Circumstances for Consolidated Financial Statements

AS 21 should be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent.

Consolidated financial statements are the financial statements of a group presented as those of a single enterprise. AS 21 does not specify which enterprises are required to prepare consolidated financial statements – but lists the rules to be followed where such financial statements are prepared.

Consolidated Financial Statement will be prepared by the parent company for all the companies that are controlled by the parent company either directly or indirectly, situated in India or abroad except in the following cases:

• Control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future. As per ASI – 25, in view of the above, merely holding all the shares as ‘stock-in-trade’, is not sufficient to be considered as temporary control. It is only when all the shares held as ‘stock-in-trade’ are acquired and held exclusively with a view to their subsequent disposal in the near future, that control would be considered to be temporary within the meaning of the paragraph.
• The term ‘Near Future’ is expressed in ASI – 8 as a period not exceeding 12 months in normal case. For the above purpose, one should note the intention at the time of making the investment, if the intention is to continue with the equity for longer period then even though it is disposed off within 12 months, investee company would still be considered as subsidiary. On the other hand, if intention at the time of purchase is dispose it in near future, but the parent company was not able to dispose of the shares even after the end of 12 months, shares will continue to be considered as stock. Or subsidiary company operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the parent.

When the parent company has some restrictions on bringing the resources of the

subsidiary company to its main resources then consolidated financial statement is not required, as the control is not resulting in extra cash flow to parent company other than as mere investment in share of any other company i.e. dividend, bonus shares. Therefore, in both the above cases, investment of parent company in the share of its subsidiary company is treated as investment according to AS 13.

Exclusion of subsidiary company will be only for any of the above reasons but a company cannot be treated as outside the group just because the main business of the subsidiary company is not in line with the business of parent company.