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

Meera Textiles Ltd holds 30% of the equity shares of Kaveri Dyes Ltd and has the power to participate in its financial and operating policy decisions. Meera Textiles Ltd also has subsidiaries and prepares consolidated financial statements. Under AS 23, how should the investment in Kaveri Dyes Ltd be accounted for in those consolidated financial statements, assuming it was not acquired exclusively for resale?

The investment should be accounted for by the equity method. Meera Textiles has significant influence through a 30% holding and is not holding the shares only for near-term resale, so AS 23 requires equity accounting in the consolidated statements instead of cost or proportionate consolidation.

  1. ABy the equity methodCorrect
  2. BBy the cost method
  3. CBy proportionate line-by-line consolidation
  4. DBy fair value through profit or loss

Explanation

AS 23 requires an investment in an associate to be accounted for in consolidated financial statements using the equity method, unless it is acquired and held exclusively with a view to disposal in the near future, or operates under severe long-term restrictions. Neither exception applies here. Cost method is used only for the exceptions, and proportionate consolidation applies to joint ventures under AS 27.

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