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

Meridian Ltd holds 22% of the equity voting power in Kaveri Ltd and has no other involvement with it. Under AS 23, how should Meridian Ltd treat Kaveri Ltd in its consolidated financial statements, assuming it prepares them and there is no evidence to the contrary?

Kaveri Ltd is an associate. AS 23 presumes significant influence when an investor holds 20% or more of the voting power, unless the contrary is clearly shown. Therefore Meridian applies the equity method in its consolidated financial statements. Control needs more than 50%, so it is not a subsidiary.

  1. AKaveri Ltd is an associate, since holding 20% or more voting power is presumed to give significant influence, and the equity method appliesCorrect
  2. BKaveri Ltd is a subsidiary, since a holding above 20% gives control
  3. CKaveri Ltd is an investment valued at cost, since less than 51% is held
  4. DKaveri Ltd is a joint venture, since another party must also hold shares

Explanation

AS 23 presumes significant influence where the investor holds 20% or more of the voting power, unless it can be clearly shown otherwise. Such an investee is an associate, and the equity method is applied in the CFS. Control requires more than 50%, so subsidiary treatment is wrong.

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