.

Practice questions from AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

AS 23 Scope, Definitions and Significant Influence in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 23 Scope, Definitions and Significant Influence: frequently asked questions

What is an associate under AS 23?

An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Significant influence means the power to participate in financial and operating policy decisions without controlling them.

Is 20% voting power always enough to make an investee an associate?

No. Holding 20% or more of voting power only creates a presumption of significant influence. You can rebut it if you clearly show the investor has no such influence.

What is the difference between an associate and a subsidiary?

A subsidiary is controlled by the investor under AS 21, so it is consolidated line by line. An associate is only significantly influenced and is accounted for under the equity method in AS 23. Control means governing policies, while significant influence means only taking part in them.

Does AS 23 apply to separate financial statements?

No. AS 23 applies when the investor prepares consolidated financial statements, and the equity method is used there. In the investor's separate financial statements, the investment is accounted for under AS 13.