Introduction to AS 21 Consolidated Financial Statements

Consolidated financial statements play a vital role in presenting a holistic view of a business group's financial status. AS 21 establishes the framework for preparing these statements, ensuring clarity and uniformity in financial reporting. This article will guide you through the applicability, presentation, and consolidation procedures outlined by AS 21, helping you navigate the intricacies of consolidated financial reporting.

Applicability of AS 21

AS 21 applies when a parent company prepares consolidated financial statements that encompass its subsidiaries. It is important to recognize that other accounting standards remain applicable during the preparation of these statements, similar to standalone financial statements. Notably, AS 21 does not address:

• Accounting methods for amalgamations, including the treatment of goodwill.
• Accounting for joint ventures (JVs).
• Investments in associates.

Presentation Requirements

A parent company must present its consolidated financial statements alongside its standalone financial statements. This dual presentation is crucial for stakeholders who require insights into both the individual and collective financial performance of the parent and its subsidiaries. The consolidated statements should depict the financial condition of the entire business group as a single entity, disregarding the legal distinctions of its individual components.

Scope of Consolidated Financial Statements

Under AS 21, every parent company is required to consolidate all subsidiaries, irrespective of their domestic or international nature. If a company lacks subsidiaries but has joint ventures or associates, it must prepare consolidated financial statements in accordance with AS 23 and AS 27, which govern the accounting for associates and joint ventures in consolidated contexts.

Exclusion Criteria for Subsidiaries

Certain subsidiaries may be excluded from consolidation if:

• Control over the subsidiary is intended to be temporary, primarily for imminent disposal.
• The subsidiary faces significant operational restrictions that impede its ability to transfer funds to the parent company.

In such instances, investments in these subsidiaries should be reported in accordance with AS 13, which pertains to accounting for investments. The justification for exclusion must be clearly disclosed in the consolidated financial statements to uphold transparency.

Steps in Consolidation Procedures

The consolidation process involves a careful integration of the financial statements of the parent and its subsidiaries. The following steps are essential to this process:

1. Eliminate the parent’s investment cost in each subsidiary against the subsidiary’s equity at the investment date.
2. Record any excess cost of investment over the subsidiary’s equity as goodwill in the consolidated financial statements.
3. If the investment cost is less than the parent’s proportional share of the subsidiary’s equity, classify the difference as a capital reserve.
4. Recognize minority interests in the net income of consolidated subsidiaries to adjust the group’s net income attributable to the parent company’s owners.
5. Present minority interests in net assets distinctly within the consolidated balance sheet to differentiate them from the parent company’s equity.

Conclusion

AS 21 establishes a fundamental standard for preparing consolidated financial statements, ensuring that stakeholders receive a clear and comprehensive view of a business group’s financial performance. By adhering to these guidelines, companies can maintain transparency, build trust among investors, and facilitate informed decision-making.