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Contemporary Accounting

Notes In preparing consolidated financial statements, the financial statements of the parent and
its subsidiaries should be combined on a line by line basis by adding together like items
of assets, liabilities, income and expenses.
22. AS-22 – Accounting for taxes on income: The accounting for taxes on income, before the
introduction of AS-22, in India was a rudimentary one where the provision for tax was
estimated only on the basis of current tax liability, thereby completely ignoring the
deferred tax liability. This treatment was quite contrary to the practices followed globally.
AS-22 attempted to reduce this gap. AS-22 demands that taxes on income should be accounted
for following the matching principle. Matching of such taxes against revenue for a period
poses problem because tax is levied on taxable income and taxable income can be
significantly different from accounting income. Such differences arise because taxable
income is based on tax laws and accounting income is determined using provisions in the
Companies Act, 1956 and in certain cases as laid down in the listing requirements of stock
exchanges.
23. AS-23 – Accounting for investment in associates in consolidated financial statements:
This standard comes into force only when a holding company prepares consolidated
financial statements. An unlisted holding company is not required to prepare consolidated
financial statements. In that case, AS-23 is not applicable for such an unlisted company
even if it has an associate. Also, it may be noted that even where a listed holding company
prepares and presents consolidated financial statements, AS-23 is not applicable for separate
financial statements of the same holding company. Where AS-23 is not applicable, the
company should follow AS-13 in presenting its investment in associates in the separate
Balance sheet.
An associate is an enterprise in which the investor has significant influence (generally
evidenced by holding of equity interest between 20%-50%) and which is neither a subsidiary
nor a joint venture of the investor. AS-23 provides that the investment in associates should
be accounted for in consolidated financial statements using the equity method.
24. AS-24 – Discontinuing operations: This standard is mandatory with effect from 1st April
2004 for all listed companies and business entities having annual turnover in excess of Rs
50 crores. For all other enterprises, AS-24 will become mandatory with effect from 1st
April 2005. This standard requires separate reporting of discontinuing operations from
continuing operations so that users of financial statements may make proper forecast of
the entity’s future cash flows/earnings from continuing operations. Para 3 of AS-24 defines
a discontinuing operation as a component of an enterprise:
(a) that the enterprise, pursuant to a single plan, is:
(i) disposing of substantially in its entirety, such as by selling the component in
a single transaction or by demerger or spin-off of ownership of the component
to the enterprise’s shareholders; or
(ii) disposing of piecemeal, such as by selling off the component’s assets and
settling its liabilities individually; or
(iii) terminating through abandonment; and
(b) that represents a separate major line of business or geographical area of operations;
and
(c) that can be distinguished operationally and for financial reporting purposes.
Thus, a discontinuing operation must be a separate line of business which is under a plan
of disposal or abandonment.

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