10 Accounting for associates Flashcards
Define Associate: significan infuence; equity method
Associate. An entity, including an unincorporated entity such as a partnership, over which an investor has significant influence and which is neither a subsidiary nor an interest in a joint venture.
Significant influence. The power to participate in the financial and operating policy decisions of the investee but it is not control or joint control over those policies. Equity method. A method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee
An investor is exempt from applying the equity method if:
(a) It is a parent exempt from preparing consolidated financial statements under IFRS 10, or (b) All of the following apply: (i) The investor is a wholly-owned subsidiary or it is a partially owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method (ii) The investor’s securities are not publicly traded (iii) It is not in the process of issuing securities in public securities markets (iv) The ultimate or intermediate parent publishes consolidated financial statements that comply with International Financial Reporting Standards
The revised version of IAS 28 no longer allows an investment in an associate to be excluded from equity accounting when an investee operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Significant influence must be lost before the equity method ceases to be applicable. T/F
The revised version of IAS 28 no longer allows an investment in an associate to be excluded from equity accounting when an investee operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Significant influence must be lost before the equity method ceases to be applicable
Separate financial statements of the investor If an investor issues consolidated financial statements (because it has subsidiaries), an investment in an associate should be either:
(a) Accounted for at cost, or (b) In accordance with IFRS 9 (at fair value); or (c) Using the equity method in its separate financial statements.
Notice the difference between this treatment and the consolidation of a subsidiary company’s results. If Y Co were a subsidiary X Co would take credit for the whole of its sales revenue, cost of sales etc and would then make a one-line adjustment to remove any non-controlling share. Under equity accounting, the associate’s sales revenue, cost of sales and so on are NOT amalgamated with those of the group. Instead the group share only of the associate’s profit after tax for the year is added to the group profit. True/ False
Notice the difference between this treatment and the consolidation of a subsidiary company’s results. If Y Co were a subsidiary X Co would take credit for the whole of its sales revenue, cost of sales etc and would then make a one-line adjustment to remove any non-controlling share. Under equity accounting, the associate’s sales revenue, cost of sales and so on are NOT amalgamated with those of the group. Instead the group share only of the associate’s profit after tax for the year is added to the group profit.
A figure for investment in associates is shown which at the time of the acquisition must be stated at cost. At the end of each accounting period the group share of the retained reserves of the associate is added to the original cost to get the total investment to be shown in the consolidated statement of financial position. True/ False
A figure for investment in associates is shown which at the time of the acquisition must be stated at cost. At the end of each accounting period the group share of the retained reserves of the associate is added to the original cost to get the total investment to be shown in the consolidated statement of financial position.
In the consolidated statement of profit or loss the investing group takes credit for its share of the aftertax profits of associates, whether or not they are distributed as dividends.
A consolidation schedule may be used to prepare the consolidated statement of profit or loss of a group with associates. True/ False
In the consolidated statement of profit or loss the investing group takes credit for its share of the aftertax profits of associates, whether or not they are distributed as dividends.
A consolidation schedule may be used to prepare the consolidated statement of profit or loss of a group with associates.
In the consolidated statement of financial position the investment in associates should be shown as:
Cost of the investment in the associate; plus Group share of post-acquisition profits; less Any amounts paid out as dividends; less Any amount written off the investment
As explained earlier, the consolidated statement of financial position will contain an asset ‘Investment in associates’. The amount at which this asset is stated will be its original cost plus the group’s share of any post-acquisition profits which have not been distributed as dividends True/ False
As explained earlier, the consolidated statement of financial position will contain an asset ‘Investment in associates’. The amount at which this asset is stated will be its original cost plus the group’s share of any post-acquisition profits which have not been distributed as dividends
The following points are also relevant and are similar to a parent-subsidiary consolidation situation.
(a) Use financial statements drawn up to the same reporting date (b) If this is impracticable, adjust the financial statements for significant transactions/events in the intervening period. The difference between the reporting date of the associate and that of the investor must be no more than three months. (c) Use uniform accounting policies for like transactions and events in similar circumstances, adjusting the associate’s statements to reflect group policies if necessary
Define upstream and downstream transactions
‘Upstream’ transactions are, for example, sales of assets from an associate to the investor. ‘Downstream’ transactions are, for example, sales of assets from the investor to an associate. Profits and losses resulting from ‘upstream’ and ‘downstream’ transactions between an investor (including its consolidated subsidiaries) and an associate are eliminated to the extent of the investor’s interest in the associate. This is very similar to the procedure for eliminating intra-group transactions between a parent and a subsidiary. The important thing to remember is that only the group’s share is eliminated.
When the equity method is being used and the investor’s share of losses of the associate equals or exceeds its interest in the associate, the investor should discontinue including its share of further losses. The investment is reported at nil value. After the investor’s interest is reduced to nil, additional losses should only be recognised where the investor has incurred obligations or made payments on behalf of the associate (for example, if it has guaranteed amounts owed to third parties by the associate). True
When the equity method is being used and the investor’s share of losses of the associate equals or exceeds its interest in the associate, the investor should discontinue including its share of further losses. The investment is reported at nil value. After the investor’s interest is reduced to nil, additional losses should only be recognised where the investor has incurred obligations or made payments on behalf of the associate (for example, if it has guaranteed amounts owed to third parties by the associate).
Any impairment loss is recognised in accordance with IAS 36 Impairment of assets for each associate individually:
In the case of an associate, any impairment loss will be deducted from the carrying value in the statement of financial position. The working would be: $ Cost of investment X Share of post-acquisition retained earnings X X Impairment loss (X) Investment in associate X
How should associates be accounted for in the separate financial statements of the investor?
Either at cost or in accordance with IFRS 9
What is the effect of the equity method on the consolidated statement of profit or loss and statement of financial position?
(a) Consolidated statement of profit or loss. Investing company includes its share of the earnings of the associate, by adding its share of profit after tax.
(b) Consolidated statement of financial position. Investment in associates is initially included in assets at cost. This will increase or decrease each year according to whether the associated company makes a profit or loss.
