ADVANCED AUDITING & PROFESSIONAL ETHICS CA C.V.SARMA, M.Com.

, FCA

AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS

Requirements of Accounting Standards
The objective behind introduction of AS21 and Ind AS 110 - “Consolidated Financial
Statements” is to lay down the principles and procedures for preparation and
presentation of consolidated financial statements.
The term “Consolidated Financial Statements” includes:
a. Consolidated Balance Sheet
b. Consolidated Statement of Profit and Loss
c. Consolidated Cash Flow Statement
d. Consolidated Statement of Changes in Equity (if applicable) and
e. Any explanatory notes annexed to, or forming part thereof.
REQUIREMENTS OF COMPANIES ACT
Section 129(3)
Where a company has one or more subsidiaries (foreign subsidiaries also), including
associate company and joint venture, it shall, in addition to its own financial
statements, prepare consolidated financial statements of the company and of all
the subsidiaries in the same form and manner as that of its own. For this purpose,
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.
Section 129(4)
The provisions applicable to the preparation, adoption and audit of the financial
statements of a holding company shall, mutatis mutandis, also apply to the
consolidated financial statements.
These consolidated financial statements shall also be approved by the Board of Directors
and shall be laid before the annual general meeting of the company like their
standalone financial statement.
According to the Companies (Accounts) Rules, 2014, the consolidation of financial
statements of the company shall be made in accordance with the provisions of
Schedule III to the Act and the applicable accounting standards.
However, where, a company is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be sufficient if the company
complies with provisions of consolidated financial statements provided in Schedule
III of the Act.
Exceptions
Section 129(6) of the Companies Act, 2013
The Central Government may, on its own or on an application by a class or classes of
companies, by notification, exempt any class or classes of companies from
complying with any of the requirements of section 129 or the rules made there under, if it is
considered necessary to grant such exemption in the public interest and any such
exemption may be granted either unconditionally or subject to such conditions as
may be specified in the notification.

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2. An investment entity need not present consolidated financial statements when it

is required to measure all of its subsidiaries at fair value through profit or loss
as per the requirements of Ind AS 110. A parent shall determine whether it is an
investment entity.
An investment entity is an entity that:
a. Obtains funds from one or more investors for the purpose of providing those
investor(s) with investment management services;
b. Commits to its investor(s) that its business purpose is to invest funds
solely for returns from capital appreciation, investment income, or both; and
c. Measures and evaluates the performance of substantially all of its
investments on a fair value basis.
However, as per Ind AS 110, parent of an investment entity shall consolidate all
entities that it controls, including those controlled through an investment
entity subsidiary, unless the parent itself is an investment entity.
3. Temporary Control
AS per AS 21, a subsidiary should be excluded from consolidation when
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. Such investments
should be accounted for in accordance with AS 13. But this rule is not there in Ind
AS 110.
Consolidation of Financial Statement of a Subsidiary: Case Study
Parent Ltd acquired 51% shares of Child Ltd during the year ended 31-3-2018.
During the financial year 2018-19, 20% shares of Child Ltd were sold by Parent
Ltd. Parent Ltd while preparing the financial statements for the year ended 31-
3-2018 and 31-3-2019 did not consider the financial statements of Child Ltd for
consolidation. As a statutory auditor how would you deal with it?
Accounting Standard 21 “Consolidated Financial Statements”, states that a subsidiary
should be excluded from consolidation when control is intended to be
temporary because the shares are acquired and held exclusively with a view to its
subsequent disposal in the near future.
AS-13 also states that such investments in such subsidiaries should be accounted for in
accordance with AS 13 “Accounting for Investments”.
In case where it is stated by the entity that the intention is temporary, the auditor
should verify whether the parent has an intention to dispose of the subsidiary in
the near future, existed at the time of acquisition of the subsidiary. The auditor
should also verify that the reasons for exclusion are given in the consolidated
financial statements.
As per Ind AS 110, there is no such exemption for „temporary control‟, or “for
operation under severe long-term funds transfer restrictions” and
consolidation is mandatory for Ind AS compliant financial statement in this
case.
However, as per section 129(3) of the Companies Act, 2013 where a company having
subsidiary, which is not required to prepare consolidated financial statements under the
applicable Accounting Standards, it shall be sufficient if the company complies with the
provisions of consolidated financial statements provided in Schedule III to the Act.

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Conclusion: In the given case, Parent Ltd acquired 51% shares of Child Ltd during the
year ended 31.03.2018 and sold 20% shares during the year ended 31.03.2019. Parent Ltd
did not consolidate the financial statements of Child Ltd for the year ended 31.03.2018 and
31.03.2019.
The intention of Parent Ltd is quite clear that the control in Child Ltd is temporary as the
former company disposed off the acquired shares in the next year of its purchase. Therefore,
Parent Ltd is not required to prepare consolidated financial statement as per AS
21, however, for the compliance of provisions related to consolidation of financial
statements given under section 129(3) of the Companies Act, 2013, Parent Ltd is required to
make disclosures in the financial statements as per the provisions contained in Schedule III
to the Companies Act 2013.
However, if the Parent Ltd is required to prepare its financial statements under
Ind AS, it shall have to prepare Consolidated Financial Statements as
exemption for „temporary control‟, or “for operation under severe long-term funds
transfer restrictions” is not available under Ind AS 110. It also states that
“Consolidation of an investee shall begin from the date the investor obtains control of the
investee and cease when the investor loses control of the investee”.
RESPONSIBILITY OF THE AUDITOR OF CONSOLIDATED FINANCIAL
STATEEMNTS
The principal auditor of the consolidated financial statements is responsible for
expressing an opinion on whether the consolidated financial statements are prepared,
in all material respects, in accordance with the financial reporting framework under
which the parent prepares the consolidated financial statements in addition to reporting
on the additional matters as required under the Companies Act, 2013 and any other statute
to the extent applicable.
Therefore, the auditor's objectives in an audit of consolidated financial statements are:
 to satisfy himself that the consolidated financial statements have been prepared in
accordance with the requirements of applicable financial reporting
framework;
 to enable himself to express an opinion on the true and fair view presented
by the consolidated financial statements;
 to enquire into the matters as specified in section 143(1) of the Companies
Act, 2013; and.
 to report on the matters given in the clauses (a) to (i) of section 143(3) of
the Companies Act, 2013 for other matters under section 143(3)(j);
SPECIAL CONSIDERATIONS
Permanent Consolidation Adjustments
Permanent consolidation adjustments are those adjustments that are made only on the
first occasion or subsequent occasions in which there is a change in the shareholding
of a particular entity which is consolidated. Permanent consolidation adjustments are:
1. Determination of Goodwill or Capital Reserve as per applicable accounting
standard
2. Determination of amount of equity attributable to minority/non-controlling
interest

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1. Determination of Goodwill or Capital Reserve (also called as bargain

purchase price under Ind AS 103)
As per Ind AS 103
the acquirer shall recognize the excess of (a) over (b) below as goodwill as of the
acquisition date.
a. The fair value of consideration transferred + the amount of non-controlling interest
in the subsidiary;
How to calculate non-controlling interest
i. Fair Value Method
NCI = Fair Value of Consideration/ % of shares acquired x (100-% of Shares
Acquired)
ii. Proportionate Share method
NCI = Value of Identifiable Net Assets x Non-controlling Shareholding
b. the acquisition-date amounts of the net-identifiable assets (INA)
The excess of (b) over (a) is treated as bargain purchase price(Capital Reserve)
as of the acquisition date.
Under AS 21
Goodwill – Costs of parent‟s investment in subsidiary > Parent‟s portion of equity on the
date of investment.
Capital Reserve - Costs of parent‟s investment in subsidiary < Parent‟s portion of equity on
the date of investment.
Duties of the Auditor
1. Pay particular attention to the determination of pre-acquisition reserves of the
components. Date of investment in components assumes importance in this
regard.
2. Examine whether the pre-acquisition reserves have been allocated
appropriately between the parent and the minority interests/non-controlling
interests of the subsidiary.
3. Verify changes that might have taken place in these permanent
consolidation adjustments on account of subsequent acquisition of
shares in the components, disposal of the components in the subsequent years.
It may happen that while working out the permanent consolidation adjustments, in the
case of one subsidiary, goodwill arises and in the case of another subsidiary,
capital reserve arises. The parent may choose to net off these amounts to disclose
a single amount in the consolidated balance sheet where permitted by the applicable
financial reporting framework. In such cases, the auditor should verify that the
gross amounts of goodwill and capital reserves arising on acquisition of various
subsidiaries have been disclosed in the notes to the consolidated financial statements.
Current Period Consolidation adjustments
Current period consolidation adjustments primarily relate to elimination of intra-group
transactions and account balances including:
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a. intra-group interest paid and received, or management fees, etc.;

b. unrealised intra-group profits on assets acquired/ transferred from/ to other
subsidiaries;
c. record deferred taxes on unrealised inter-company profits elimination in
accordance with Ind AS 12;
d. intra-group indebtedness;
e. adjustments related to harmonising the different accounting policies being
followed by the parent and its components;
f. adjustments to the financial statements (of the parent and the components being
consolidated) for recognized subsequent events or transactions that occur
between the balance sheet date and the date of the auditor‟s report on the
consolidated financial statements of the group.
There are two types of subsequent events:
 adjusting events
 non-adjusting events
Events occurring after balance sheet date which do not require adjustments would
not normally require disclosure, although they may be of such significance that they
may require a disclosure in the report of approving authority in the case of
accounting standards and in the financial statements in case of Ind AS. For such
events, the following shall be disclosed:
i. The nature of the event; and
ii. An estimate of its financial effect or a statement that such an estimate cannot
be made.
g. adjustments for the effects of significant transactions or other events that
occur between the date of the components balance sheet and not already
recognised in its financial statements and the date of the auditor‟s report on
the group‟s consolidated financial statements when the financial
statements of the component to be used for consolidation are not drawn up
to the same balance sheet date as that of the parent;
The financial statements of the components used in the consolidation should
be drawn up to the same reporting date as that of the parent. If it is not
practicable to draw up the financial statements of one or more components to
such date and, accordingly, those financial statements are drawn up to different
reporting dates, adjustments should be made for the effects of significant
transactions or other events that occur between those dates and the date
of the parent‟s financial statements.
When the end of the reporting period of the parent is different from that of a
subsidiary, the subsidiary prepares, for consolidation purposes, additional financial
information to enable the parent to consolidate the financial information of the
subsidiary, unless it is impracticable to do so.
If it is impracticable to do so, the parent shall consolidate the financial information
of the subsidiary using the most recent financial statements of the subsidiary
adjusted for the effects of significant transactions or events that occur between the

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date of those financial statements and the date of the consolidated financial
statements.
In any case, the difference between reporting dates should not be more than
six months in case of financial statements under AS and three months in
case of financial statements under Ind AS.
h. In case of a foreign component, adjustments to convert a component‟s audited
financial statements prepared under the component‟s local GAAP to the GAAP
under which the consolidated financial statements are prepared;
i. determination of movement in equity attributable to the minorities
interest/non-controlling interest since the date of acquisition of the subsidiary. It
should also be noted that under Ind AS, non-controlling interest can also result in
negative balance. Unlike earlier AS, as per paragraph 28 of Ind AS 27, if the net
worth of subsidiary is negative, non-controlling interest could have deficit balance;
The adjustments required for preparation of consolidated financial statements are
made in memorandum records kept for the purpose by the parent. The auditor
should review the memorandum records to verify the adjustment entries made in
the preparation of consolidated financial statements.
The auditor while auditing the consolidated financial statements should verify and
ensure that all the current period adjustments were correctly made.

REPORTING
When the Parent’s Auditor is also the Auditor of all its Components
The auditor should report:
i. Whether principles and procedures for preparation and presentation of
consolidated financial statements as laid down in the relevant accounting
standards have been followed.
ii. In case of any departure or deviation, the auditor should make adequate
disclosure in the audit report so that users of the consolidated financial statements
are aware of such deviation.
iii. Auditor should issue an audit report expressing opinion whether the
consolidated financial statements give a true and fair view of the state of
affairs of the Group as on balance sheet date and as to whether consolidated
profit and loss statement gives true and fair view of the results of consolidated profit
or losses of the Group for the period under audit.
iv. Where the consolidated financial statements also include a cash flow statement,
the auditor should also give his opinion on the true and fair view of the cash
flows presented by the consolidated cash flow statements
When the Parent’s Auditor is not the Auditor of all its Components
In such a case, the auditor of the consolidated financial statements should consider the
requirement of SA 600.
As prescribed in SA 706, if the auditor considers it necessary to make reference to the
audit of the other auditors, the auditor‟s report on the consolidated financial statements
should disclose clearly the magnitude of the portion of the financial statements
audited by the other auditor(s).

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This may be done by stating aggregate rupee amounts or percentages of total

assets, revenues and cash flows of components included in the consolidated
financial statements not audited by the parent‟s auditor.
Total assets, revenues and cash flows not audited by the parent‟s auditor
should be presented before giving effect to permanent and current period
consolidation adjustments.
When the Component(s) Auditor Reports on Financial Statements under an
Accounting Framework Different than that of the Parent
The parent may have components located in multiple geographies outside India
applying an accounting framework (GAAP) that is different than that of the parent
such as US GAAP or IFRS in preparing its financial statements. Local component
auditors may be unable to report on financial statements prepared using the parent‟s
GAAP because of their unfamiliarity with such GAAP.
In such a case, the parent‟s management shall perform a conversion of
framework used by the component to the framework under which the
consolidated financial statements are prepared. The conversion adjustments
are audited by the principal auditor to ensure that the financial information of the
component(s) is suitable and appropriate for the purposes of consolidation.
However, in some cases a component may prepare financial statements on the basis of the
parent‟s accounting policies, as outlined in the group accounting manual, which
normally contain all accounting policies, including relevant disclosure
requirements, which are consistent with the FRF under which the group‟s
consolidated financial statements are prepared. In such a case, the local component
auditor can audit and issue audit report accordingly. The principal/parent auditors should
perform procedures necessary to ensure that such Financial Statements are prepared in
accordance with group accounting policies. This ensures that the component‟s financial
statements will be directly usable for the preparation of consolidated financial
statements by the parent entity.
The Principal auditor can then decide whether or not to rely on the
components‟ audit report and make reference to it in the auditor‟s report on
the consolidated financial statements.
Components Not Audited
Where the financial statements of one or more components continue to remain
unaudited, the auditor may be able to obtain sufficient appropriate audit evidence in
relation to such consolidated amounts/balances. In such cases, the auditor should
evaluate the possible effect when reporting on the consolidated financial
statements using the guidance provided in SA 705, “Modifications to the Opinion in the
Independent Auditor‟s Report”
APPENDIX
Problems on calculation of Goodwill/Capital Reserve
1. A Ltd. acquired 80% of B Ltd. at a valuation of Rs. 130 crore by payment of
cash of Rs.120 crore. Assume that the value of identifiable net assets is Rs.130
crore. Calculate Goodwill/bargain purchase price (capital reserve) where Non-
controlling interest is to be calculated by following:
i) Fair Value Method

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ii) Proportionate Share Method

Answer
Fair Value Method
Fair Value of Consideration transferred = Rs. 120 crore
Amount of Non-controlling Interest = Rs. 30 crore
NCI = 120 crore/80x20 = Rs.30 crore
a. The aggregate of the above two is Rs. 150 crores
b. The value of net identifiable assets is Rs. 130 crore
Since (a) calculated above is more than (b) the goodwill in this case is Rs. 20 crore.
The accounting entry to be passed in this case is as follows:
INA 130
Goodwill (Balancing Figure) 20
To Cash 120
To NCI 30
Proportionate Share Value Method
NCI = 130 x 20% = Rs.26 crores
The accounting entry to be passed in this case is as follows:
INA 130
Goodwill (Balancing Figure) 16
To Cash 120
To NCI 26
2. XYZ purchased 80% shares of ABC Ltd. on 01/04/11 for Rs. 140000. The
Issued Capital is Rs.100000. The fair value of the net identifiable assets is
Rs.150000. Calculate the amount of NCI and amount of Goodwill/Capital
Reserve as on 01/04/11 using
a. Fair Value Method
b. Proportionate Share Method
Fair Value Method
Fair Value of Consideration transferred = Rs. 1,40,000
Amount of Non-controlling Interest = Rs. 35,000
NCI = 140000/80x20 = Rs.35,000
a. The aggregate of the above two is Rs. 175000
b. The value of net identifiable assets is Rs. 150000
Since (a) calculated above is more than (b) the goodwill in this case is Rs. 25000
The accounting entry to be passed in this case is as follows:

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INA 150000
Goodwill (Balancing Figure) 25000
To Cash 140000
To NCI 35000
Proportionate Share Value Method
NCI = 150000 x 20% = Rs.30000
The accounting entry to be passed in this case is as follows:
INA 150000
Goodwill (Balancing Figure) 20000
To Cash 140000
To NCI 30000
3. Ram Ltd. acquires Shyam Ltd. by purchasing 60% of its equity for Rs. 15
lakh in cash. The fair value of non-controlling interest is determined as Rs.10
lakh. The net aggregate value of identifiable assets and liabilities, as measured
in accordance with Ind AS 103 is determined asRs.5 lakh.
How much goodwill is recognized based on two measurement bases of non-
controlling interest (NCI)?
Fair Value Method
Fair Value of Consideration transferred = Rs. 15,00,000
Amount of Non-controlling Interest = Rs.10,00,000
NCI = 1500000/60x40 = Rs.10,00,000
a. The aggregate of the above two is Rs. 2500000
b. The value of net identifiable assets is Rs. 500000
Since (a) calculated above is more than (b) the goodwill in this case is Rs. 20,00,000
The accounting entry to be passed in this case is as follows:
INA 500000
Goodwill (Balancing Figure) 2000000
To Cash 1500000
To NCI 1000000
Proportionate Share Value Method
NCI = 500000 x 40% = Rs.2,00,000
The accounting entry to be passed in this case is as follows:
INA 500000
Goodwill (Balancing Figure) 1200000
To Cash 1500000
To NCI 200000

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4. Seeta Ltd. acquires Geeta Ltd. by purchasing 70% of its equity for Rs.15 lakh
in cash. The fair value of NCI is determined as Rs.6.9 lakh. Management have
elected to adopt full goodwill method and to measure NCI at fair value as well
as at proportionate share value method. The net aggregate value of the
identifiable assets and liabilities, as measured in accordance with the standard
is determined as Rs.22 lakh. (Tax consequences being ignored).

Fair Value Method

Fair Value of Consideration transferred = Rs. 15,00,000
Amount of Non-controlling Interest = Rs.6,90,000 (Given in the Question)
a. The aggregate of the above two is Rs. 2190000
b. The value of net identifiable assets is Rs. 2200000
Since (b) calculated above is more than (a) the bargain purchase gain is Rs. 10,000
The accounting entry to be passed in this case is as follows:
INA 2200000
To Cash 1500000
To NCI 690000
To Bargain Purchase Gain
(Balancing Figure) 10000
Proportionate Share Value Method
NCI = 2200000 x 30% = Rs.6,60,000
The accounting entry to be passed in this case is as follows:
INA 2200000
To Cash 1500000
To NCI 660000
To Bargain Purchase Gain
(Balancing Figure) 40000

Uniform Accounting Policies

A parent shall prepare consolidated financial statements using uniform accounting policies
for like transactions and other events in similar circumstances.
If a member of the group uses accounting policies other than those adopted in the
consolidated financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to that group member‟s Financial
Statements in preparation of Comparative Financial Statements to ensure conformity with
group‟s accounting policies.

1. PQR Ltd. is the subsidiary company of MNC Ltd. In the individual financial
statements prepared in accordance with Ind AS, PQR Ltd. has adopted
Straight-line method (SLM) of depreciation and MNC Ltd. has adopted
Written-down value method (WDV) for depreciating its property, plant and
equipment. As per Ind AS 110, Consolidated Financial Statements, a parent

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shall prepare consolidated financial statements using uniform accounting

policies for like transactions and other events in similar circumstances.
How will these property, plant and equipment be depreciated in the
consolidated financial statements of MNC Ltd. prepared as per Ind AS?
Solution
As per Ind AS 16, „Property, Plant and Equipment‟, a change in the method of
depreciation shall be accounted for as a change in an accounting estimate as per
Ind AS 8, „Accounting Policies, Changes in Accounting Estimates and Errors‟.
Therefore, the selection of the method of depreciation is an accounting estimate
and not an accounting policy.
The entity should select the method that most closely reflects the expected pattern of
consumption of the future economic benefits embodied in the asset. That method should be
applied consistently from period to period unless there is a change in the expected pattern
of consumption of those future economic benefits in separate financial statements as well as
consolidated financial statements.
Therefore, there can be different methods of estimating depreciation for property, plant and
equipment, if their expected pattern of consumption is different. The method once
selected in the individual financial statements of the subsidiary should not be
changed while preparing the consolidated financial statements.
Accordingly, in the given case, the property, plant and equipment of PQR Ltd. (subsidiary
company) may be depreciated using straight line method and property, plant and
equipment of parent company (MNC Ltd.) may be depreciated using written down value
method, if such method closely reflects the expected pattern of consumption of future
economic benefits embodied in the respective assets.

2. H Limited has a subsidiary, S Limited and an associate, A Limited. The three companies
are engaged in different lines of business.
These companies are using the following cost formulas for their valuation in accordance
with Ind AS 2, Inventories:

Name of the Company Cost formula used

H Limited FIFO
S Limited, A Limited Weighted average cost
Whether H Limited is required to value inventories of S Limited and A Limited also using FIFO
formula in preparing its consolidated financial statements?

Solution
Ind AS 110 states that if a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to that group member‟s financial
statements in preparing the consolidated financial statements to ensure conformity with
the group‟s accounting policies.
It may be noted that the above mentioned paragraph requires an entity to apply uniform
accounting policies “for like transactions and events in similar circumstances”. If
any member of the group follows a different accounting policy for like transactions and

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events in similar circumstances, appropriate adjustments are to be made in preparing

consolidated financial statements.
Ind AS 8 defines accounting policies as “the specific principles, bases, conventions, rules
and practices applied by an entity in preparing and presenting financial statements.”
Ind AS 2 requires inventories to be measured at the lower of cost and net realisable value. It
also states that that the cost of inventories shall be assigned by using FIFO or weighted
average cost formula. An entity shall use the same cost formula for all inventories having a
similar nature and use to the entity. For inventories with a different nature or use,
different cost formulas may be justified.
It also requires disclosure of “the accounting policies adopted in measuring
inventories, including the cost formula used”. Thus, as per Ind AS 2, the cost
formula applied in valuing inventories is also an accounting policy.
As mentioned earlier, as per Ind AS 2, different cost formulas may be justified for
inventories of a different nature or use. Thus, if inventories of S Limited and A Limited
differ in nature or use from inventories of H Limited, then use of cost formula (weighted
average cost) different from that applied in respect of inventories of H Limited (FIFO) in
consolidated financial statements may be justified. In other words, in such a case, no
adjustment needs to be made to align the cost formula applied by S Limited
and A Limited to cost formula applied by H Limited.
3. How should assets and liabilities be classified into current or non-current in
consolidated financial statements when parent and subsidiary have different
reporting dates?
Paragraphs B92 and B93 of Ind AS 110 require subsidiaries with reporting period end
different from parent, to provide additional information or details of significant
transactions or events if it is impracticable to provide additional information to enable the
parent entity to consolidate such financial information at group‟s reporting period end.

The appropriate classification of the assets and liabilities as current or non-current in the
consolidated financial statements has to be determined by reference to the reporting period
end of the group. Accordingly, when a subsidiary‟s financial statements are for a different
reporting period end, it is necessary to review the subsidiary's balance sheet to ensure that
items are correctly classified as current or non-current as at the end of the group's reporting
period.
For example, a subsidiary with the financial year end of 31st December, 20X1 has a payable
outstanding that is due for payment on 1st January, 20X3, and has accordingly classified it
as non- current in its balance sheet. The financial year end of the parent‟s consolidated
financial statements is 31st March 31, 20X3. Due to the time lag, the subsidiary's payable
falls due within 12 months from the end of the parent's reporting period.
Accordingly, in this case, the payable should be classified as a current liability in the
consolidated financial statements of the parent because the amount is repayable within nine
months of the end of the parent's reporting period.

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