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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Vedant Industries Ltd holds 45% of the voting power in Quill Papers Ltd. Under an agreement with other shareholders, Vedant has the right to appoint a majority of Quill's directors and so governs its financial and operating policies to obtain economic benefits. Vedant is not exempt from preparing consolidated financial statements. How should Quill Papers Ltd be treated in Vedant's consolidated financial statements under AS 21?

Quill Papers Ltd is a subsidiary and is consolidated line by line. AS 21 treats control as either more than half the voting power or control over the composition of the board to obtain economic benefits. Vedant's board control satisfies the second test, so the 45% shareholding does not make Quill an associate.

  1. AAs a subsidiary, consolidated line by line, because Vedant controls the composition of Quill's boardCorrect
  2. BAs an associate, because voting power is below 50%, and accounted for under the equity method
  3. CAs a joint venture, because other shareholders also take part in decisions
  4. DAs a simple investment carried at cost, because voting power is below 50%

Explanation

AS 21 defines control as either owning more than one-half of the voting power or controlling the composition of the board of directors so as to obtain economic benefits. Vedant has the second form of control, so Quill is a subsidiary and is consolidated line by line. The associate option fails because it relies only on the 45% holding and ignores board control.

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