Ch 16 - GA : Associates and Joint Arrangements Flashcards
Define an associate
An entity over which the investor has signify influence and hat is either a subsidiary nor an interest in a joint venture
Define significant influence
Significant influence is the power to participate in the financial and operating policy decisions of the intense but is not control or joint control over these policies
Assumed to be shareholdings of 20-50%
However, when there is a shareholding of below 50%, you should always assess whether there is any evidence of control
As if control is present, then you should account for the investment as a subsidiary
What is the assumed SH of an associate?
Assumed to be shareholdings of 20-50%
However, when there is a shareholding of below 50%, you should always assess whether there is any evidence of control
How must you treat a SH with 20-50% shareholding, but where there is evidence of control?
As if control is present, then you should account for the investment as a subsidiary
What kind of accounting treatment is given to associates?
Equity accounting
Describe equity accounting
Rather than splitting out the A&L line by line, there is just a single line to show the investment
This is adjusted year by year to account for various issues
Define a joint venture per FRS 102 Section 15
A contractual arrangement whereby 2 or more parties undertake an economic activity that is subject to joint control
What is a joint control in practice?
In practice, joint control means that none of the parties alone can control the activity
What must a contract specify to classify a joint venture?
The contract must specify that all important decisions on financial and operating policy require each of the parties’ consent
What are the benefits of a joint venture?
Pooling of resources/technology Access to new and bigger markets Sharing of skills/specialisms Synergies resulting in reduced costs Shared risk of a new project
What are the types of joint ventures per FRS 102 Section 15?
Jointly controlled operations
Joint controlled entities
Jointly controlled assets
Define jointly controlled operations
An arrangement where 2 parties that have control control have right to the assets and obligations for the liabilities of the Joint Arrangement
Define joint controlled entities
Involves the establishment of a separate entity in which each venturer has an interest and joint control
Main focus of the course
How do you treat joint ventures and associates/
The same
Through equity accounting
Describe the main characteristics of a joint operation
A joint operation that is not structured through a separate entity is always a joint operation
The 2 venturers use their own assets and incurs their own expenses and liabilities
Turnover and expenses incurred are shared jointly by means of a joint venture agreement
No separate entity is set up
It is likely that a full set of acc won’t be prepared for this type of entity, although it isn’t impossible
A party to a joint operation should recognise its share of the A,L, I & E of the joint operation
Note: in the exam, only need an awareness of Joint Operations
Describe a joint controlled entity
A jointly controlled entity will own its own asset, incur its own liabilities and expenses, and earn its own income
These involve the establishment of a separate legal entity (company/partnership) in which each venture has an interest
If an investor is party to a joint venture but doesn’t have joint control over the joint venture
Required to be recorded using the equity accounting method
If the investor has signify influence, he should account for his inv in acc with FRS 102 Section 14 Investment in Associates
If he doesn’t have signify influence, he should account for it as a financial asset
How should an investor in a joint venture that doesn’t have joint control over the joint venture record this?
Equity accounting method
How should an investor in a joint venture that has significant influence over the joint venture record this?
he should account for his inv in acc with FRS 102 Section 14 Investment in Associates
How should an investor in a joint venture that has joint control over the joint venture record this?
Each venturer should recog its share of the joint venture in its consolidated FS as per FRS 102 Section 15 Investment in Joint Ventures
How is equity accounting different to consolidation?
With consolidation, we had control of the entity and therefore added across 100% of P and S’s A,L, I & E
We equity account for an associate because we don’t have control, only signify influence
So not necessary to include 100% of all of the above
Instead, just show Parent’s share that has accumulated since the acquisition
How does equity acc work?
Just show Parent’s share that has accumulated since the acquisition
How is an associate shown in the P&L and CBS
In CBS - one line to show ‘Investment in Associate’ in NCA
in CPaL ‘Share of Profits in Associate’ shown immediately above PBT
When you have an associate, what is the additional working required for CBS?
W7 - Investment in associate on CBS
Original cost of investment
Ps % of A’s post-acc net assets
Less goodwill amortisation and impairment losses to date
= Inv in associate on CBS
What must be done with goodwill that was acquired when the associate was purchased?
must be amortised over its useful life
Why should the equity method be used for associates & JV?
the rationale being that it reflects the signify influence by making investor answerable for the associated overall perf, not just the distributions received
How does the equity method show the associate/
inv in the associate is initially recognised at cost, but the carrying amount is then increased/decreased by the investor’s share in the post-acquisition change in the associates net assets
How does equity accounting affect the P&L?
Also, share of post-acquisition prof/losses should be recognised in the investor’s consolidated P&L acc
Give some examples of issues that can affect the accounting of associates/joint ventures In Consolidated bal sheet
Fair values adjustments
Impacts equity accounting
Balances with the associate
Unrealised profit in stock
Give some examples of issues that can affect the accounting of associates/joint ventures In Consolidated P&L acc
Trading between company and an associate
Unrealised profit in inventory
How is an associate incorporated into standard workings W1
W1- will be added but outside the circle
May be useful to add the months it has been held if the acquisition was in the year to remind you to adj for this
How is an associate incorporated into standard workings W2
W2 - Not as essential, only using for W5 and W7, but can still show the same as for a sub
How is an associate incorporated into standard workings W3
W3- Same idea as previous but net assets may need to be adjusted to reflect their FV
Goodwill amortised, assume 10 years if not given one
Note: amortisation isn’t shown separately
If there was existing amortisation, amortisation to date = amortisation at acq - amortisation to date
How is an associate incorporated into standard workings W4
Not required
Since we equity account for an associate, everything recorded in the associate belongs to the parent and hence there is no NCI
How is an associate incorporated into standard workings W5
In group P&L account reserve (P&L reserve) we need to
Include the group share of the associate’s post acquisition P&L reserve
Include any amortisation/impairment losses to date
What is the layout for W5 when including an associate?
100% of Ps P&L reserve
P% of S’s post acquisition P&L reserve
P% of A’s post acquisition P&L reserve
Less GW amortisation to date
Less Associate impairments/amortisation to date (W7)
How is an associate incorporated into standard workings W6
W6 Other group reserves
100% Ps reserve
P% of S’s post acquisition reserve (W2)
P% of A’s post acquisition reserve (W2A)
= Other group reserves
How is an associate incorporated into standard workings W7
W7 = investment in associate New for associates Original cost of investment P% of A's post-acc net assets (W2A) (W5) Less impairment/amortisation to date (W5) = Investment in associate
When will FV adjustments be required?
If the fair value of the net assets of the associate exceeds the NBV, the cost of the inv will effective include a FV uplift
Additional depr will need to be charged on the FV uplift and will subsequently be deducted from the inv in the associate in the bal sheet
What is the result of a FV uplift on calc required?
CP&L W4 Share of profits of Associate then becomes
Cost of investment P^ x A's post acc net assets ***Less P% of FV depreciation Less cumulative amortisation = Investment in associate
CBS W5 P&L Reserve then becomes 100% Ps P&L Reserve P% of S's post acq P&L reserve P% of As post acq P&L reserve Less amortisation in S Less amortisation in A Less P% of FV depr Group P&L reserve
How are dividends from the associate dealt with in a consolidated P&L?
Not included
Instead, includes group shares of the associates profit after tax less any goodwill amort/impairment in the year
Line shown is ‘Share of profits in the Associate’
This is shown immediately above Profit before Tax
Note: if the acquisition occurred within the year, and was not at the start- you will need to apportion the PROFIT AFTER TAX by the months the comp has actually owned it
How would you deal with an associate if it was acquired in the year
if the acquisition occurred within the year, and was not at the start- you will need to apportion the PROFIT AFTER TAX by the months the comp has actually owned it
Which workings does an associate not affect?
CBS W2 and W3 as these are wholly to subsidiaries
When does a FV adjustment arise?
This will arise if, upon acquisition, some of the assets of the Associate have a FV in excess of their carrying value
How are intra-group trades dealt with between a parent and an associate?
If the Parent and Associate trade with each other during the year, they will need to eliminate any unrealised profits in the group FS
But balances between group companies and the associate remain in the consolidated balance sheet
Any sales and purch between remain part of the consolidated figures, but only the unrealised profits (Associate PURPs) are removed
How are dividends from an associate to the parent dealt with for an associate?
This needs to be eliminated from the Parent’s investment income
As we are recording a share of profits of the Associate in the Consolidated P&L account and dividends are a distribution of profit
So if you didn’t eliminate it, it would be being double counted
How are balances between group companies and associates dealt with?
Balances between group companies and the associate remain in the CBS
Any sales/purchases between group companies and associated are NOT eliminate
So remain part of the consolidated figures in the P&L
What adjustments are made for unrealised profit in stock?
Calculate the PURP as for a subsidiary, then multiply by P’s % ownership
Note: this is NOT affected by who sells to who
PURP = P% x profit element x % stock remaining at year end
P% since we equity account for the associate, we only want to account for the P% of the PURP
profit element is calculated either using
Mark up on cost (Cost is 100%)
Profit margin (prof = 100%)
% stock remaining at year end - this will have to be told to you in q
What adjustments are made for unrealised profit in stock if the parent sold to the associate?
Consolidated BS DR Group P&L acc reserve (W5) CR Investment in associate (W7) Consolidated P&L account Add P’s share of unrealised profit to CoS (as per subsidiary accounting)
What adjustments are made for unrealised profit in stock if the associate sold to the parent?
Consolidated bal sheet DR Group P&L acc reserve (W5) CR Group stock Consolidated P&L account Deduct P’s share of unrealised profit from share of profit of associate
What are the IFRS differences re associates?
Under IFRS Standards, intangibles with an indefinite life like goodwill aren’t amortised.
Instead, they are reviewed annually for impairment
So there is no need to calc the goodwill component of a inv in an associate to work out amortisation
