AS 23 sets out principles and procedures for recognising, in consolidated financial statements, the effects of the investments in associates — enterprises over which the investor has significant influence but not control. An associate sits between an ordinary investment (where the investor is passive) and a subsidiary (where the investor has control). AS 23 requires that this in-between relationship be reflected using the equity method, so that the group's consolidated accounts capture its share of the associate's results rather than just dividends received.
Objective and scope
The objective is to set out principles and procedures for recognising, in the consolidated financial statements, the effects of investments in associates. The standard applies in accounting for investments in associates in the preparation and presentation of consolidated financial statements by an investor. Importantly, AS 23 deals with associates only in the context of consolidated financial statements — in the investor's separate financial statements, the investment in an associate is accounted for under AS 13 (at cost, subject to the other-than-temporary decline rule), not by the equity method.
Associate and significant influence
An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Significant influence is the power to participate in the financial and/or operating policy decisions of the investee but not control over those policies. Significant influence may be exercised in several ways, such as representation on the board of directors, participation in policy-making processes, material transactions between the investor and the investee, interchange of managerial personnel, or provision of essential technical information.
AS 23 provides a presumption based on voting power: if the investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed to have significant influence unless it can be clearly demonstrated otherwise; and if it holds less than 20%, it is presumed not to have significant influence unless such influence can be clearly demonstrated. So 20% is an indicator, not an absolute rule — the substance of the relationship governs.
The equity method
Under the equity method, the investment in an associate is initially recorded at cost, and the carrying amount is then adjusted for the post-acquisition change in the investor's share of the net assets of the associate. In practice this means:
The investor's share of the associate's profits or losses after acquisition is included in the consolidated statement of profit and loss, and correspondingly increases or decreases the carrying amount of the investment.
Distributions (dividends) received from the associate reduce the carrying amount of the investment (because they represent a realisation of part of the investor's share of net assets already recognised) — they are not shown as income, since the investor's share of profit has already been recognised.
Adjustments to the carrying amount may also be needed for changes in the associate's equity that have not been included in its profit or loss.
At acquisition, any difference between the cost of the investment and the investor's share of the fair values of the net assets of the associate is treated as goodwill or capital reserve and is included in the carrying amount of the investment (not shown separately). The equity method thus reflects the economic reality that the investor shares in the associate's fortunes, even though it does not control it.
Discontinuing use of the equity method and losses
The investor discontinues the equity method from the date it ceases to have significant influence but retains the investment (thereafter accounting for it as an ordinary investment). If the investor's share of losses of the associate equals or exceeds the carrying amount of the investment, the investor ordinarily discontinues recognising its share of further losses, and the investment is reported at nil; further losses are provided for only to the extent the investor has incurred obligations or made payments on behalf of the associate. This prevents the carrying amount being written below zero for losses beyond the investor's exposure.
Disclosure
Disclosures include an appropriate listing and description of associates, including the proportion of ownership interest and, if different, the proportion of voting power held; and the investor's share of the profits or losses of associates included in the consolidated financial statements, together with the carrying amount of such investments. Goodwill or capital reserve included in the carrying amount, and the investor's share of any contingencies and capital commitments of the associates, are also relevant disclosures.
A brief illustration
An investor holds 30% of an associate, acquired for ₹60 lakh (which equalled 30% of the associate's net assets at that date, so no goodwill). In the following year, the associate earns a profit of ₹40 lakh and pays a total dividend of ₹10 lakh. Under the equity method in the consolidated accounts, the investor recognises its 30% share of the profit — ₹12 lakh — in the consolidated statement of profit and loss, increasing the carrying amount of the investment to ₹72 lakh. The dividend received (30% of ₹10 lakh = ₹3 lakh) then reduces the carrying amount to ₹69 lakh, and is not shown as separate income (since the profit share has already been recognised). The carrying amount of the investment thus tracks the investor's evolving share of the associate's net assets, rather than sitting frozen at original cost with only dividends recorded.
How AS 23 compares with Ind AS 28
AS 23 corresponds to Ind AS 28, Investments in Associates and Joint Ventures, and both use the equity method with the same essential mechanics and the same 20% presumption of significant influence. There are some notable differences. First, scope: Ind AS 28 applies the equity method to both associates and joint ventures (under Ind AS, joint ventures are equity-accounted, whereas the AS framework deals with joint ventures separately under AS 27 using proportionate consolidation). Second, Ind AS 28 requires the equity method to be applied in the consolidated financial statements and interacts with Ind AS 110 and Ind AS 111, and it contains more detailed guidance on matters such as impairment of the investment (tested under Ind AS 36) and the elimination of unrealised profits on transactions with associates. As with other Ind AS/AS pairs, the treatment of goodwill within the investment (impairment under Ind AS versus the AS approach) also differs. But the core idea — reflecting the investor's share of the associate's post-acquisition results through the equity method in consolidated accounts — is common to both.
Common pitfalls
Recurring issues include applying the equity method in the investor's separate financial statements (where AS 13 applies instead); recognising dividends from an associate as income rather than reducing the carrying amount; continuing to recognise the investor's share of losses below a nil carrying amount without an obligation to do so; and misjudging significant influence (for example, mechanically applying the 20% threshold without considering the substance of the relationship).
Why this is cleaner on a unified system
Equity accounting for associates requires reliably tracking the investor's share of the associate's post-acquisition profits, losses, and distributions and adjusting the carrying amount accordingly — far easier when the group's records and the consolidation process draw on connected, consistent data. When the underlying figures share a single source of truth, computing and rolling forward the equity-accounted carrying amount and preparing the related disclosures is more straightforward than reconciling the associate's results against separately maintained investment records.
This article is a detailed educational summary of AS 23 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of AS 23 as issued by the ICAI before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.