doubt in consolidation-AS-23-value of investment of associate

This query is : Resolved

PRAKRITI HARLALKA (Querist)
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03 December 2016 Sir, kindly provide a solution for the following problem- H Ltd acquired 15000 shares of A Ltd on 31.05.2010, as on 01.4.2010 securities premium of A Ltd was 10,00,000. Profit for the year 2011 was 4500. My querry is- 1. Whether securities premium will be included in pre acq profit. 2. If i include such figure in pre acq profit, capital reserve is created of huge amount which ultimately reduces my investment value n makes it negative, but my net worth is positive so my investment should also be positive.

PRAKRITI HARLALKA

PRAKRITI HARLALKA (Querist)
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03 December 2016 Correction to point 2- net worth of my associate A Ltd is positive so investment value of H Ltd should also be positive.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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21 July 2024 In the context of consolidating the financial statements of H Ltd and A Ltd under Accounting Standard (AS) 23 - Consolidated Financial Statements, let's address your queries step by step:

1. **Inclusion of Securities Premium in Pre-Acquisition Profits**:
- Securities premium of A Ltd as on 1st April 2010 is not considered as part of pre-acquisition profits. Pre-acquisition profits typically include only those profits generated by the associate before the acquisition date (31st May 2010 in this case).
- Securities premium is a part of the shareholders' equity and does not represent profits earned by the company. Hence, it is not included in the calculation of pre-acquisition profits.

2. **Impact on Investment Value and Capital Reserve**:
- When consolidating the financial statements, the investment in associates (A Ltd, in this case) is initially recognized at cost.
- Post-acquisition profits (profits earned by A Ltd after 31st May 2010) are added to the investment account in the consolidated financial statements. If these profits exceed the cost of investment, they can lead to the creation of a capital reserve.
- If the capital reserve becomes large enough to exceed the carrying amount of the investment, it does not reduce the investment value to negative. Instead, the excess amount is typically treated as goodwill or other adjustments in the consolidated financial statements.
- The net worth (equity) of A Ltd being positive ensures that the investment value of H Ltd in the consolidated financial statements remains positive. The investment is not adjusted to a negative value solely due to the creation of capital reserves or other components like goodwill.

3. **Treatment in Consolidated Financial Statements**:
- In preparing consolidated financial statements, H Ltd should eliminate its investment in A Ltd against the shareholders' equity of A Ltd (excluding pre-acquisition profits).
- Any post-acquisition profits of A Ltd are added to the investment in associates in the consolidated statement of profit and loss, thereby reflecting the share of profits of A Ltd attributable to H Ltd.

### Conclusion
To summarize, securities premium is not included in pre-acquisition profits when calculating the investment value in associates for consolidation purposes. Post-acquisition profits may lead to the creation of capital reserves or other adjustments, but these do not reduce the investment value to a negative amount. As long as the net worth of the associate (A Ltd) is positive, the investment value of H Ltd in the consolidated financial statements will also remain positive, reflecting the equity attributable to H Ltd in A Ltd.

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