Accounting Standard (AS) 21 : Consolidated Financial Statements

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Accounting Standard 21 (AS 21) is a financial reporting standard issued by the Institute of Chartered Accountants of India (ICAI). AS 21 provides guidelines for the determination of consolidated financial statements, which are prepared by a parent company that controls one or more subsidiary companies. This article aims to provide a detailed overview of AS 21, covering its key points and significance in India.

Key Points of Accounting Standard (AS) 21 :

1. Objective of AS 21:

The primary objective of AS 21 is to ensure that consolidated financial statements provide reliable and relevant information about the financial position, performance, and cash flows of a group of entities as a single economic entity.

2. Scope of AS 21:

AS 21 applies to the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent company. It covers the procedures for consolidation, accounting treatment of investments, elimination of intercompany transactions, and reporting of non-controlling interests.

3. Control and Consolidation:

AS 21 defines control as the power to govern the financial and operating policies of an entity. A parent company is required to prepare consolidated financial statements when it controls one or more subsidiary companies. Control is typically evidenced by ownership of more than 50% of the voting power or the ability to appoint the majority of the board of directors.

4. Accounting Treatment of Investments:

AS 21 provides guidelines for accounting treatment of investments in subsidiaries, associates, and joint ventures. Investments in subsidiaries are consolidated, meaning they are included in the consolidated financial statements. Investments in associates and joint ventures are accounted for using the equity method or proportionate consolidation method, respectively.

5. Preparation of Consolidated Financial Statements:

AS 21 outlines the process for preparing consolidated financial statements. It requires the parent company to combine the financial statements of the parent and its subsidiaries, making necessary adjustments to eliminate intercompany transactions, balances, and unrealized profits. The consolidated financial statements must be prepared using uniform accounting policies.

6. Reporting of Non-controlling Interests:

AS 21 mandates the reporting of non-controlling interests (NCIs) in the consolidated financial statements. NCIs represent the portion of equity in a subsidiary not attributable to the parent company. NCIs are presented separately in the consolidated statement of financial position and consolidated statement of profit and loss.

7. Disclosures:

AS 21 emphasizes the importance of adequate disclosures in the consolidated financial statements. Disclosures should include the nature of the relationship between the parent company and its subsidiaries, details of significant restrictions on the ability of subsidiaries to transfer funds to the parent, and the nature and extent of any changes in ownership interests.

Significance of AS 21 in India:

1. Compliance with Accounting Standards:

AS 21 is a mandatory accounting standard in India. Companies are required to comply with AS 21 while preparing their consolidated financial statements to ensure consistency and comparability of financial information across different entities.

2. Transparency and Accountability:

AS 21 promotes transparency and accountability by providing guidelines for the preparation of consolidated financial statements. It ensures that investors, creditors, and other stakeholders have access to reliable and relevant information about the financial performance of the entire group of entities.

3. Improved Decision Making:

The use of AS 21 enables users of financial statements to make more informed decisions by providing a comprehensive view of the financial position, performance, and cash flows of the group. Consolidated financial statements eliminate the duplication of intercompany transactions and provide a clearer understanding of the group's overall financial health.

4. International Comparability:

AS 21 aligns with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) on consolidation principles. This alignment allows Indian companies that follow AS 21 to enhance the comparability of their consolidated financial statements with those prepared by international entities following similar standards. This facilitates cross-border investments, acquisitions, and collaborations.

5. Investor Confidence and Trust:

By adhering to AS 21, companies demonstrate their commitment to transparent and standardized financial reporting practices. This enhances investor confidence and trust, as stakeholders can rely on the consolidated financial statements to make informed decisions regarding investments, lending, and other financial transactions.

6. Regulatory Compliance:

AS 21 ensures that Indian companies comply with the regulatory requirements set forth by the ICAI and other regulatory bodies. Compliance with AS 21 is essential for companies listed on stock exchanges, as they need to provide accurate and reliable consolidated financial statements to meet regulatory obligations.

7. Facilitating Merger and Acquisition Activities:

AS 21 plays a vital role in merger and acquisition activities by providing a framework for the preparation of consolidated financial statements. It enables companies to assess the financial impact of acquiring or merging with other entities, facilitating a more accurate valuation and assessment of risks and benefits.


Accounting Standard 21 (AS 21) is a crucial financial reporting standard in India, governing the preparation and presentation of consolidated financial statements. By following AS 21, companies ensure transparency, comparability, and compliance with international standards. 

The standard promotes investor confidence, facilitates informed decision making, and supports regulatory compliance. AS 21 plays a significant role in enhancing the overall financial reporting framework in India, promoting accountability and trust among stakeholders.

Practical examples that can help you better understand the application of Accounting Standard 21 (AS 21) :

1. Example 1: Acquisition of Subsidiary

Company A acquires 80% of the voting rights in Company B, making it the parent company. According to AS 21, Company A is required to prepare consolidated financial statements. The financial statements of Company B are combined with those of Company A, adjusting for intercompany transactions, unrealized profits, and any non-controlling interests.

2. Example 2: Non-controlling Interests (NCIs)

Company X owns 70% of the voting rights in Company Y, while the remaining 30% is held by external shareholders. According to AS 21, the consolidated financial statements prepared by Company X must reflect the non-controlling interests (NCIs) of the external shareholders separately. This ensures transparency in reporting the portion of equity attributable to the non-controlling shareholders.

3. Example 3: Joint Ventures

Company P enters into a joint venture with Company Q, forming a separate entity, Company R. AS 21 provides guidance on the accounting treatment of joint ventures. The equity method is used to account for the investment in the joint venture, and the proportionate share of assets, liabilities, revenues, and expenses of the joint venture are included in the consolidated financial statements of Company P.

4. Example 4: Elimination of Intercompany Transactions

Company M, the parent company, sells goods worth INR 1,000 to its subsidiary, Company N. To avoid double counting, AS 21 requires the elimination of intercompany transactions during the consolidation process. In this case, the sale of INR 1,000 is eliminated, and only the transactions with external parties are reflected in the consolidated financial statements.

5. Example 5: Uniform Accounting Policies

Company X and its subsidiary, Company Y, follow different accounting policies for the valuation of inventory. According to AS 21, when preparing consolidated financial statements, Company X needs to ensure uniform accounting policies across the group. This may involve adjusting the subsidiary's financial statements to align with the parent company's policies.

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