[Opinion] Accounting for Investment in CCDs/OCDs of Subsidiaries | Associates | JVs Under Ind AS

Anand Agrawal – [2025] 173 taxmann.com 894 (Article)

1. Introduction and Background

The accounting treatment of investments in convertible instruments such as Compulsorily Convertible Debentures (CCDs) and Optionally Convertible Debentures (OCDs) issued by subsidiaries, associates and joint ventures has been a subject of significant debate under Indian Accounting Standards (Ind AS). This case study provides an in-depth examination of the applicable accounting standards, regulatory guidance, and practical considerations for measuring such investments in separate financial statements.

1.1 Context and Importance

In corporate structures, parent companies frequently invest in convertible debt instruments issued by their subsidiaries, associates or joint ventures. These instruments combine characteristics of both debt and equity –

• Debt component – Fixed coupon payments and principal repayment obligation
• Equity component – Conversion feature into equity shares

The dual nature of these instruments creates complexity in financial reporting, particularly regarding –

1. Whether to account for the entire instrument at cost or apply bifurcation
2. Appropriate measurement basis in separate versus consolidated financial statements
3. Interaction between Ind AS 27, Ind AS 32 and Ind AS 109

1.2 Key Accounting Questions

This case study specifically addresses –

1. Can investments in CCDs/OCDs of subsidiaries/associates/JVs be measured at cost in separate financial statements?
2. How does Ind AS 27 interact with Ind AS 109 for such instruments?
3. What are the practical implications of choosing the cost model versus fair value model?
4. What guidance has been provided by the Ind AS Transition Facilitation Group (ITFG) and Expert Advisory Committee (EAC)?

2. Regulatory Framework and Standards Analysis

2.1 Ind AS 27 – Separate Financial Statements

Paragraph 10 of Ind AS 27 states –

“An entity shall account for investments in subsidiaries, joint ventures and associates either –

(a) at cost, or

(b) in accordance with Ind AS 109.”

Key Interpretations

1. The standard provides an explicit accounting policy choice for investments in subsidiaries, associates and JVs
2. The cost model is permitted as an alternative to fair value measurement
3. This applies to all types of investments, including debt instruments like CCDs/OCDs

Paragraph B36 of Ind AS 27 (Application Guidance) clarifies

“The cost method is a method of accounting whereby the investment is recognised at cost.”

2.2 Ind AS 109 – Financial Instruments

While Ind AS 109 generally governs financial instruments, Paragraph 2.1(g) states –

“This Standard does not apply to… interests in subsidiaries, associates and joint ventures that are accounted for under Ind AS 110, Ind AS 27 or Ind AS 28.”

Measurement Categories under Ind AS 109

1. Amortised Cost – For debt instruments held to collect contractual cash flows that meet SPPI criteria
2. FVOCI – For certain debt instruments where business model includes both collection and sale
3. FVTPL – For all other financial assets

2.3 Ind AS 32 – Financial Instruments – Presentation

Paragraph 28 of Ind AS 32 requires –

“The issuer of a financial instrument shall classify the instrument, or its component parts, as a financial liability or an equity instrument in accordance with the substance of the contractual arrangement.”

Key Implications

1. Issuers must bifurcate compound instruments into liability and equity components
2. However, this requirement applies to issuers, not necessarily investors
3. Investors may account for the entire instrument as a single unit if using cost model under Ind AS 27

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