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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Veda Industries Ltd holds 40% of the voting power in Ritu Components Ltd. Veda also holds 60% of the equity of Sagar Plastics Ltd, which in turn holds 15% of the voting power in Ritu Components Ltd. No other shareholder has any special rights. For preparing consolidated financial statements under AS 21, how should Ritu Components Ltd be treated by Veda Industries Ltd?

Ritu Components Ltd is a subsidiary of Veda Industries Ltd. AS 21 tests control by voting power held directly or through subsidiaries, and Veda controls 40% directly plus 15% through Sagar Plastics, totalling 55%, which is more than half. Effective economic interest is irrelevant to this test.

  1. AAs an associate, because direct holding is below 50%
  2. BAs a subsidiary, because Veda controls 55% of the voting power directly and through Sagar PlasticsCorrect
  3. CAs a joint venture, because two companies hold shares in it
  4. DAs a subsidiary only if Veda's effective economic interest exceeds 50%

Explanation

Under AS 21, control means ownership of more than one-half of the voting power, which can be held directly or through subsidiaries. Veda holds 40% directly and controls another 15% through its subsidiary Sagar, giving 55%. Treating Ritu as an associate by looking only at direct holding is wrong, because holdings of subsidiaries are counted. Effective economic interest (40% + 60%×15% = 49%) is not the test.

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