Consolidated financial statements under AS 21: when a company must consolidate, the method and a worked example

Many small CA firms audit a private company that has quietly acquired or set up a subsidiary — a second manufacturing unit, a trading arm, a property-holding company. From then on the company needs consolidated financial statements every year, and the first set is often prepared in a hurry from two trial balances in Excel. This guide covers when consolidation is required for a company following the Accounting Standards (not Ind AS), the AS 21 method step by step, a worked example and the audit points.

When a company must consolidate

Section 129(3) requires a company that has one or more subsidiaries or associate companies to prepare, in addition to its own financial statements, consolidated financial statements of the company and all its subsidiaries and associates, in the same form and manner as its own, and to lay them before the annual general meeting. For this purpose "subsidiary" includes an associate company and a joint venture. The company also attaches a statement in Form AOC-1 with the salient features of each subsidiary, associate and joint venture.

Section 129(4) applies the provisions on the preparation, adoption and audit of the holding company's financial statements to the consolidated statements as well — so they are approved by the Board, audited and filed (Form AOC-4 CFS).

The Rule 6 exemption

The second proviso to Rule 6 of the Companies (Accounts) Rules, 2014 (as substituted in 2016) exempts a company from preparing consolidated statements if it meets all of these conditions:

1. it is a wholly-owned subsidiary, or a partially-owned subsidiary whose other members (including those not otherwise entitled to vote) have been intimated in writing — with proof of delivery of the intimation available with the company — and do not object to it not presenting consolidated statements;
2. its securities are not listed, and not in the process of being listed, on any stock exchange in or outside India; and
3. its ultimate or any intermediate holding company files consolidated financial statements with the Registrar that comply with the applicable Accounting Standards.

So the exemption helps a mid-level company in a group; it never helps the top company. Check the rule as amended at the time of the audit before relying on it.

What is a subsidiary under AS 21

AS 21 defines a subsidiary as an enterprise controlled by another (the parent). Control is:

• ownership, directly or indirectly through subsidiaries, of more than one-half of the voting power; or
• control of the composition of the board of directors (or the governing body), so as to obtain economic benefits from its activities.

The definition of a subsidiary in section 2(87) of the Companies Act — control of the composition of the board, or control of more than one-half of the total voting power, with limits on layers for certain companies — decides whether section 129(3) applies; AS 21 then governs how the consolidation is done. Associates (AS 23, equity method) and joint ventures (AS 27, proportionate consolidation) also enter the consolidated statements but follow their own standards; this guide covers subsidiaries.

AS 21 (paragraph 11) allows only two exclusions: a subsidiary whose control is intended to be temporary because it was acquired and is held exclusively with a view to its disposal in the near future (ordinarily within twelve months of acquisition), and a subsidiary that operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent. An excluded subsidiary is accounted for as an investment under AS 13, and the consolidated statements disclose the reasons for not consolidating it. A subsidiary is not excluded just because its business is different from the parent's.

The AS 21 method, step by step

1. Get the inputs right. Final, audited (or audit-ready) trial balances of the parent and each subsidiary, mapped to the same Schedule III lines. Use the same reporting date; if that is not practicable, AS 21 allows a different date only where the difference is not more than six months, with adjustments for significant transactions in between. Align accounting policies — if uniform policies cannot be used, disclose the fact and the proportions of the items to which different policies were applied.
2. Add line by line. Combine assets, liabilities, income and expenses of the parent and its subsidiaries.
3. Eliminate the investment. Set the parent's cost of investment in each subsidiary against the parent's portion of the subsidiary's equity at the date on which the investment was made. An excess of cost is goodwill; a shortfall is capital reserve.
4. Work out minority interest. Minority interest in net assets = the minority's share of equity at the date of investment + its share of the movements in equity since the date the parent-subsidiary relationship came into existence. Minority interest in the year's profit is deducted from group profit to arrive at the profit attributable to the parent's owners. Show minority interest in the balance sheet separately from liabilities and from the parent's equity (Schedule III's instructions place it within equity but separate from the owners' equity; either way it is a separate line).
5. Remove intra-group items in full. Balances between group companies (loans, debtors and creditors, current accounts), intra-group sales and purchases, interest, rent and dividends are eliminated in full. Unrealised profit in closing stock or fixed assets bought from another group company is eliminated in full; unrealised losses too, unless cost cannot be recovered.
6. Losses beyond the minority's interest. Where a subsidiary's losses applicable to the minority exceed the minority's interest in its equity, the excess is absorbed by the parent's share, unless the minority has a binding obligation and is able to make good the losses. Later profits of the subsidiary go to the parent until those losses are recovered.
7. Present and disclose. Schedule III (Division I) applies, with its General Instructions for consolidated statements — including the additional information showing, for the parent and each subsidiary, associate and joint venture, its share in consolidated net assets and in consolidated profit or loss, and the minority interest. Disclose the list of all subsidiaries with name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held (AS 21 para 29).

A worked example

P Ltd bought 80% of S Pvt Ltd for ₹90 lakh several years ago, when S had share capital of ₹50 lakh and reserves of ₹50 lakh. There has been no change in the holding or S's share capital since. At 31 March 2026 S's reserves are ₹80 lakh.

During the year P sold goods to S for ₹20 lakh at a margin of 25% on sales; S still holds ₹8 lakh of them at year end, and owes P ₹5 lakh. In consolidation: sales and purchases are both reduced by ₹20 lakh; the ₹5 lakh debtor in P and creditor in S are removed; and unrealised profit of ₹2 lakh (25% × 8) is removed from closing stock and from group profit. Because P was the seller, the profit sits in P's books, so the whole ₹2 lakh comes out of the parent's share; minority interest is unaffected. AS 21 itself only requires the profit to be eliminated in full.

Before eliminating, check that the two sides agree. If P shows ₹5 lakh receivable and S shows ₹4.6 lakh payable, find the reason — cash or goods in transit, an unrecorded credit note — and correct the books. Do not eliminate the larger figure and park the difference in "other current liabilities".

Audit points

• Report. The auditor reports separately on the consolidated statements (SA 700), including the matters under section 143(3) as they apply to them.
• Components audited by others. Where another auditor audits a subsidiary, the parent's auditor considers SA 600 (using the work of another auditor) and the reporting requirements on reliance in the report.
• CARO 2020 does not apply to the report on consolidated statements except clause 3(xxi), which reports qualifications or adverse remarks in the CARO reports of the companies included in the consolidation.
• Internal financial controls. The report on IFC (section 143(3)(i)) on consolidated statements covers the parent and those subsidiaries, associates and joint ventures that are companies incorporated in India to which it applies.
• Reconcile the consolidation to the standalone statements: the parent's share of equity in the consolidated balance sheet should differ from its standalone equity only by its share of subsidiaries' post-acquisition reserves, any capital reserve on consolidation and the consolidation adjustments (such as unrealised profit eliminated) — explain each.

Frequently asked questions

Sources

• Companies Act, 2013 — sections 2(85), 2(87), 129(3) and 129(4), 143
• Companies (Accounts) Rules, 2014 — Rule 6 (second proviso substituted by the Companies (Accounts) Amendment Rules, 2016)
• AS 21 Consolidated Financial Statements — Companies (Accounting Standards) Rules, 2021
• Schedule III, Division I — General Instructions for the preparation of consolidated financial statements
• CARO 2020 — paragraph 3(xxi); ICAI Guidance Note on CARO 2020 (Revised 2022)
• ICAI — SA 600 Using the Work of Another Auditor; SA 700 Forming an Opinion and Reporting on Financial Statements