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

Vindhya Ltd. acquired 25% of the equity shares of Aravali Ltd. Which of the following situations requires Vindhya Ltd. to NOT apply the equity method to this investment in its consolidated financial statements, and instead account for it under AS 13?

The equity method is not applied where the investment is acquired and held exclusively with a view to disposal in the near future, and it is then accounted for under AS 13. A loss, a different reporting date or different accounting policies do not remove an associate from the equity method.

  1. AThe investment was acquired and is held exclusively with a view to its disposal in the near futureCorrect
  2. BAravali Ltd. reported a net loss during the year
  3. CAravali Ltd.'s financial statements are drawn up to a date two months earlier than Vindhya Ltd.'s
  4. DAravali Ltd. follows an accounting policy for inventory different from that of Vindhya Ltd.

Explanation

AS 23 excludes from the equity method an investment in an associate that is acquired and held exclusively with a view to disposal in the near future; it is accounted for under AS 13. Losses do not exclude an associate. Differences in reporting dates or accounting policies are dealt with by adjustments or disclosure, not by dropping the equity method.

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