Ind AS 110 and Ind AS 28

Exemptions from preparing Consolidated Financial Statements (CFS) under Ind AS 110:
A parent entity is not required to present consolidated financial statements if it meets all of the following conditions:

1. The parent is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements.
2. Its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market).
3. It did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.
4. Its ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with Ind AS.

Exemptions from applying the Equity Method under Ind AS 28:
An entity need not apply the equity method to its investment in an associate or a joint venture if any of the following apply:

1. The entity is a parent that is itself exempt from preparing consolidated financial statements by the scope exception in paragraph 4(a) of Ind AS 110 (as listed above).
2. The investment is held by a venture capital organisation, mutual fund, unit trust, or similar entities, including investment-linked insurance funds, and is measured at fair value through profit or loss (FVTPL) in accordance with Ind AS 109.
3. The investment, or a portion of it, is classified as held for sale in accordance with Ind AS 105.
4. The entity is an investment entity, and it measures its investment in the associate or joint venture at FVTPL in accordance with Ind AS 109.

The equity method of accounting is applied when an investor has either significant influence over an investee or joint control over a joint venture.

• Significant influence: This is the power to participate in the financial and operating policy decisions of the investee, but it is not control or joint control of those policies. It is generally presumed if an investor holds 20% or more of the voting power, unless clearly demonstrated otherwise. Conversely, less than 20% typically implies no significant influence, unless evidenced by factors like board representation or participation in policy-making.
• Joint control: This is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Key Adjustments Required in Applying the Equity Method:

1. Initial Recognition: The investment is initially recognised at cost.
2. Share of Profit or Loss: The carrying amount of the investment is increased or decreased to recognise the investor's share of the investee's profit or loss after the acquisition date.
3. Share of Other Comprehensive Income (OCI): The investor's share of the investee's OCI is recognised in the investor's OCI.
4. Dividends: Dividends received from the investee reduce the carrying amount of the investment.
5. Impairment: The investment is assessed for impairment, and any impairment losses are recognised.
6. Unrealised Profits/Losses: Profits and losses resulting from 'upstream' (investee to investor) and 'downstream' (investor to investee) transactions between the investor and its associate or joint venture are eliminated to the extent of the investor's interest in the investee.
7. Fair Value Adjustments at Acquisition: Any difference between the cost of the investment and the investor's share of the net fair value of the investee's identifiable assets and liabilities at acquisition is accounted for (e.g., goodwill is included in the carrying amount of the investment and not amortised; excess of net fair value over cost is recognised in capital reserve).
8. Uniform Accounting Policies: Adjustments are made to conform the investee's accounting policies to those of the investor if they differ, unless impracticable.

An investment entity is an entity that:

1. Obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services.
2. Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both.
3. Measures and evaluates the performance of substantially all of its investments on a fair value basis.

Implications for Consolidation: An investment entity is required to measure its investments in subsidiaries at fair value through profit or loss (FVTPL) in accordance with Ind AS 109, 'Financial Instruments', instead of consolidating them. However, an investment entity must still consolidate a subsidiary that is not itself an investment entity and whose main purpose and activities are to provide services that relate to the investment entity’s investment activities.

As per Ind AS 110, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. This involves three elements: power over the investee, exposure or rights to variable returns from its involvement, and the ability to use its power to affect the amount of the investor’s returns.

Significant influence, as defined in Ind AS 28, is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The key difference lies in the degree of power: control implies the ability to direct relevant activities, while significant influence means the ability to participate in decision-making without having the ultimate say or directing power. Control is a higher threshold of power than significant influence.

Ind AS 28 requires that an investor apply Ind AS 36, 'Impairment of Assets', to determine whether it is necessary to recognise any impairment loss with respect to its investment in an associate or joint venture.

Impairment Indicators: At each reporting date, an investor assesses whether there is any objective evidence that an investment in an associate or a joint venture may be impaired. If such evidence exists, the investor estimates the recoverable amount of the investment.

Recoverable Amount: The entire carrying amount of the investment (including goodwill) is tested for impairment by comparing its recoverable amount (the higher of value in use and fair value less costs to sell) with its carrying amount. An impairment loss recognised in accordance with Ind AS 36 is allocated to any goodwill (part of the carrying amount of the investment) and then to the other assets of the investment.

Reversal of Impairment: An impairment loss recognised for an investment in an associate or a joint venture is reversed if there has been a change in the estimates used to determine the investment’s recoverable amount since the last impairment loss was recognised. The reversal is limited to the extent that the carrying amount of the investment does not exceed the carrying amount that would have been determined had no impairment loss been recognised.

When a parent entity (P) has significant influence over, or joint control of, an entity (A) that is itself an investment entity, P must still apply the equity method of accounting to its investment in A, as per Ind AS 28.

However, the application of the equity method in this scenario has a specific nuance:

• Financial Statements of the Investee (A): When applying the equity method, P uses the financial statements of A. Since A is an investment entity, A measures its own subsidiaries at fair value through profit or loss (FVTPL) in accordance with Ind AS 109, rather than consolidating them (unless a subsidiary provides investment-related services to A).
• P's Share of A's Results: Consequently, P's share of A's profit or loss, recognised under the equity method, will reflect A's FVTPL measurement of its subsidiaries. P does not look through A to consolidate A's subsidiaries directly. The fair value gains or losses recognised by A on its subsidiaries will flow through A's profit or loss, and P will recognise its share of this profit or loss.

In essence, the parent (P) applies the equity method to its investment in the investment entity (A), and the investment entity (A) accounts for its subsidiaries at FVTPL. This ensures that the financial statements of P reflect the nature of A as an investment entity whose primary business is investing for returns, rather than operating underlying businesses.

The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets.

Initial Recognition: The investment in an associate or a joint venture is recognised at cost.

Subsequent Measurement:

• The carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition.
• The investor’s share of the investee’s other comprehensive income (OCI) is recognised in the investor’s OCI.
• Distributions received from an investee reduce the carrying amount of the investment.
• Adjustments are also made for changes in the investor’s proportionate interest in the investee arising from changes in the investee's equity that have not been recognised in the investee's profit or loss or OCI (e.g., issue of shares by the associate).
• The investment is also tested for impairment in accordance with Ind AS 36, 'Impairment of Assets'.

Under Ind AS 110, an investor controls an investee if and only if the investor has all three of the following elements: power over the investee, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns.

• Power over the investee: This refers to existing rights that give the current ability to direct the relevant activities of the investee. Relevant activities are those that significantly affect the investee's returns. Power can arise from voting rights (even less than 50% in cases of 'de facto' control due to widely dispersed shareholding), contractual arrangements (e.g., management contracts), or rights to appoint or remove key management.
• Exposure, or rights, to variable returns: The investor must be exposed to, or have rights to, variable returns from its involvement with the investee. These returns can be positive, negative, or both, and their variability is crucial. Examples include dividends, profit or loss, fees for services, exposure to credit losses, or residual interests.
• Ability to use its power to affect its returns: This element links the first two, meaning the investor must have the practical ability to use its power to influence the variable returns it receives from the investee.

In complex scenarios:

• Potential voting rights: These are considered in assessing power if they are substantive, meaning they are exercisable at the present time and give the holder the current ability to direct the relevant activities.
• Contractual arrangements: These can grant power even without majority ownership, for instance, through rights to direct operating and financing policies.

An entity qualifies as an 'investment entity' under Ind AS 110 if it meets all three of the following criteria:

1. Obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services.
2. Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both.
3. Measures and evaluates the performance of substantially all of its investments on a fair value basis.

Implications for Consolidation:

• An investment entity is generally exempt from consolidating its subsidiaries. Instead, it measures its investments in subsidiaries at fair value through profit or loss (FVTPL) in accordance with Ind AS 109, Financial Instruments.
• This exemption applies because the primary purpose of an investment entity is to generate returns from capital appreciation or investment income, not to control and operate businesses.
• Exception: An investment entity shall consolidate a subsidiary if that subsidiary provides services that relate to the investment entity's investment activities (e.g., investment advisory services, administrative services).

Ind AS 110 requires an investor to consider its potential voting rights when assessing whether it has power over an investee. Potential voting rights are rights that are currently exercisable or convertible, such as options or convertible instruments.

When assessing power, the investor considers the existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other parties. The intent or purpose of holding potential voting rights does not affect the assessment. The ability to exercise those rights must be substantive, meaning there are no barriers that would prevent the holder from exercising them. If the potential voting rights are not currently exercisable or convertible, they are not considered in the assessment of control.

The assessment of whether potential voting rights are substantive requires judgement, considering all facts and circumstances.

When a parent loses control of a subsidiary, it derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position. The accounting treatment involves:

1. Derecognising the assets (including any goodwill) and liabilities of the former subsidiary from the consolidated statement of financial position.
2. Derecognising the carrying amount of any non-controlling interests in the former subsidiary.
3. Derecognising the cumulative translation differences recognised in other comprehensive income relating to that subsidiary.
4. Recognising the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control.
5. Recognising any investment retained in the former subsidiary at its fair value at the date when control is lost. This fair value becomes the initial carrying amount for subsequent accounting under Ind AS 109, Ind AS 28, or Ind AS 111, as appropriate.
6. Recognising the resulting difference as a gain or loss in profit or loss.

Parent-Subsidiary (Consolidation - Ind AS 110):
For consolidated financial statements, unrealised profits and losses resulting from intercompany transactions (both upstream and downstream) between a parent and its subsidiary are eliminated in full. This ensures that the consolidated financial statements reflect transactions from the perspective of a single economic entity.

Investor-Associate/Joint Venture (Equity Method - Ind AS 28):
For investments accounted for using the equity method, unrealised profits and losses from upstream (associate/JV sells to investor) and downstream (investor sells to associate/JV) transactions are eliminated only to the extent of the investor's interest in the associate or joint venture. For example, if an investor sells goods to an associate and makes a profit, only the investor's share of that profit (based on its ownership percentage in the associate) is eliminated from the investment's carrying amount and the investor's share of the associate's profit. The remaining portion of the profit, attributable to other investors in the associate, is not eliminated.

A parent is exempted from preparing consolidated financial statements if it meets all of the following conditions:

1. It is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements.
2. Its debt or equity instruments are not traded in a public market (on a stock exchange, including local or regional exchanges).
3. It did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.
4. Its ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with Ind AS.

Non-controlling interests (NCI) are defined as the equity in a subsidiary not attributable, directly or indirectly, to a parent.

Presentation: In the consolidated statement of financial position, NCI are presented within equity, separately from the equity of the owners of the parent.

Accounting:

• Profit or Loss and OCI Allocation: The consolidated statement of profit or loss and other comprehensive income attributes the profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling interests.
• Total Comprehensive Income: Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.
• Changes in Ownership Interest: Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (i.e., transactions with owners in their capacity as owners). No gain or loss is recognised in profit or loss on such changes.
• Acquisition of NCI: When a parent acquires NCI, the difference between the fair value of the consideration paid and the carrying amount of the NCI acquired is recognised directly in equity as an adjustment to retained earnings.
• Disposal of NCI: When a parent disposes of NCI without losing control, the difference between the fair value of the consideration received and the carrying amount of the NCI disposed of is recognised directly in equity.

When an investor ceases to have significant influence over an associate or joint control over a joint venture, it derecognises the investment accounted for using the equity method. The accounting treatment is as follows:

1. The investor measures any retained investment at its fair value at the date when it ceases to have significant influence or joint control. This fair value is regarded as its fair value on initial recognition as a financial asset in accordance with Ind AS 109.
2. The difference between the fair value of any retained investment and any proceeds from disposing of the part interest in the associate or joint venture, and the carrying amount of the investment at the date when significant influence or joint control is lost, is recognised in profit or loss.
3. The investor reclassifies to profit or loss the amounts previously recognised in other comprehensive income in relation to that associate or joint venture, on the same basis as would be required if the investee had directly disposed of the related assets or liabilities.