Ch4. Accounting for associates Flashcards
IAS28 definition of an associate
An entity over which the investor has significant influence
What is significant influence?
The power to participate in the financial and operating policy decisions of the invested but is not control or joint control over those policies
What are the 3 aspects of significant influence?
- Representation on the board of directors
- Participation in policy making processes
- Material transactions between investor and investee
Assumption with significant influence
An entity only holds significant influence if it holds between 20% and 50% of a company’s shares. Although, if all other elements are met it can be classified as an associate if under 20%.
How do we treat the investment in the parents individual company accounts?
The same as with a subsidiary, as a cost
Which method is used in the SOFP for associates in group accounts?
The equity method and equity accounting (IAS28). The investment in associate amount goes into a new line under non-current assets.
How are associates treated in group accounts in the P&L?
Extra Line: Group % of Associates profit for the year (shown before group profit before tax)
Intragroup associates with transactions:
DO NOT cancel intragroup transactions (remove the sale)
DO eliminate profits and losses on transactions between investor and associate (PUP) in the same was as group accounts
Associate PUP adjustment:
A PUP = A% x PUP
Calculate PUP in the same way as with subsidiaries
Double entry for PUP if parent sells to associate:
Dr parents cost of sales (P&L) APUP
Dr parents retained earnings APUP
Cr inventories in associate APUP
(if the associate holds the inventory)
Double entry for PUP if associate sells to parent:
Dr share of A’ profit (P&L)
Dr parents retained earnings (SOFP)
Cr group inventories
(if the parent holds the inventory)
