Chapter 15 - Group accounts: Associates & joint ventures Flashcards
What is an associate?
An associate is an entity over which the investor has significant influence but not control.
What is considered ‘significant control’?
Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
If an investor holds 20% or more of the voting power of the investee (directly or indirectly) it is presumed that the investor has significant influence.
Significant influence can also be shown by one or more of the following:
* Representation on the board of directors
* Participation in policy making decisions
* Material transactions between the investor and investee
* Interchange of managerial personnel
* Provision of essential technical information
Is an associate a part of a group?
An associate is not part of the group as a group comprises the parent and its subsidiaries only.
How are associate companies accounted for in the investing company’s own accounts?
- The statement of financial position of the investing company shows the investment in the associate in non-current asset investments, usually at cost.
- The investing company’s statement of profit of loss shows dividend income received from the associate as ‘income from associates’.
How are associate companies accounted for in consolidated financial statements?
An investment in an associate should be accounted for in the consolidated financial statements using the equity method of accounting.
The group’s share of the associate’s profits, assets and liabilities are included in the consolidated financial statements rather than the cost of the investment and dividend income received.
If the investing company does not own a subsidiary are consolidated financial accounts necessary for only associates?
The equity method is only used in the group accounts ie the parent company holds investments in subsidiaries as well as associates.
If the investor does not issue consolidated financial statements the investment will only be shown in the investor’s individual financial statements.
If a parent company has an associate, what additional aspects will need to be included when preparing consolidated SOFPs?
- Associate included in group structure
- Investment is associate included as a line in assets
- Include the parent’s share of the associate’s post acquisition retained earnings in retained earnings
Outline the equity method to account for investments in associates when preparing consolidated SOFPs
Step 1: Set Up the Pro-Forma:
Step 2: Fill in the Cost Line:
* Put the cost of the associate as recorded in the parents books
Step 3: Calculate the Groups Share of the Post Acquisition Change in Net Assets:
* Calculate the change in retained earnings by taking the RE at the year end and deducting the RE at acquisition.
* Multiply this by the groups % share in the associate to get the groups share of the post acquisition change in net assets
Step 4: Deduct Any Impairment to Date:
Step 5: Include the Investment in Associate as an Asset Line in the SOFP:
If a parent company has an associate, what additional aspects will need to be included when preparing consolidated SOPLs?
The group’s share of the associate’s profit after tax is recognised in the consolidated statement of profit or loss as a single line entry.
This is disclosed immediately before the group profit before tax as ‘Share of profit of associates’.
If the associate is acquired mid-year its results should be time-apportioned.
Where an impairment review in the current period has revealed an impairment loss to be charged to the statement of profit or loss, the loss is deducted from the parent’s share of the profit after tax of the associate (or added to the parent’s share of a post-tax loss.)
Outline the equity method to account for investments in associates when preparing consolidated SOPLs
Step 1: Set Up the Pro-Forma:
Step 2: Calculate the Groups Share of the Associates Profit:
* Mutliply the groups % share in the associate by the associates profit post tax
Step 3: Recognise any Impairment:
* Deduct any impairment from the calculated groups share of the associates profit post tax
Step 4: Include the Income from Associate as an Line in the SOPL ‘Investment income’:
If an associate makes a loss, what must be considered with regards to the SOFP & SOPL?
Where an associate makes a loss the group share of the post-tax loss should be recognised in the CSoPL.
The group’s share of the loss will also be recognised as a reduction in the carrying amount of the associate in the SOFP.
However, once the carrying amount of the investment in the associate has been reduced to zero, no further losses are recognised by the group - i.e. the investment loss in the SOPL cannot exceed the carrying amount of the investment before the loss
What are the adjustments that may need to be made to the consolidated accounts when preparing consolidated SOFPs involving an associate?
1. Fair Value Adjustments (at Acquisition Date)
- Adjust the associates identifiable assets and liabilities to fair value at acquisition.
2. Elimination of Unrealised Profits
- Eliminate any profit made on transactions between the group and the associate that haven’t yet been sold outside the group (i.e. still in inventory or unsold).
Are transactions between a group and an associate eliminated like they are for intra-group transactions?
Transactions between a group and an associate eliminated like they are for intra-group transactions are not cancelled on consolidation.
How are balances between the group and associate accounted for in consolidated SOFPs?
Receivables and payables balances due from/to the associate in the
individual statement of financial position of the parent or its subsidiaries
are carried across into the consolidated statement of financial position
Outline the method for the fair value adjustment where the fair value of an associates non-current asset has increased when preparing consolidated SOFPs
Step 1: Calculate the increase in depreciation of the NCA as a result of the fair-value increase
* The difference between the depreciation on the asset as per the associates book and the depreciation on the asset as per its fair value at acquisition
Step 2: Calculate the groups share of the additional depreciation
* Mutliply the groups % share in the associate by the increase in depreciation
Step 3: Adjust the associate’s profit since acquisition and subsequently the investment in associate:
* Deduct the groups share of the additional depreciation from the associate’s profit since acquisition, hence reducing the value of the investment in associates in the SOFP
Outline the method for adjusting for unrealised profits where parent sells to associate when preparing consolidated SOFPs
Step 1: Identify if goods sold by the parent to the associate remain in the associates inventory at year-end
* These profits are unrealised from the group and associates perspective
Step 2: Calculate the unrealised profit:
* Use profit margin (markup or margin) × value of unsold goods
* Example:
- Parent sells at £10,000 (cost £8,000) → £2,000 profit
- 50% inventory unsold → unrealised profit = £1,000
Step 3: Calculate the groups share of the unrealised profit:
* Mutliply the groups % share in the associate by the unrealised profit
Step 4: Make the adjustment to the carrying amount of the investment in the associate and the parents retained earnings:
* Reduce P’s retained earnings by its share of the unrealised profit
* Reduce the carrying amount of the investment in A by P’s share of the unrealised profit.
Outline the method for adjusting for unrealised profits where associate sells to parent when preparing consolidated SOFPs
Step 1: Identify if goods sold by the associate to the parent remain in the parents inventory at year-end
* These profits are unrealised from the group and associates perspective
Step 2: Calculate the unrealised profit:
* Use profit margin (markup or margin) × value of unsold goods
* Example:
- Associate sells at £10,000 (cost £8,000) → £2,000 profit
- 50% inventory unsold → unrealised profit = £1,000
Step 3: Calculate the groups share of the unrealised profit:
* Mutliply the groups % share in the associate by the unrealised profit
Step 4: Make the adjustment to the parents inventory and the parents share of the associates retained earnings:
* Reduce P’s share of A’s retained earnings by its share of the unrealised profit.
* Reduce P’s inventory on consolidation by its share of the unrealised profit.
What are the adjustments that may need to be made to the consolidated accounts when preparing consolidated SOPLs involving an associate?
1. Fair Value Adjustments (at Acquisition Date)
- Adjust the associates identifiable assets and liabilities to fair value at acquisition.
2. Elimination of Unrealised Profits
- Eliminate any profit made on transactions between the group and the associate that haven’t yet been sold outside the group (i.e. still in inventory or unsold).
3. Dividends
- Eliminate any dividends received by the parent from the associate.
Outline the method for the fair value adjustment where the fair value of an associates non-current asset has increased when preparing consolidated SOPLs
Step 1: Calculate the increase in depreciation of the NCA as a result of the fair-value increase
* The difference between the depreciation on the asset as per the associates book and the depreciation on the asset as per its fair value at acquisition
Step 2: Calculate the groups share of the additional depreciation
* Mutliply the groups % share in the associate by the increase in depreciation
Step 3: Adjust the groups share of associates profit:
* Deduct the groups share of the additional depreciation from the groups share of the associate’s profit, hence reducing the investment income line in the SOPL
Outline the method for adjusting for unrealised profits where parent sells to associate when preparing consolidated SOPLs
Step 1: Identify if goods sold by the parent to the associate remain in the associates inventory at year-end
* These profits are unrealised from the group and associates perspective
Step 2: Calculate the unrealised profit:
* Use profit margin (markup or margin) × value of unsold goods
* Example:
- Parent sells at £10,000 (cost £8,000) → £2,000 profit
- 50% inventory unsold → unrealised profit = £1,000
Step 3: Calculate the groups share of the unrealised profit:
* Mutliply the groups % share in the associate by the unrealised profit
Step 4: Make the adjustment to the cost of sales of the parent:
* Increase P’s cost of sales by its share of the unrealised profit. (This adjustment reduces group profit by its share of the unrealised profit.)
Outline the method for adjusting for unrealised profits where associate sells to parent when preparing consolidated SOPLs
Step 1: Identify if goods sold by the associate to the parent remain in the parents inventory at year-end
* These profits are unrealised from the group and associates perspective
Step 2: Calculate the unrealised profit:
* Use profit margin (markup or margin) × value of unsold goods
* Example:
- Associate sells at £10,000 (cost £8,000) → £2,000 profit
- 50% inventory unsold → unrealised profit = £1,000
Step 3: Calculate the groups share of the unrealised profit:
* Mutliply the groups % share in the associate by the unrealised profit
Step 4: Make the adjustment to groups share of the associates profit after tax:
* Reduce P’s share of A’s profits after tax by its share of the unrealised profit
Outline the method for adjusting for dividends paid from the associate to the group when preparing consolidated SOPLs
Dividend income from the associate is not recorded in the consolidated statement of profit or loss.
This is because under the equity method the group’s share of the associate’s profit before dividends has already been recognised.
JOINT VENTURES
Outline the proforma and method for putting together a consolidated statement of finacial position where the group has an associate
METHOD
UK GAAP COMPARISON
