9. Accounting for Investments in associates

Question 1

What is an associate?

Answer 1

An associate is an entity, over which the investor has significant influence.

Question 2

What is significant influence?

Answer 2

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

Question 3

What is the key criterion for identifying an investor/associate relationship?

Answer 3

The investor has significant influence over the associate.

Question 4

Does the investor have to hold shares in an associate?

Answer 4

The investor does not need to hold shares in an associate, but where more than 20% of the voting power is held, significant influence is presumed to exist.

Question 5

What does AASB provide guidelines on?

Answer 5

To help determine the existence of significant influence, including the ability to influence the investee’s board of directors, and the existence of material transactions between the investor and the investee.

Question 6

Is significant influence a type of control?

Answer 6

Yes, but it does not extend to control as required for a parent–subsidiary relationship.

Question 7

What is equity method?

Answer 7

A method of accounting whereby the investment is initially recognised 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

Question 8

What is the rationale behind the equity method?

Answer 8

It is difficult to determine the rationale behind the equity method, particularly whether it is meant to be a one-line consolidation method.

Question 9

What does an entity do when it does not prepare consolidated financial statements?

Answer 9

The equity method is applied to investments in associates in the accounts of the investor itself.

Question 10

What does an entity do when it does prepare consolidated financial statements?

Answer 10

The equity method is applied to associates of the parent and its subsidiaries in the consolidated financial statements, and not in the accounts of the parent itself.

Question 11

When is the equity method applied?

Answer 11

From the date the investor obtains significant influence over the investee.

Question 12

T or F

The investment in an associate is initially recorded at cost.

Answer 12

True

Question 13

How is the dividend revenue recognised in the parent’s accounts when dividends are paid/declared by an associate and the investor prepares consolidated financial statements?

Answer 13

It is recognised in the parent’s accounts is eliminated on consolidation.

Question 14

Where dividends are paid/declared by an associate and the investor does not prepare consolidated financial statements, how is the dividend revenue recognised?

Answer 14

No dividend revenue is recognised by the investor?

Question 15

How is the investor’s share of other comprehensive income of the associate is disclosed?

Answer 15

As a separate line item in the investor’s statement of profit or loss and other comprehensive income

Question 16

How is the investor’s share of current period profit of the associate is disclosed?

Answer 16

As a separate line item in the investor’s statement of profit or loss and other comprehensive income.

Question 17

Does the equity method require the investment in an associate to be adjusted?

Answer 17

Yes, for the investor’s share of the post-acquisition equity of the associate

Question 18

T or F?
Where differences between fair values and carrying amounts exist at acquisition date for the investee’s identifiable assets and liabilities, subsequent equity recognised by the associate may include pre-acquisition amounts relating to these differences.

Answer 18

True

Question 19

Would adjustments for any goodwill arising on acquisition occur on impairment of goodwill?

Answer 19

Yes

Question 20

Is the calculation of adjustments for differences between carrying amounts and fair values always on an after-tax basis?

Answer 20

Yes

Question 21

Where equity accounting adjustments are made on consolidation, would the payment of pre-acquisition dividends affect the determination of post-acquisition movements in equity after acquisition date?

Answer 21

Possibly

Question 22

True of False?
Where the investor acquires its interest in another entity at a date prior to having significant influence over that entity, derecognition of any fair value adjustments to the investment account recorded by the investor does not have to be made?

Answer 22

False

It may

Question 23

Why are adjustments made?

Answer 23

Adjustments are made where the accounting policies of the investor differ from those applied by the associate.

Question 24

When do cumulative preference dividends have to be taken into account?

Answer 24

In calculating the investor’s share of equity of the associate, cumulative preference dividends may have to be taken into account.

Question 25

When are post-acquisition dividends treated differently?

Answer 25

Where consolidated financial statements are prepared in situations where the investor is not a parent.

Question 26

T or F?

The rationale for the AASB 128 requirements for adjusting for inter-entity transactions is not clear.

Answer 26

True

Question 27

Is the investors share of losses of an associate recognised?

Answer 27

Yes, but only to the point where the carrying amount of the investment in the associate is zero.

Question 28

What is in AASB 12?

Answer 28

Disclosures relating to investments in associates are contained in AASB 12 Disclosure of Interests in Other Entities.

Question 29

Are adjustments made to COGS and Sales?

Answer 29

Adjustments are not made to accounts such as sales and cost of sales as would occur under the consolidation method.

Question 30

How are the adjustments to the investors share of the equity of the associate made?

Answer 30

For the effects of both upstream and downstream transactions even though a downstream transaction does not affect the equity of the associate.

Question 31

Is the investor entitled to a share of equity?

Answer 31

The investor is entitled to a share of realised equity of an associate; hence adjustments are made for unrealised profits.

Question 32

T or F?
If, after reporting losses, an associate earns a profit, the investor recognises a share of profits only after the share of profits exceeds the share of past losses not recognised.

Answer 32

True

Question 33

Can the share of losses be offset against other investments?

Answer 33

Yes it may if the investor has in the associate such as long-term receivables.

Question 34

True of False?
As part of the disclosures relating to significant judgements and assumptions made in relation to associates, explanations are required where the equity method is not applied and more than a 20% interest is held in an associate, as well as when the equity method is applied and less than 20% interest is held.

Answer 34

True

Question 35

For material investments in associates does detailed summarised financial information have to be disclosed?

Answer 35

Yes