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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Sagar Industries Ltd acquired 100% of the equity shares of Kiran Packaging Ltd on 1 January 2026. The acquisition was made exclusively with a view to selling the shares to a strategic buyer within the next six months, and negotiations have already begun. Sagar Industries prepares consolidated financial statements for the year ended 31 March 2026. What is the correct treatment of Kiran Packaging Ltd under AS 21?

Kiran Packaging Ltd must be excluded from consolidation, and the investment accounted for under AS 13. AS 21 excludes a subsidiary where control is temporary, meaning the shares were acquired and are held exclusively for disposal in the near future, even though the parent owns 100% of the voting power.

  1. AConsolidate it line by line because Sagar Industries holds more than half of the voting power
  2. BExclude it from consolidation and account for the investment as per AS 13Correct
  3. CConsolidate it using the equity method as per AS 23
  4. DConsolidate it only for the period from 1 January 2026 to the date of sale

Explanation

AS 21 requires a subsidiary to be excluded from consolidation when control is intended to be temporary because the shares were acquired and are held exclusively with a view to disposal in the near future. Such an investment is accounted for under AS 13. Line-by-line consolidation is wrong because the temporary-control exception applies despite 100% ownership.

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