AS 23 applies whenever a company holds an investment in an associate — a company over which it has significant influence but not outright control. The practical test: you own 20% to 50% of voting power. Below 20% is usually just a passive investment (AS 13 territory). Above 50% is a subsidiary (AS 21 territory). AS 23 fills the gap in between.
The core engine of AS 23 is the equity method. Forget just recording dividends as income — that's the cost method and it understates your true economic stake. Under the equity method, you record the investment at cost first, then every year you increase the carrying value by your share of the associate's profits and decrease it by your share of losses and dividends received. Dividends are a return of investment, not income — so they reduce the carrying amount. The balance sheet figure now moves in sync with the associate's performance.
At acquisition, compare what you paid against your share of the associate's net assets. If you paid more, the excess is goodwill — embedded inside the investment, not shown separately. If you paid less (a bargain purchase), the difference is treated as a capital reserve and credited to income. Both are exam favourites.
Two key limits to remember: First, once your share of cumulative losses brings the carrying amount to zero, stop recognising further losses — unless you have a legal or constructive obligation to cover the associate's losses. Second, and this catches many students: AS 23 applies only in consolidated financial statements. In the company's own standalone accounts, investments in associates stay at cost under AS 13.
This section is asked frequently as a 4–6 mark numerical (calculate carrying amount after equity method adjustments) or a conceptual 2-marker (what is significant influence, when do you stop recognising losses). Nail the equity method calculation flow and the goodwill treatment and you're exam-ready.