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There are two companies. Both companies holding 50:50 in one another company. After some period of time, one company purchased additional 1 equity shares due to which the holding of this company is increased more than 50%. Is in this case consolidation under AS-21 required?




Under AS-21, the ‘Control’ is defined as follows:



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




(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.



Meaning of control is here that the board of directors of a company, if it has the power, without the consent or concurrence of any other person, to appoint or remove all or majority of the directors of that company.



AS-21 assumes that control exists in case the parents holds either by direct investment or investments made through its subsidiaries, the voting right of more than 50% in the other enterprise. It is pertinent to note that the term used is voting power and not merely shareholding. Mere shareholding with not enough voting power will not lead to control though it may give sufficient right in the distribution of profits.



In brief, the control over an undertaking to make it a subsidiary to justify the consolidation within the meaning of AS-21 is either voting control through direct or indirect ownership of shares of the undertaking or control over the constitution of the board of directors. Any other type of control or dominant influence will be irrelevant.



Subsidiary under the Companies Act:



A subsidiary under the Companies Act is one that arises because of:



i)     Control of the composition of board of directors; or

ii)   Ownership of more than half of nominal value of equity shares; or

iii)   X is a subsidiary of Y which is a subsidiary of Z; therefore, X is a subsidiary of Z.



Therefore the key difference between AS-21 that defines enterprises that need consolidation and the Companies Act that defines a subsidiary is as follows:



i)         The Companies Act requires ownership of more than half of the nominal value of equity shares, whereas AS-21 deals with the holding of more than one half of voting power. Since the extent of voting power held, for the purposes of Act, is governed by the amount paid up on equity shares and not the nominal value, there is difference in the definition of control, to this limited extent.


ii)            Under the Companies Act control of composition of the board of directors of a company is sufficient to qualify that Company as a subsidiary. Under AS-21 to qualify for consolidation the control of the composition of the board of the enterprise should be obtain economic benefits from its activities.



Hence the Company Act only defines the subsidiary companies. As per the Notification G.S.R. 739(E) dated 07.12.2006  of the para given below:



3. Accounting Standards.-



(1) The Central Government hereby prescribes Accounting Standards 1 to 7 and 9 to 29 as recommended by the Institute of Chartered Accountants of India, which are specified in the Annexure to these rules.


(2) The Accounting Standards shall come into effect in respect of accounting periods commencing on or after the publication of these Accounting Standards.



4. Obligation to comply with the Accounting Standards.-



(1)   Every company and its auditor(s) shall comply with the Accounting Standards in the manner specified in Annexure to these rules.


(2)   The Accounting Standards shall be applied in the preparation of General Purpose Financial Statements.



Hence the accounting standards for the companies are having the independent stands. Mere becoming the subsidiary company as per the companies act would not constitute to apply the same for the purpose of accounting standards also. One has to go into the depth of accounting standards and understand whether this would be applicable or not in the particular circumstances.



The act will override the Accounting Standard only if the said act specifically overrides the accounting standard(s).



It is the responsibility of the management to ensure that CFS includes enterprises that are under its control. If the management believes that subsidiary company as per companies act should excludes from consolidation on the ground that it does not have any control of the enterprise, it should demonstrate the absence of control.


Published by

CA Prabhakar Dubey
(Chartered Accountants)
Category Accounts   Report

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