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Prof FAR > CH15 group accounts and joint ventures > Flashcards

CH15 group accounts and joint ventures Flashcards

1
Q

What is an associate in the context of investment?

A

An associate is an entity over which the investor has significant influence but not control.

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2
Q

What does significant influence mean?

A

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

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3
Q

What is the voting power percentage that presumes significant influence?

A

20% or more of the voting power of the investee.

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4
Q

Name one way significant influence can be demonstrated.

A
  • Representation on the board of directors
  • Participation in policy making decisions
  • Material transactions between the investor and investee
  • Interchange of managerial personnel
  • Provision of essential technical information
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5
Q

True or False: An associate is part of the group.

A

False

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6
Q

What comprises a group in the context of investment?

A

The group comprises the parent and its subsidiaries only.

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7
Q

How is the investment in an associate shown in the investing company’s statement of financial position?

A

As non-current asset investments, usually at cost.

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8
Q

What does the investing company’s statement of profit or loss show regarding dividend income from the associate?

A

As ‘income from associates’.

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9
Q

What method is used to account for an investment in an associate in consolidated financial statements?

A

The equity method of accounting.

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10
Q

What elements of the associate are included in the consolidated financial statements?

A

The group’s share of the associate’s profits, assets, and liabilities.

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11
Q

In which financial statements is the equity method used?

A

In the group accounts.

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12
Q

If the investor does not issue consolidated financial statements, how is the investment shown?

A

In the investor’s individual financial statements as described above.

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13
Q

Fill in the blank: The investment in the associate is usually recorded at _______.

A

[cost]

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14
Q

True or False: The equity method includes the cost of the investment and dividend income received in consolidated financial statements.

A

False.

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15
Q

In the CSFP, what do you replace the cost of the associate with?

A

OUR SHARE of the assets and liabilities of the associate at y/e

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16
Q

In the CSPL, what do you replace the dividend income received from the associate with?

A

OUR SHARE of the profit of the associate for the year

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17
Q

equity accounting working for associates

A
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18
Q

What is included in group retained earnings regarding an associate?

A

The parent’s share of the associate’s post-acquisition retained earnings. This is the figure from line two of our associate working.

This is treated similarly to a subsidiary.

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19
Q

In group retained earnings, how are associates treated compared to subsidiaries?

A

Associates are treated the same as subsidiaries

This includes the parent’s share of post-acquisition retained earnings.

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20
Q

should you consolidate the associate if you have been given its full fs?

A

NO!!!!

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21
Q

What is the first working required for consolidating subsidiaries?

A

Group structure diagram including the associate

This diagram illustrates the relationships between the parent and its subsidiaries, including any associates.

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22
Q

What components are included in Working 6 for investment in an associate?

A
  • Cost of investment
  • Plus share of post-acquisition retained earnings
  • Less any impairment losses to date

This working outlines how to calculate the net investment in an associate for consolidation purposes.

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23
Q

What does Working 5 focus on in the consolidation process?

A

Consolidated retained earnings (reserves) including parent’s share of associate’s post-acquisition retained earnings

This ensures that the financial statements reflect the earnings retained by the associate after the acquisition.

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24
Q

do you need to produce a net asset tale for an associate?

A

no

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25
do you need a gw working for associates?
no
26
Do you do an NCI working for an associate?
no
27
NCI working recap (for a sub, NOT an associate)
1. NCI at acq (cost) - 2nd line from GW working (what would it have cost us to buy the other bit of the sub?) 2. THEIR SHARE of the sub's profit since acq - from the net assets table (total at the bottom right which is profit post acq for group) 3. less THEIR SHARE of any GW impairment IF used full FV method to calc GW
28
How is the group's share of the associate's profit after tax recognised in the consolidated statement of profit or loss?
As a single line entry ## Footnote This entry is disclosed immediately before the group profit before tax as 'Share of profit of associates'.
29
When an associate is acquired mid-year, how should its results be treated?
Time-apportioned ## Footnote This means the results should be adjusted based on the period of ownership.
30
What happens when an impairment review reveals an impairment loss in the current period?
The loss is deducted from the parent's share of the profit after tax of the associate ## Footnote Alternatively, it can be added to the parent's share of a post-tax loss.
31
What is disclosed immediately before the group profit before tax in the consolidated statement?
'Share of profit of associates' ## Footnote This reflects the group's share of the associate's profit after tax.
32
What should be recognized in the CSoPL when an associate makes a loss?
The group share of the post-tax loss BUT it is capped at the cost of the original investment. Once the losses go beyond that, you do not have to recognise them. ## Footnote CSoPL refers to the Consolidated Statement of Profit or Loss.
33
How is the group's share of the loss treated in relation to the carrying amount of the associate?
It is recognized as a reduction in the carrying amount of the associate (to nil)
34
What happens when the carrying amount of the investment in the associate is reduced to zero?
No further losses are recognized by the group.
35
How does FV adjustment impact on the CSOFP and CSPL working s for an associate?
36
Associates: are trading transactions cancelled?
no
37
Associates: is dividend income received by parent cancelled?
yes
38
Associates: does the PURP still apply?
unfortunately, yes
39
Recap - PURP calc - transactions between parent and sub
40
How to adjust PURP calc for transaction between parent and associate?
Multiply the PURP figure by OUR SHARE of the unrealised profit (the small %)
41
Whose REs will ALWAYS be adjusted for PURP between parent and associate?
PARENT
42
As well as deducting the unrealised profit from the PARENT's REs, what else do you do with the PURP figure?
Deduct from consolidated inventories IF PARENT HOLDS PHYSICAL INV. If inventories sitting in ASSOCIATE'S warehouse, we have a problem because we do not consolidate the associate into the group accounts and so cannot deduct the PURP from consolidated inv figure. Instead we deduct the PURP figure from the one line that brings in all of the associates assets (the investment in associates working)
43
Normally, you would also deduct the PURP figure from the seller's COS. And you can do so if the PARENT is the SELLER. However, IF the associate is the seller, it is not in the consolidation schedule for the CSPL... What do you do?
You can't add it to COS. Instead, take our share of the PURP and deduct it from our share of the associate's profits in the CSPL
44
Do we account for the whole PURP for transactions with associates?
NO. Only our share.
45
What is a joint arrangement?
A contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. ## Footnote Joint arrangements are defined under IFRS 11.
46
Define joint control.
The contractually agreed sharing of control, where decisions about relevant activities require unanimous consent of all parties sharing control. ## Footnote Joint control is essential for joint arrangements.
47
What are the two types of joint arrangements identified by IFRS 11?
* Joint ventures * Joint operations ## Footnote These types are distinguished by the nature of control and rights to assets.
48
Describe a joint venture.
A joint arrangement where parties have joint control and rights to the net assets of the arrangement, often a separate legal entity that prepares its own financial statements. ## Footnote The results and position of the JV are included in each venturer’s consolidated financial statements using the equity method.
49
How should the results of a joint venture be reported in financial statements?
Using the equity method of accounting in each venturer’s consolidated financial statements. ## Footnote This method reflects the venturer's share of the joint venture's profits or losses.
50
What is a joint operation?
A joint arrangement where the parties have rights to the assets and obligations for the liabilities relating to the arrangement. ## Footnote Joint operations differ from joint ventures in terms of rights and obligations.
51
In a joint operation, how does a party recognize its share of the arrangement?
By recognizing its share of assets, liabilities, revenue, and expenses of the joint operation in its own separate financial statements. ## Footnote This recognition is crucial for accurate financial reporting.
52
joint venture summary - how are things split on fs?
53
Joint venture: more similar to a sub or assoc?
Assoc - no overall control - equity account
54
What is the treatment of goodwill in associates and joint ventures under IFRS?
No implicit goodwill is recognised.
55
How is goodwill recognised under UK GAAP on acquisition?
Goodwill is recognised on acquisition as the difference between the consideration transferred and the investor's share of the fair value of the net assets acquired, and then amortised.
56
What does IFRS 12 require regarding disclosures for associates and joint ventures?
IFRS 12 requires specific disclosures regarding interests in associates and joint ventures.
57
Does FRS 102 require detailed information about the investee or associated risks?
No, FRS 102 does not require detailed information about the investee or risks associated with it.
58
Does FRS 101 grant any disclosure exemptions?
No, FRS 101 does not grant any disclosure exemptions.
59
When the parent sells to a subsidiary, how much unrealised profit is eliminated?
The full amount. Adjust consolidated inventory and the parent’s retained earnings.
60
When the subsidiary sells to the parent, how much unrealised profit is eliminated?
The full amount. Adjust consolidated inventory and the subsidiary’s retained earnings.
61
When an associate sells to the investor (parent), how much unrealised profit is eliminated?
Only the investor’s share. Adjust consolidated inventory and the investment in associate.
62
What’s the formula for unrealised profit in a sale?
Unrealised profit = Sale value × markup %, or cost × markup %. Then multiply by ownership share if needed.
63
When the investor sells to an associate, what is adjusted?
Only the investor’s share of unrealised profit. Adjust investment in associate and retained earnings.
64
Are unrealised profits eliminated if a company sells to an external party?
No. Sales to third parties are realised — no adjustment needed.
65
What two accounts are typically adjusted for unrealised profits?
Inventory and either retained earnings or investment in associate, depending on the relationship.
66
unrealised profit elimination table

Prof FAR (17 decks)

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