AS-23 states that for consolidation with Associates, Equity Method has to be followed. Goodwill or Capital Reserve has to be ascertained at the time of acquisition and investment has to be carried at Carrying Value. Carrying Value is costs of original investment plus post acquisition profit. Goodwill / (Capital Reserve) merely has to be disclosed without any effect in the outer column or on the balances of the Co.

The Annual Report of Tata Investment Corporation Ltd. and DLF for instance calculates Goodwill / (Capital Reserve) arising on acquisition of shares of Assoicates. Goodwill or Capital Reserve has been disclosed by them in the Significant Notes to Financial Statement. Investment in Associate is shown as original cost + post acquisition profit.

When we read As-21, it states that goodwill / (capital reserve) should be ascertained when the holding – subsidiary relationship comes into existence, i.e, when the shareholding of parent exceeds 50%.

Deducing from what is read from AS-21 and AS-23, the goodwill / (capital reserve) in the case of Companies in hand is computed when 20% or more holding is acquired, that is the relationship of Associate is established.

There are two basic Issues or Doubts with regards to consolidation that needs to be addressed:

1st Issue:

  1. i) While calculating the Goodwill / (Capital Reserve) , do we substract from the investment in associate, the % share in Share Premium balance of Associate:

Let’s take imaginary figures. A Ltd. acquired 25% in B Ltd.

Cost of Control:

Investment made                                                                        110


25% of Paidup Equity Shares of associate (25%*100)            25

25% of Profit & Loss A/c Balance (25% * 200)                         50

25% of Share Premium or Securities Premium

of Associate B(25% * 400)

Goodwill                                                                       35


If I take 25% of Share Premium then the Goodwill can change into

Capital Reserve

The study materials of ICAI on Financial Reporting states that % shareholding in Paidup capital and Reserves and Surplus has to be deducted from Invesments made in order to arrive at Goodwill / (Capital Reserve).

As we know that Securities Premium A/c is part of Reserves and Surplus then should be not consider Share Premium A/c too while computing Goodwill / (Capital Reserve).

Contention from some quarters is that Share Premium A/c can only for  few purposes as specified in section 52 of the Companies Act, 2013, namely:


  • Bonus shares : Paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or
  • Writing off : Writing off expenses of / commission paid / discount allowed on any issue of equity share capital; or
  • Writing off : Writing off the preliminary expenses of the company;
  • Provisioning : Providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company;
  • Buy-back : Purchasing its own shares / other securities (section 68).

and therefore cannot be used for calculation of Goodwill / (Capital Reserve). But my contention here is that we are merely using the Share Premium a/c for calculation purpose and not for any other purpose which will effect in the reduction of balance standing in the Share Premium A/c and therefore should be applied while calculating goodwill / (capital reserve).

2nd Issue:

Suppose A Ltd. holds 27.65% in B Ltd. and B Ltd. holds 22.88% in A Ltd then do we give any effect of same while calculating goodwill / (capital reserve). Some quarters are of the opinion that any effect should not be given as consolidation is not being done for Holding – subsidiary relationship but for Parent-Associate relationship. My contention is that be it any relationship but where there is cross-holding and certain method has been prescribed for calculating goodwill / (capital reserve) for cross holding, the same should be followed.

When cross holding exists then the revenue and capital profits of both A Ltd. and B Ltd. are adjusted for inter company holdings and then percentage share of such adjusted profit is taken.


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