Chapter 12 - Associates And Joint Arrangements

Question 1

Ownership in Associates

Answer 1

20% to 50% Ownership

Question 2

Definition of an Associate

Answer 2

An entity over which the investor has significant influence

IAS28

Question 3

What is significant influence

Answer 3

The power to participate in the financial and operating policy decisions but does not constitute control

Question 4

Accounting Treatment of Associate

Answer 4

Equity Accounting

Question 5

Equity Accounting for Associates

Answer 5

Group share of net assets
Group share of net income

No line-by-line aggregation of the Associate’s accounts

Question 6

Intra-group balances and transactions

Answer 6

The transactions are not eliminated

Question 7

Intra-group unrealized profits

Answer 7

IAS28 - Unrealized profits on trading should be removed based on investor’s share

Unrealized Profit Adjustment = Group %age Share x unrealized profits

Question 8

Impairment of investment value

Answer 8

The impaired amount is taken off of the investment in the Associate in the group’s accounts

Question 9

Associate profits

Answer 9

Group’s share of the Associate’s profit are included in consolidated income Statement

Question 10

Dividends from Associates

Answer 10

Dividends received from Associates are excluded from consolidated income Statement

Question 11

Financial treatment of impairment of Goodwill

Answer 11

DR / Operating Expenses

CR / Investment in Associate

Question 12

Group adjustments to retained earnings

Answer 12

Group share of post acquisition profits
Goodwill impairment
Dividends received

Question 13

Calculating share of Associate profits

Answer 13

Retained earnings of Associate at year end
Less:
Retained earnings at acquisition 
Equals:
Post acquisition profits 
Multiply:
%age share by post acquisition profits

Question 14

Financial treatment of unrealized profits

Answer 14

DR / Group Cost of Sales

CR / Investment in Associate

Question 15

Financial treatment of unrealized profits if Associate sells to Parent

Answer 15

DR / Share of Associate’s profit

CR / Group Inventory

Question 16

Investment in Associate

Answer 16

Cost of Investment
Add: Investor’s share of Associate’s post-acquisition Profit
Add: Investor’s share of Associate’s post-acquisition recognized gains

Question 17

Where FV of assets is higher than the consideration paid

Answer 17

The excess of FV over net assets is credited to statement of P&L

Question 18

How can significant influence be shown ?

Answer 18

• Representation on the board of directors
• Participation in policy- making processes
  -Material transactions between the entity and investee
  -Interchange of managerial personnel
  -Provision of essential technical information

Question 19

Joint arrangement

Answer 19

An arrangement of which 2 or more parties have joint control - IFRS 11

Question 20

Joint control

Answer 20

Three key aspects of control

• Contractually agreed terms of sharing control of an arrangement
• Control is agreed as joint
• Unanimous Consent is required from each party

Question 21

Two types of Joint arrangement?

Answer 21

Joint Operation - the parties that have joint control of the arrangement have rights to the asset and obligations for the liabilities relating to the arrangement.

Joint Venture - the parties that have joint control of the arrangement have rights to the net assets of the arrangement