ITC: Consolidation of accounts

Suresh Krishnamurthy

THE Institute of Chartered Accountants of India recently issued Accounting Standard 21 which deals with consolidation of accounts of the holding companies with those of its subsidiaries.

The standard mandatorily requires consolidation of accounts for periods after April 1, 2001. Consolidation of accounts can be a way of capturing the value of the investment and loan portfolio of companies.

In many cases, consolidation of accounts could provide a much clear picture to users of financial statement. For example, take the case of ITC. It received a Rs 5-crore dividend from one of its subsidiaries in the year ended March 2000. However, almost the entire dividend from the subsidiary was not paid from that year's profits but from previous year reserves.

Technically, the dividends do not represent profits earned during the year. However, there is more than a fair chance of investors taking that into account to calculate profit growth. The consolidated profit and loss account which eliminates dividends from subsidiaries and includes their profits would eliminate this problem.

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ITC's investments in Russel Credit provide another example where consolidation would help. Russel Credit has invested Rs 350 crore in .001 per cent preference shares of ICICI. The fair value of the investment is much below that of its cost.

If, in future, the company decides to represent the value of the investment properly, it would remain out of ITC's financial statements. Once again, consolidation can come to the rescue of the users.

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However, the issue of Accounting Standard for investments in associates may be necessary to provide a more accurate picture. For now, investments in associates continue to be valued at cost. This will not capture the value of these assets. For example, ITC has invested in companies such as ITC Filtrona and Surya Tobacco.

The value of these investments will continue to be represented at cost even in the consolidated financial statements if the Accounting Standard for investments is not revised. However, the ICAI is revising the standard and it may be issued sufficiently early to apply for financial periods starting from April 2001.