5. Associates and Joint Ventures

Question 1

What is an associate?

Answer 1

An entity over which the investor has significant influence, but not control

Question 2

What is significant influence?

Answer 2

The power to participate in the financial and operating policy decisions of the investee but not control over those policies

Question 3

What is the general threshold of ownership to be called as an associate?

Answer 3

20 - 50%

Question 4

What 4 things can indicate significant influence?

Answer 4

1. Representation on the board
2. Participation in policy
3. Material transactions between investor and investee
4. Provision of essential technical information

Question 5

How should an investment in an associate be accounted for in the group SFP?

Answer 5

Using the equity method

Question 6

What is the equity calculation for the investment in the associate?

Answer 6

Cost of associate
Plus: Group Share of post acqn profits
Less: Impairment losses
Less: Dividends received to date

Question 7

What amount for profit from the associate is included in the Group P&L?

Answer 7

Associate % of Profit After Tax

Question 8

Where is the group share of profit from associate included in the group P&L?

Answer 8

Group profit before tax

Question 9

Is there an adjustment for intragroup transactions and balances for an associate?

Answer 9

No

Question 10

What is the PUP adjustment if a parent sells to an associate?

Answer 10

Dr P CoS (and thus retained earnings) A% x PUP

Cr Investment in Associate A% x PUP

Question 11

What is the PUP adjustment if a associate sells to a parent?

Answer 11

Dr Share of A’s Profit (and thus retained earnings) A% x PUP

Cr Group Inventories A% x PUP

Question 12

What is a joint arrangement?

Answer 12

An arrangement over which two or more parties have joint control

Question 13

What are the two types of joint arrangemnet?

Answer 13

A joint operation and a joint venture

Question 14

What is a joint operation? (3)

Answer 14

1. Parties have rights to assets and obligations to liabilities
2. No separate entity
3. Recognise share of assets and liabilities in their own separate financial statements

Question 15

What is a joint venture? (4)

Answer 15

1. Joint control and rights to net assets
2. Separate legal entity, with own fin statements
3. Include in group accounts using the equity method
4. Eliminate any PUP arising on consolidation