Associates

Question 1

Definition of an associate

Answer 1

-an entity over which the investor has significant influence

Question 2

What means significant influence?

Answer 2

• 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

Question 3

What is equity accounting?

Answer 3

• is 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 the net assets of the associate

Question 4

What are the effect of equity accounting on consolidated statement of financial position?

Answer 4

• 100% of the assets and liabilities of the parent and subsidiary company on a line by line basis
• an ‘investment in associate’ line with non-current assets which includes the cost of the investment plus the group share of post-acquisition reserves

Question 5

What are the effects of equity accounting on consolidated statement of profit or loss?

Answer 5

• 100% of the income and expenses of the parent and subsidiary company on a line by line basis
• single line ‘share of profit of associates’ which includes the group share of any associate’s profit after tax

Question 6

When equity method should not be used?

Answer 6

• the investment is classified as held for sale in accordance with IFRS 5
• the parent is exempted from having to prepare consolidated accounts on the grounds that it is itself a wholly, or partially, owned subsidiary of another company

Question 7

How is the associate calculated included as a non-current asset investment?

Answer 7

Cost of investment x
Share of post-acquisition profits x
Less: impairment loses (x)
Less: PUP (where parent sells to associate) (x)

Question 8

Unrealised profit in inventory on trading betweeen group and associate must be eliminated to the extent of the investor’s interest (i.e. % owned by parent) Adjustments:

Answer 8

Determine the value of closing inventory which is the result of a sale to or from the associate
Use mark-up/margin to calculate the profit earned by the selling company

Question 9

What are the required adjustment with unrealised profit in inventory?

Answer 9

Where parent sells to associate
DR Parent’s cost of sales in CSPL
(Group retained earnings in CSOFP)
CR Investment in associate
Where associate sells to parent:
DR Share of profit of associate in CSPL
(Group retained earnings in CSOFP)
CR Inventory on CSFP