Chapter 4: Accounting for associates

Question 1

Def of associate

Answer 1

An associate is an entity which the investor has significant influence

Significant influence is the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies.
We will assume that one company has significant influence over another if it holds between 20-50% of shares.

Question 2

recording the investment in associate in the parent’s company accounts

Answer 2

Almost always recorded at cost

Question 3

Accounting treatment in consolidated financial statements

Answer 3

using the equity method ie. the cost of the associate plus or minus any post-acq profits or losses less impairment

Question 4

how is the ‘investment in associate’ calculated in the SFP

Answer 4

Cost of associate
Share of post-acq profit/loss
less: impairment losses on associate to date
Less: share of dividend received

it is a single line in the SOFP

Question 5

how is the ‘investment in associate’ calculated in the pnl

Answer 5

Group % of Associate Profit After Tax for the year
shown before group profit before tax

An associate is not a group company, therefore there will be no cancellation of intra-group transactions, but dividends from the associate are ignored

Question 6

Unrealised profits and losses on transactions between investor and associate should be eliminated in the same way as for group accounts. The calculation for the PUP is identical to the subsidiary.

If parent sells to associate:
If associate sells to parent:

Answer 6

Parent to ass
Dr Parent COS (Pnl) and Parent RE(SFP): A% x PUP
Cr Investment in Associate A% x PUP (if associate holds the inv)

Ass to Parent
Dr Share of A’s profits (PnL) & Parents RE: A%xPUP
Cr Group inventories: A%xPUP (if parent holds inventory)