Chapter 16 Group accounts: associates and joint arrangements

Question 1

1.1 IAS 28 Investments in Associates and Joint ventures

Answer 1

IAS 28 defines an associate as an entity over which the investor has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or join control of those policies. Significant influence is assumed with shareholdings of 20% to 50%.

Question 2

1.2 Definition of joint arrangements

Answer 2

IFRS 11 defines a joint arrangement as a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control means none of the parties alone can control the activity and the contract must specify all important decisions on financial and operating policy require each of the parties’ consent.
IFRS 11 defines joint operations as the parties having joint control of the arrangement have rights to the assets, and obligations for the liabilities relating to the arrangement. Joint ventures are a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
Per IAS28 the treatment of associates and joint ventures is the same, called equity accounting.

Question 3

1.3 Joint Operations

Answer 3

Not structured through a separate entity. Likely that a full set of accounts will not be prepared for this type of entity. A party to a joint operation should recognise its share of assets, liabilities, income and expenses of the joint operation.

Question 4

1.4 Joint ventures

Answer 4

A joint venture is a separate legal entity that maintains its own financial statements. The joint venture owns its own assets, incurs liabilities and expenses, and earn its own income. An investor in a joint venture is a party to a joint venture that does not have joint control, if they have significant influence, they should account for the investment in accordance to IAS 28. If they do not have significant influence, they account for it as a financial asset. If a venturer has joint control in the joint venture, each venturer should recognise its share in its consolidated financial statements, as per IAS 28.

Question 5

2.1 Associates in the consolidated statement of financial position

Answer 5

The consolidated statement of financial position is prepared on a normal line by line basis for the parent and subsidiary. Equity accounting requires the associate to be included as a non-current asset investment, presented as a single line calculated as:
- Original cost of the investment X
- P’s % of A’s post-acquisition net assets X
- Less impairments to date (X)
- Investment in associate on CSFP X

Question 6

3.1 Associates in the consolidated P+L

Answer 6

The equity method of accounting requires that the consolidated statement of profit or loss it 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.

Question 7

4.1 Balances with the associate

Answer 7

If associate is outside the group:
- balances between group companies and the associate remain in the consolidated statement of financial position
- any sales or purchases between group companies and associate are not eliminated and will remain part of the consolidated figures in profit or loss.

Question 8

4.2 Unrealised profit in inventory

Answer 8

Adjustment must be made for unrealised profit in inventory. Calculate the PURP as for a subsidiary, then multiply by parent’s % ownership.
Parent company selling to associate – In the consolidated statement of financial position Dr Group retained earnings and Cr Investment in associate. In the consolidated statement of profit or loss add parent’s share of unrealised profit to cost of sales (as per subsidiary accounting).
Associate selling to parent company – In the consolidated statement of financial position Dr Group retained earnings and Cr Group inventory. In the consolidated statement of profit or loss: Deduct parent’s share of unrealised profit from share of profit of associate.

Question 9

4.3 Dividends

Answer 9

Remove dividends paid from the associate to the parent in the same way that dividends from subsidiaries are removed. Instead, the parent’s share of the associate’s profit for the year is included in the CP+L.

Question 10

5.1 UKGAAP differences

Answer 10

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. An additional working is therefore required to calculate the goodwill amortisation.
- Consideration paid X
- Less: parents % of net assets on acquisition X
- Goodwill at acquisition X
- Amortisation/impairment to date (X)
Goodwill is not shown separately on the statement of financial position, but in order to calculate the amortisation charge, this calculation is required.