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

Nilgiri Ltd acquired 35% of Orchid Ltd. Orchid Ltd uses the weighted average method for inventory valuation, whereas Nilgiri Ltd uses FIFO for similar items, and the effect is material. Orchid's financial statements are used for the equity method. Which treatment is required under AS 23?

The investor must adjust the associate's figures to its own policy for like transactions. Where that is not practicable, it discloses that fact together with the proportion of items to which different policies were applied. AS 23 does not allow ignoring the difference or excluding the associate.

  1. AAdjust Orchid's figures to Nilgiri's policy, or disclose the fact and the proportion of items accounted under different policies if adjustment is not practicableCorrect
  2. BIgnore the difference, since an associate may always follow its own policies
  3. CExclude Orchid from the consolidated financial statements
  4. DChange Nilgiri's own policy to weighted average

Explanation

AS 23 requires the investor to use uniform accounting policies for like transactions. If it is not practicable, the fact is disclosed along with the proportion of items to which different policies were applied. Ignoring the difference or excluding the associate is not permitted.

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