Associates and Joint Arrangements

Question 1

IAS 28 Investments in Associates and Joint Ventures

Answer 1

A company may buy shares in another company without gaining control, however it may still have significant influence to participate in the financial and operating policy decisions of the company. In this instance the investing company would refer to the investee as an Associate.

The investing company would own 20%-50% of shares.

Significant influence can be recognised by:

• Representation on the board of directors
• Involvement in policy making procedures
• Substantial transactions between the investor and the entity

Question 2

Accounting for an Associate

W6 of CFSP - Investment in associate

Answer 2

Associates are accounted for using equity accounting in according to IAS28.

In CSFP include a single line withing non-current assets called “investment in associate” calculated as:

Cost of investment 
Add: Share of post-acquisition reserves
less: impairment losses (Full value)
less; PURP (if P sells to Associate and Adjust for P% share)
 = Investment in associate.

The P share of the 3 adjustments; post-acquisition reserves, impairment losses and PURP would also be recorded in consolidated retained earnings (W5 of CSFP).

Question 3

Associates: What is equity accounting?

Answer 3

We use equity accounting to show our investment in associates.

If the investee does not have a subsidiary (control over another company) then this investment in another company (20%-50% share) would be presented at cost.

If the investee does have a subsidiary and therefore is producing group accounts, investments in associates must be accounted for using equity accounting to show what the

Question 4

Associates: Intra-group trading

Answer 4

When equity ccounting for associates remember:

1. Do not remove balances with associates. They are outside of the group accounts and should be included.
2. DO NOT remove trading between P and A
3. IF the Associate pays a dividend to the Parent then is DOES need to be removed as it is replaced by the Parents share of the post-acquisition profits instead.
4. PURP adjustment IS required for unsold goods at Y/E. This is limited to the Parents % interest in A.

Question 5

IFRS 11 - Joint Arrangements

Answer 5

Joint Operations
- Venturers have the rights to assets and obligations for the liabilities of the arrangement.

Joint Venture

• Venturers have rights to net assets of the arrangement.
• This is normally a separate entity.