Fr - Investment in Associate - Overview & In depth

Question 1

What is a significant influence

Answer 1

• It exists when an investor can participate in and influence the financial and operating policy decisions of an investee but is not to control the decision without the helps
• Generally considered to have significant influence it holds 20-50% of the voting shares of another company
  IAS 28

Question 2

What is an example of a significant influence

Answer 2

• Representation of BOD
• Participation in policy-making processes, including decisions about dividends
  -Material transaction between the investor and the associates
  -Interchange of managerial personnel
• Influence would not be adequately demonstrated by simply reporting the investment at cost or FV on the SFP
  -Passive investment in equity are accounted for either FVPL or FVOCI -elect investment

Question 3

Explain what equity method

Answer 3

• Method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for post-acquisition change
  “one-line consolidation” - because it essentially collapses income earned from investment into one line on SCI
  
  • Remaining shares are held by one individual or voting block who is not influenced by the investor

Question 4

What is the initial measurement of investment in associate

Answer 4

• Equity investment is recognized at cost. Reflected with debit to an investment for cost, credit to consolidation given up (Cash, A/P)

Transaction cost - IAS 28 does not indicate whether directly attributable transaction cost are capitalized or expensed in SCI

Question 5

Explain the subsequent measurement of investment in associate

Answer 5

• It is important that the investment is recorded in a way that reflects the relationship as more strategic than simple passive ownership of share

Equity income - The method does this by including in the investor net income its share of the associate net income
- Dividends declared by the associate are not reflected as income to the investor

Question 6

What is the difference between IFRS & ASPE

Answer 6

• ASPE does not require the use of the equity method
• Cand choose between equity method or cost method

However, if the associate is quoted in an active market, the equity method must be used.

ASPE - 3856

Question 7

Explain what acquisition differential is

Answer 7

Acquisition method - any difference between the purchase price and proportionate share of the BV of the associate

Occurs from
1. FV differential - FV of the assets and liabilities of the associates at the time of acquisition are different from BV of those assets and liabilities
Goodwill - REpresent the expected value of future financial performance. Expectation arises because intangible asset favourable characteristics of associates make it likely that the associate will produce higher than average earning

Question 8

What is the formula for calculating goodwill

Answer 8

Acquisition price - BV of the associates net asset * (% ownership) = Acquisition differential +/- FV differential * ownership % = Goodwill (or bargain purchase)

Identifiable net asset - used to refer to the assets and liabilities of the investee that have value at the date of acquisition
FV differential = BV - FV

-Goodwill calculated in the acquisition schedule is not recorded separately. Carrying value of the investment as reported in the investment in associate.

Question 9

What is a bargain purchase option

Answer 9

• Is the price paid to acquire an interest in another company below the FV of the investor share of the investee INA
• Calculation and allocation of the investor share of the acquisition differential must be done before determining whether a bargain purchase has occurred

Dr. Investment in Associate xx
Cr. Cash. xx
Cr. Gain on purchase of associate xx

Question 10

Provide the subsequent measurement of investment in associate “In-depth”

Answer 10

Equity method - does this by including investor net income its share of the associate net income
Dividend declared - decrease as they are paid out of past earnings and are recorded investment account

Amortization of FV differential
- Assocaite will continue to prepare its own F/S based on BV of its asset and liabilities.
- Investor perspective - investment should be based on FV at the date of acquisition, value that existed when investor acquired an equity interest

Question 11

How is the equity method calculated for subsequent measurement

Answer 11

Associate net income * Ownership % = Share of associate income +/- FV differential amortization + Realized intercompany profit/gain (or-losses) from prior year - Unrealized intercompany profit/gain (or+losses) in current year = Equity Income

Downstream sale - sales by the investor to the associate
Upstream sale - Sales by the associate to the investor

Question 12

How is impairment determined

Answer 12

• The investor may still determine that an impairment of a specific asset exist even though the associate may not have identified any such impairment

Objective evidence include:
- Significant financial difficulty of the associate
- Breach of contract, such as a default or delinquency in payment by associate
- Probability that the associate will enter bankruptcy or other financial reorganization
- Impairment losses recorded by the investor can be subsequently reversed to the extent that recoverable value of its investment subsequently increases

Question 13

What are some common ways for the recognition of investment in associate

Answer 13

1. THrough disposal of the investment
2. THrough increase or decrease of the investment ownership
   - Sell portion of the shares it owens
   - Add more shares where diluting investor ownership to the point significant influence no longer exist