AS 21 brings a parent and its subsidiaries into one set of group financial statements. To prepare them, you need to establish control, separate acquisition-date equity from later profits, and remove the effects of transactions within the group. The example below follows an 80% acquisition through goodwill, minority interest and an inventory-profit adjustment.
Framework: this guide covers AS 21 for entities applying Accounting Standards, rather than the Ind AS consolidation framework.
ICAI’s current official AS 21 text contains the detailed rules. ICAI also maintains a dedicated AS 21 publication page and its Accounting Standards collection as on April 1, 2025. AS 21 itself does not create the legal obligation to prepare consolidated financial statements; when such statements are presented because of a statute or otherwise, they are prepared in accordance with AS 21.
Step 1: Decide whether control exists
Under AS 21, control exists when the parent owns, directly or indirectly through subsidiaries, more than one-half of an enterprise’s voting power, or when it controls the composition of the board of directors or corresponding governing body so as to obtain economic benefits from the enterprise’s activities. A subsidiary is an enterprise controlled by another enterprise.
A shareholding report alone may not identify every subsidiary. Check board-composition rights and indirect holdings as well. A parent that presents consolidated financial statements consolidates all subsidiaries, domestic as well as foreign, except for the specific exclusions permitted by AS 21.
Step 2: Apply the exclusion rules narrowly
Dissimilar business activities are not a valid reason to leave a subsidiary out of consolidation. AS 21 permits exclusion where control is intended to be temporary because the subsidiary was acquired and held exclusively for disposal in the near future, or where severe long-term restrictions significantly impair its ability to transfer funds to the parent.
For the temporary-control exception, “near future” is ordinarily considered not more than twelve months from acquisition unless a longer period is justified by the facts and circumstances. The disposal intention is assessed at acquisition.
Step 3: Consolidate line by line
AS 21 requires the financial statements of the parent and subsidiaries to be combined line by line by adding like assets, liabilities, income and expenses. The parent’s investment in each subsidiary is then eliminated against the parent’s portion of the subsidiary’s equity at the acquisition date.
If investment cost exceeds the parent’s share of acquisition-date equity, the excess is recognised as goodwill in the consolidated financial statements. If cost is lower, the difference is treated as capital reserve. Using only year-end equity can therefore distort goodwill, capital reserve and post-acquisition movements.
An 80% acquisition: goodwill and minority interest
Assume Parent Ltd acquires 80% of Subsidiary Ltd for ₹80 lakh. At acquisition, Subsidiary Ltd’s equity is ₹90 lakh. Parent Ltd’s share is ₹72 lakh, so the ₹8 lakh excess of investment cost over that share is goodwill under the AS 21 mechanics.
Suppose Subsidiary Ltd then earns ₹20 lakh after acquisition. Before other relevant consolidation adjustments, the 20% outside interest in that result is ₹4 lakh. If Parent Ltd also sold inventory to Subsidiary Ltd and ₹5 lakh of profit remains unrealised because those goods are still inside the group at year-end, the ₹5 lakh is eliminated in full from consolidated profit and inventory. The group cannot earn a profit merely by selling to itself.
Completed consolidation working (₹ lakh)
Extend the 80% acquisition example above. Assume a single acquisition, ordinary equity only, no dividends or other equity changes, and no relevant adjustments beyond those shown. The ₹20 lakh is the subsidiary’s post-acquisition result. The ₹5 lakh unrealised inventory profit arose on a sale by the parent to the subsidiary.
| Working | Calculation | ₹ lakh |
|---|---|---|
| Parent’s share of acquisition-date equity | 90 × 80% | 72 |
| Goodwill | Investment cost 80 − 72 | 8 |
| Minority interest at acquisition | 90 × 20% | 18 |
| Minority share of subsequent result | 20 × 20% | 4 |
| Closing minority interest | 18 + 4 | 22 |
| Parent’s share of subsidiary’s subsequent result | 20 × 80% | 16 |
| Full unrealised profit elimination | Profit remaining in group inventory | (5) |
| Net of the two displayed movements attributable to the parent | 16 − 5 | 11 |
The ₹11 lakh is not total consolidated profit or total group reserves: the parent’s own balances and any other adjustments must also be included. Because the parent was the seller, this ₹5 lakh elimination reduces the parent-attributable result; it does not reduce the subsidiary’s ₹20 lakh result used in the minority calculation. A sale in the opposite direction requires the allocation to be reconsidered.
Worksheet check: acquisition-date equity of ₹90 lakh plus goodwill of ₹8 lakh reconciles to the eliminated investment of ₹80 lakh plus opening minority interest of ₹18 lakh. This working illustrates the mechanics; it is not a full consolidated balance sheet.
Step 4: Eliminate intra-group effects in full
AS 21 requires intra-group balances and transactions, including sales, expenses and dividends, to be eliminated in full. Resulting unrealised profits are also eliminated in full. Unrealised losses are eliminated unless the cost of the transferred asset cannot be recovered.
At year-end, reconcile inter-company receivables and payables, sales and purchases, interest, management charges, dividends, fixed-asset transfers and inventory movements. Timing differences and unrecorded invoices should be resolved before final elimination entries.
Step 5: Present minority interest separately
AS 21 uses the term minority interest for the part of a subsidiary’s net results and net assets attributable to interests not owned, directly or indirectly, by the parent. Minority interest in income is identified separately, and minority interest in net assets is presented separately from liabilities and the equity of the parent’s shareholders.
Practitioners who also work with Ind AS should avoid automatically importing Ind AS terminology or measurement mechanics into an AS 21 set of accounts. Confirm the applicable reporting framework first.
Step 6: Align reporting dates and accounting policies
The financial statements used for consolidation should be drawn up to the same reporting date. If that is impracticable, AS 21 allows a different subsidiary reporting date, but the difference cannot exceed six months. Significant transactions or events between the two dates must be adjusted, and the reporting-date difference should be consistent from period to period.
Consolidated financial statements should also use uniform accounting policies for like transactions and events in similar circumstances. Where a group entity uses a different policy, appropriate consolidation adjustments are made. If uniform policies are not practicable, the fact and the proportions of affected items are disclosed as required by the Standard.
Step 7: Use the correct acquisition and disposal cut-off
A subsidiary’s results enter the consolidated financial statements from the date the parent-subsidiary relationship begins and remain included only up to the date that relationship ceases. If the former subsidiary does not become an associate, AS 21 directs subsequent investment accounting to AS 13, with the carrying amount at the date it ceases to be a subsidiary regarded as cost thereafter.
Before you finalise the consolidated accounts
- Confirm the framework. Make sure AS 21, rather than Ind AS 110, applies.
- Identify the group entities. Review direct and indirect voting rights plus board-composition control.
- Document exclusions. Do not exclude a subsidiary for convenience or dissimilar activities.
- Check acquisition-date equity. Reconcile investment cost, the parent’s share of equity, goodwill or capital reserve, and the control date.
- Combine like items line by line. Use consistent account mapping across group entities.
- Clear inter-company differences. Reconcile balances and transactions before elimination.
- Remove unrealised profits. Check inventory and fixed-asset transfers, not only outstanding balances.
- Calculate minority interest. Separate the outside share of subsidiary results and net assets.
- Check reporting dates. Apply the six-month maximum and adjust significant intervening events.
- Align accounting policies. Post consolidation adjustments where required.
- Apply cut-offs. Include subsidiary results only for the period of the parent-subsidiary relationship.
- Complete disclosures. Include required subsidiary information and relevant reporting-date differences or exclusions.
What to retain with the consolidation working
Keep the control assessment, acquisition-date equity reconciliation, inter-company matching schedules, elimination entries and minority-interest roll-forward together. Each adjustment should identify its source and affected accounts, so the final numbers can be traced back to the entity statements.
Updated 13 September 2026: added the consolidation worksheet and clarified its assumptions.
