Accounting for associates

Question 1

Associate definition

Answer 1

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

Significant influence = power to aprticipate in the financial and operating policy decisions of the associate but is not control or joint control over those polices. Holds 20%-50%.
Shown by:
Representation on the board
Material transactions

Question 2

Investment in associate carrying value

Answer 2

Almost always treated at cost

Question 3

Consolidating financial statements - Statement of financial position

Answer 3

Use the equity method - i.e. the cost of the associate plus (or minus) post acquisition profits (or losses) less impairment less dividends received = Investment in Associate

Question 4

Consolidating financial statements - P&L

Answer 4

Group % if Associates Profit After Tax for the year. This is shown before the group profit before tax.

Question 5

Associate inra-group transactions

Answer 5

Associates are not a group company so don’t cancel any intra-group transactions.

However any unrealised profit and losses on transactions should be removed. Same PUP calculation with the final PUP being multiplied by the % holding in associate.

Parent sells:
Dr - Parents Cost of Sales and retained earnings: x %
Cr - Inventory in Associate: x % (if still held in inventory)

Associate sells:
Dr - Share of assocate profits and retained earnings: x %
Cr - Group inventories: x % (if still in inventory)

REMEBER: use fair value for net assets, no goodwill and no non-controlling interest calculation for an associate.