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

Nisha Ltd holds 35% of Omkar Ltd, an associate carried at ₹45,00,000 in consolidated statements. Omkar Ltd incurred a large loss, and Nisha's share of the loss for the year is ₹52,00,000. Nisha has no obligation to fund Omkar's losses. What does AS 23 require Nisha to do?

Nisha should reduce the investment to zero and stop recognising further losses. AS 23 limits recognition of an associate's losses to the carrying amount of the investment, so ₹45,00,000 is charged and the excess ₹7,00,000 is not recorded, since Nisha has no obligation to fund the associate.

  1. AReduce the investment to zero and recognise further losses as a liability
  2. BReduce the investment to zero and stop recognising further lossesCorrect
  3. CRecord the full share of ₹52,00,000 and show a negative investment
  4. DIgnore the loss until Omkar Ltd is wound up

Explanation

Under the equity method, losses are recognised until the investment's carrying amount is reduced to zero. Beyond that, further losses are not recognised unless the investor has incurred obligations or made payments on the associate's behalf. Here the investment is reduced from ₹45,00,000 to nil, and the excess ₹7,00,000 is not recognised.

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