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
