A Ltd. has a share capital of 50,000 shares @100 per share. H Ltd. acquired 15% shares in A Ltd. on 1.4.2024. It also acquired all the 5,000, 12%…

As per para 3 of AS 23 ‘Accounting for Investments in Associates in Consolidated Financial Statements', 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. Standard further explains in para 4 that as regards share ownership, if an investor holds, directly or indirectly through subsidiary (ies), 20% or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly through subsidiary (ies), less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. Further as per an explanation to para 4 of the standard, for the purpose of classification of associate, the potential equity shares of the investee held by the investor will not be taken into account for determining the voting power of the investor. In other words, the voting power should be determined on the basis of the current outstanding securities with voting rights. As per the information given in the question, H Ltd. presently holds indirectly 22.7% shares (with and without voting rights) (Refer W.N.) in A Ltd. However, the current outstanding securities with voting rights in A Ltd. is only 15% and the remaining holding is on account of potential equity shares. Since potential equity shares do not have voting rights they will not be taken into consideration while determining the significant influence of H Ltd. on A Ltd. Hence, A Ltd. is not an associate of H Ltd. Working Note: Calculation of percentage of holding of shares after conversion Particulars ₹ Current holding is 15% i.e. 7,500 shares of 100each 7,50,000 Potential equity shares i.e. 5,000 shares of 100each 5,00,000 12,50,000 Total share capital of A Ltd. after conversion of debentures into equity shares will be = 50,00,000 +5,00,000 = 55,00,000 Percentage of holding = ₹ (12,50,000/55,00,000) x 100 = 22.7% approx.