Chapter 16: Group Accounts: associates and joint arrangements

Question 1

When is significant influence assumed?

Answer 1

Significant influence is assumed with shareholdings of 20% to 50%, unless there are facts given that clearly indicate otherwise (OBT: power to participate but not control or jointly control policies)

Question 2

What is joint control?

Answer 2

A joint arrangement is a contractual agreement whereby two or more parties undertake an economic activity that is subject to joint control.

In practice, joint control means that none of the parties alone can control the activity. To be classified as a joint arrangement, the contract must specify that all important decisions on financial and operating policy require unanimous consent of each of the parties’ with joint control

Question 3

What is an associate?

Answer 3

IAS 28 Investments in Associates and Joint Ventures gives the following definitions.

‘An associate is an entity over which the investor has significant influence.’

Question 4

What are the two types of joint arrangement?

Answer 4

Joint operations: Venturers have the rights to assets and obligations to liabilities of the arrangement (IFRS 11, appx A)

Joint ventures: Venturers have the rights to net assets of the arrangements. (IFRS 11, appx A)

Question 5

What is a joint venture?

Answer 5

• A joint venture is a separate legal entity that maintains its own financial statements
• The joint venture will own its own assets, incur its own liabilities, incur its own expenses and earn its own income
• If a venturer has joint control in the joint venture:
  Each venturer should recognise its share of the joint venture in its consolidated financial statements as per IAS 28 Investments in Associates and Joint Ventures

Question 6

How are associates included in the consolidated statement of financial position?

Answer 6

• Equity accounting requires the associate to be included as a non-current asset investment, presented as one single line, calculated as:

(add) Original cost of the investment
(add) P’s % of A’s post-acquisition movement in net assets (include any post-acquisition profits less any dividends paid by A)
(less) impairments to date

= Investment in associate on CSFP

Question 7

What is the impact of the associate on W5? (group retained earnings)

Answer 7

(add) 100% Parent’s retained earnings
(add) Parent ownership% of Subsidiary’s post-acquisition movement in retained earnings (W2)
(add) Parent’s % of Associate’s post-acquisition movement in retained earnings (W2A)
(less) Goodwill impairment to date (W3)
(less) Associate impairments to date (W7)

Question 8

What is the impact of the associate on W6? (other group reserves)

Answer 8

(add) 100% P’s reserve
(add) P% of S’s post-acquisition movement in reserves (W2)
(add) P% of A’s post-acquisition movement in reserves (W2A)

Question 9

How do you account for if the fair value of the net assets of the associate exceed carrying amount?

Answer 9

The cost of the investment will effectively include a fair value uplift.

• Additional depreciation will need to be charged on the fair value uplift and will subsequently be deducted from the investment in the associate in the SOFP
• Investment in associate therefore becomes the same working as before with an extra deduction of (less) P% of fair value depreciation - remove from W5 and W7

Question 10

What does the equity method of accounting require for the consolidated statement of profit or loss?

Answer 10

• Does not include dividends from the associate
• Instead includes group share of the associate’s profit for the year less any impairment in the year
• This is the ‘Share of profit of associate’ line and is held before group profit before tax (this should be pro-rated if the associate was acquired part way through the period)

Question 11

How do you calculate the ‘Share of profit of associate’ line?

Answer 11

(add) P% x A’s profit for the year
(less) P% of A’s current year FV depreciation
(less) current year impairment of associate

Question 12

How are intra-group trading balances treated for associates?

Answer 12

• balances between group companies and the associate remain in the consolidated statement of financial position
• any sales or purchases between group companies and the associate are NOT eliminated and will remain part of the consolidated figures in the SPL

Question 13

How do you account for unrealised profit in inventory?

Answer 13

Calculate the PURP as for a subsidiary, then multiply by P’s ownership

Question 14

What are the double entries in the CSFP for PURP when a parent sells to an associate? What about CSPL?

Answer 14

• CSFP:
  Dr Group retained earnings (W5)
  Cr Investment in associate (W7)
• CSPL:
  Add P’s share of unrealised profit to cost of sales (as per subsidiary accounting)

Question 15

What are the double entries in the CSFP for PURP when an associate sells to parent company? What about CSPL?

Answer 15

• CSFP:
  Dr Group Retained Earnings (W5)
  Cr Group inventory
• CSPL:
  Deduct P’s share of unrealised profit from ‘share of profit of associate’

Question 16

How do you treat dividends paid by the associate?

Answer 16

• Remove dividends paid from the associate to the parent in (W2), in the same way that dividends from subsidiaries are removed

Question 17

What is the difference between international and UK GAAP?

Answer 17

Under FRS 102 goodwill is amortised over a maximum of 10 years. This is still relevant for associates and joint ventures even though no separate goodwill figure is presented. `

Question 18

What is the separate calculation for goodwill under UK GAAP?

Answer 18

Goodwill on acquisition =

(add) Consideration paid
(less) P% x net assets at acquisition (W2)
= Goodwill at acquisition X
Amortisation/impairment to date (X)