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

Consolidation Procedures and Associate Losses under AS 23

Updated 4 October 2026 · Fact-checked

Under AS 23, you apply the equity method in the CFS: use latest statements, align policies, remove your share of unrealised profit, and stop recognising losses at zero. Dividends reduce the carrying amount. Skip it for investments held only for near-term disposal; stop it on loss of influence or severe restrictions. AS 21 applies if it becomes a subsidiary.

Understand Consolidation Procedures and Associate Losses

An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture. In the CFS, the investment is shown under the equity method. You start at cost (including goodwill or capital reserve within it) and adjust the carrying amount for your share of the associate's post-acquisition profit or loss.

The associate's financial statements should be as near as possible to the investor's reporting date. Use the latest available statements. If the dates differ, adjust for significant transactions or events between the two dates. If the associate uses different accounting policies for like transactions, adjust its figures to the investor's policies. If this is not practicable, disclose that fact.

If the investor and the associate trade with each other, unrealised profits and losses on those transactions are eliminated to the extent of the investor's interest in the associate. This applies to both upstream transactions (associate to investor) and downstream transactions (investor to associate). You eliminate only the investor's share, in line with its holding. Eliminate it once only. Do not eliminate the whole amount, and do not make a second deduction for the other side of the entry.

Losses are recognised only until the carrying amount of the investment reaches zero. The investment is not shown at a negative figure. Further losses are not recognised, but they are disclosed. If the associate later makes profits, the investor resumes recognising its share only after its share of profits equals the share of net losses not recognised.

A dividend received from the associate is not income in the CFS. It is a return of the investment already recognised through the share of profit. So it reduces the carrying amount.

The equity method is not applied in two cases. The first is where the investment is acquired and held exclusively with a view to disposal in the near future. The second is where the associate operates under severe long-term restrictions that impair its ability to transfer funds. Such investments are accounted for under AS 13.

You also discontinue the equity method from the date the investor ceases to have significant influence. The investment is then accounted for under AS 13, and the carrying amount at that date is regarded as its cost. If the associate becomes a subsidiary, the investor consolidates it under AS 21 instead.

Key rules to remember

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.

How to solve Consolidation Procedures and Associate Losses questions

Follow this order and you will cover every adjustment the examiner expects.

  1. 1Confirm that the entity is an associate. Significant influence is presumed where the investor holds 20% or more of voting power, unless it can be clearly shown otherwise; below 20% it is presumed absent unless it can be clearly shown. The entity must not be a subsidiary or joint venture. Also check that the investment is not held exclusively for disposal in the near future, in which case the equity method is not applied and AS 13 applies.
  2. 2Take the associate's latest statements and adjust for the reporting date gap and for different accounting policies.
  3. 3Compute the adjusted post-acquisition profit or loss for the year, and the investor's share of it.
  4. 4Work out unrealised profits and losses on transactions between the two, and eliminate them to the extent of the investor's interest in the associate, once only.
  5. 5Deduct the dividends received from the carrying amount. Do not treat them as income.
  6. 6Build the carrying amount from cost. If it would go below zero, stop at zero and note the unrecognised loss.
  7. 7Check whether significant influence is lost or severe restrictions exist. If yes, stop the equity method, account for the investment under AS 13 and treat the carrying amount at that date as cost. If the associate has become a subsidiary, apply AS 21 instead.
  8. 8Show the final carrying amount and the share of profit in the CFS and state any disclosure.

Quickest way: Carrying amount ladder

When to use it: Use it for any numerical question asking for the carrying amount or the share of profit in the CFS.

  1. Write: Cost.
  2. Add: share of adjusted profit (after unrealised profit).
  3. Subtract: dividends received.
  4. Check for zero: if the result goes negative, cap at zero and note the unrecognised loss.
  5. For MCQs, eliminate options that treat the dividend as income or show a negative investment.
  6. For written answers, show each line with workings and a one-line reason so you earn step marks.

Common mistakes in Consolidation Procedures and Associate Losses

  • Crediting the dividend received to the CFS profit and loss.

    Students follow the investor's own books, where AS 13 treats it as income.

    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.

    This is borrowed from the subsidiary treatment.

    Fix: For an associate, eliminate only the investor's percentage share.

  • Showing the investment at a negative figure.

    Students keep deducting the share of losses mechanically.

    Fix: Stop at zero. Disclose the unrecognised loss and resume recognising only after profits exceed it.

  • Ignoring accounting policy differences.

    Students use the associate's profit as given.

    Fix: Restate the associate's profit to the investor's policy before taking the share.

  • Continuing the equity method after significant influence is lost, or applying it to an investment held only for near-term disposal.

    Students look at past holding rather than present influence and intent, and treat a 20% holding as an automatic associate.

    Fix: Stop the equity method from the date influence is lost. Account for the investment under AS 13 and treat the carrying amount at that date as cost. Do not apply the equity method at all to an investment held exclusively for disposal in the near future, or to an associate under severe long-term restrictions on transferring funds. Account for both under AS 13. If the associate becomes a subsidiary, apply AS 21.

Worked examples

Example 1

Investor Ltd acquired 30% of Associate Ltd on 1 April 2025 for ₹60,00,000. This cost includes any goodwill or capital reserve, and no depreciation or amortisation adjustment arises on the goodwill or fair-value difference. For the year ended 31 March 2026, Associate Ltd reported profit of ₹40,00,000 and paid a dividend of ₹10,00,000. Compute the carrying amount of the investment in the CFS at 31 March 2026.

Show the solution
  1. Share of profit = 30% × ₹40,00,000 = ₹12,00,000.
  2. Dividend received = 30% × ₹10,00,000 = ₹3,00,000. It reduces the carrying amount.
  3. No further adjustment arises on goodwill or fair-value difference, as stated.
  4. Carrying amount = ₹60,00,000 + ₹12,00,000 − ₹3,00,000 = ₹69,00,000.

Answer: The carrying amount is ₹69,00,000.

Example 2

Investor Ltd holds 40% of Associate Ltd. Carrying amount of the investment at the start of the year is ₹5,00,000. Assume that the carrying amount is only the equity investment: Investor Ltd has no other long-term interests in Associate Ltd, and Associate Ltd pays no dividends in either year. Associate Ltd reports a loss of ₹20,00,000 this year. Next year it reports a profit of ₹25,00,000. Show the treatment for both years.

Show the solution
  1. Year 1: share of loss = 40% × ₹20,00,000 = ₹8,00,000.
  2. The carrying amount is only ₹5,00,000, and there are no other long-term interests to absorb the loss. So recognise a loss of ₹5,00,000 and reduce the investment to nil.
  3. Unrecognised loss = ₹8,00,000 − ₹5,00,000 = ₹3,00,000. Disclose it.
  4. Year 2: share of profit = 40% × ₹25,00,000 = ₹10,00,000. No dividend is received, so there is no deduction from the carrying amount.
  5. Recognise profit only after covering the unrecognised loss: ₹10,00,000 − ₹3,00,000 = ₹7,00,000.
  6. Carrying amount at the end of Year 2 = nil + ₹7,00,000 = ₹7,00,000.

Answer: Year 1: loss recognised ₹5,00,000, investment nil, unrecognised loss ₹3,00,000. Year 2: profit recognised ₹7,00,000, carrying amount ₹7,00,000.

Exam tips

  • Always show the working for share of profit, unrealised profit and dividends separately. Each line earns marks.
  • Before computing, check the percentage holding and whether the entity is really an associate.
  • In loss questions, set up a table of carrying amount against share of loss to catch the zero cap.
  • For theory, give the AS 23 rule and its reason in one sentence each, then conclude.

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

Consolidation Procedures and Associate Losses: frequently asked questions

How is a dividend from an associate treated in the CFS?

It is not income in the CFS. You reduce the carrying amount of the investment by the dividend received, because the share of profit has already been recognised.

How much unrealised profit do I eliminate for an associate?

Unrealised profits and losses on transactions are eliminated to the extent of the investor's interest in the associate, whether the sale was upstream or downstream. You eliminate it once, based on the percentage holding. This differs from the full elimination for a subsidiary.

What happens when losses exceed the carrying amount?

You stop recognising losses once the investment reaches zero. The extra loss is disclosed, and later profits are recognised only after they exceed the unrecognised losses.

When do I stop using the equity method, or not use it at all?

You do not apply it where the investment is acquired and held exclusively with a view to disposal in the near future, or where the associate works under severe long-term restrictions that impair its ability to transfer funds. You discontinue it when the investor no longer has significant influence. In these cases the investment is accounted for under AS 13, and where influence is lost the carrying amount at that date is regarded as its cost. If the associate becomes a subsidiary, AS 21 applies instead.