Query No. 39

Subject:          

  Preparation of consolidated financial statements.1

A. Facts of the Case

1. An  unlisted  company  is  partner  in  two  partnership  firms  and  has 99% share in both the partnership firms. Another company has 1% share in both the partnership firms.

B. Queries

2. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

        (a)        Whether it is compulsory for the company to consolidate the accounts of partnership firms in the accounts of the company                     as per Accounting Standard (AS) 21, ‘Consolidated Financial Statements’.

        (b)        If the partnership firms maintain their accounts as per the cash basis  of  accounting,  whether  it  is  compulsory  to                              prepare accounts under mercantile basis while preparing consolidated financial statements under AS 21.

C. Points considered by the Committee

3. The  Committee  notes  the  introductory paragraph  of  AS  21  which provides as below:

“.....  An  enterprise  that  presents  consolidated  financial  statements should prepare and present these statements in accordance with this Standard....”

4.         The  Committee  also  notes  the  Amendment  to  Clause  32  of  the Listing  Agreement  of  Securities  and  Exchange  Board  of  India,  which provides as below:  

“a.        Consolidated Financial Statements: 

Companies  shall  be  mandatorily  required  to  publish Consolidated  Financial  Statements  in  the  annual  report  in addition to the individual financial statements.

..........”

5.         The Committee is of the view that AS 21 does not require compulsory preparation  of  consolidated  financial  statements.  AS  21  only  requires that if an enterprise presents consolidated financial statements, it should prepare and present the consolidated financial statements in accordance with this Standard. The amendment to Clause 32 of the Listing Agreement which  mandatorily  requires  the  presentation  of  consolidated  financial statements does not apply to the company in question, as the company is not a listed company.

6.         The  Committee  is  of  the  view  that  despite  being  not  required  to prepare  and  present  consolidated  financial  statements  statutorily,  the company  may  wish  to  prepare  these  statements  on  voluntary  basis. However, for this purpose, it would be required to determine whether the company controls the partnership firms as per the definition of ‘Control’ as provided in paragraph 5 of AS 21, which is reproduced below:

“(a)   the  ownership,  directly  or  indirectly  through  subsidiary(ies), of more than one-half of the voting power of an enterprise; or 

(b)        control of the composition of the board of directors in the case of  a  company  or  of  the  composition  of  the  corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.”

7.         The Committee notes from the facts of the case that the company has  99%  share  in  both  the  partnership  firms.  The  Committee  is  of  the view that percentage of share in a partnership firm is not the determining factor as to whether the company has control over the partnership firms or not, in view of the definition of ‘Control’ as reproduced above. The Committee, is accordingly, of the view that the company should determine, keeping  in  view  the  above  definition  of  ‘Control’,  as  to  whether  the company has control over the partnership firms or not.

8.         The Committee notes paragraphs 20 and 21 of AS 21 which provide as below:  

“20.  Consolidated  financial  statements  should  be  prepared  using uniform  accounting  policies  for  like  transactions  and  other events in similar circumstances. If it is not practicable to use uniform  accounting  policies  in  preparing  the  consolidated financial statements, that fact should be disclosed together with the  proportions  of  the  items  in  the  consolidated  financial statements to which the different accounting policies have been applied.

21.       If a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements when they are used in preparing the consolidated financial statements.”

9.         The Committee, on the basis of the above, is of the view that in this case  if  consolidated  financial  statements  are  prepared,  appropriate adjustments should be made to the financial statements of the partnership firms by using mercantile basis of accounting for consolidation purposes. However,  if  it  is  not  practicable  to  prepare  the  consolidated  financial statements by making appropriate adjustments to the financial statements of the partnership firms for consolidation purposes, a disclosure of the fact should be made alongwith the disclosure of proportions of the items in  the  consolidated  financial  statements  in  respect  of  which  different accounting policies have been applied.

D.   Opinion

10.   On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 2:

(a)        AS 21 does not require compulsory preparation of consolidated financial statements. AS 21 only requires that if an enterprise presents  consolidated  financial  statements,  it  should  prepare and present the consolidated financial statements in accordance with this Standard.

(b)        In case consolidated financial statements are prepared by the company, adjustments/disclosures in the consolidated financial statements should be made as suggested in paragraph 9 above.

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1Opinion finalised by the Committee on 28.9.2001.