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

Dhruv Enterprises Ltd acquired 25% of the equity shares of Neelkanth Pharma Ltd, a company over which it has significant influence, for ₹50 lakh. On the acquisition date, the equity share capital and reserves of Neelkanth Pharma totalled ₹240 lakh. How should Dhruv Enterprises treat the investment in its consolidated financial statements at the acquisition date under AS 23?

The investment is carried at ₹50 lakh, which is its cost. The share of net assets is ₹60 lakh, so cost is ₹10 lakh lower, giving a capital reserve. AS 23 includes this within the carrying amount of the investment and requires it to be identified and disclosed separately, not credited to profit.

  1. ACarrying amount of ₹50 lakh, which includes capital reserve of ₹10 lakh to be identified and disclosed separatelyCorrect
  2. BCarrying amount of ₹60 lakh, with ₹10 lakh credited to the consolidated profit and loss statement
  3. CCarrying amount of ₹50 lakh, which includes goodwill of ₹10 lakh to be identified and disclosed
  4. DCarrying amount of ₹60 lakh, with ₹10 lakh credited to capital reserve

Explanation

Share of equity at acquisition is 25% × 240 = ₹60 lakh. The cost of ₹50 lakh is lower, so the difference of ₹10 lakh is a capital reserve. AS 23 requires the goodwill or capital reserve arising on acquisition to be included in the carrying amount of the investment and identified and disclosed separately. The carrying amount therefore remains the cost of ₹50 lakh. Calling the difference goodwill reverses the direction of the difference.

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