D. FINANCIAL STATEMENTS OF GROUPS OF ENTITIES - ASSOCIATES

Question 1

Associate.

Answer 1

Associate. An entity over which the investor has significant influence.

Question 2

Significant influence

Answer 2

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. This could be shown by:
 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
If an investor holds 20% or more of the voting power of investee, it can be presumed that the investor has significant influence over the investee, unless it can be clearly shown that this is not the case. Significant influence can be presumed not to exist if the investor holds less than 20% of the voting power of the investee, unless it can be demonstrated otherwise.

Question 3

equity method.

Answer 3

An investment in associate is accounted for in consolidated financial statements using the equity method.

Question 4

Consolidated statement of profit or loss and other comprehensive income.

Answer 4

Consolidated statement of profit or loss and other comprehensive income. The associate’s sales revenue, cost of sales and so on are not amalgamated with those of the group. Instead, only the group share of the associate’s profit for the year and other comprehensive income for the year is included in the relevant sections of the statement of profit or loss and other comprehensive income.

Question 5

Associate - consolidated statement of financial position.

Answer 5

The consolidated statement of financial position should show a non-current asset, investments in associates. Calculated as: Cost of investment in associate +share of post acquisition retained earnings - impairment losses on associate to date

Question 6

Intragroup transactions.

Answer 6

Intragroup transactions. Intragroup transactions and balances are not eliminated. However, the investor’s share of unrealised profits or losses on transfer of assets that do not constitute a ‘business’ is eliminated.

Question 7

Joint arrangement:

Answer 7

Joint arrangement: An arrangement in which two or more parties have joint control.

Question 8

Joint control

Answer 8

Joint control: the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Question 9

A joint arrangement has the following characteristics:

Answer 9

A joint arrangement has the following characteristics:
 The parties are bound by a contractual arrangement
 The contractual arrangement gives two or more of those parties joint control of the arrangement
The existence of a contractual agreement distinguishes a joint arrangement from an investment in an associate. If there is no contractual arrangement, then a joint arrangement does not exist. The contractual arrangement sets out the terms upon which the parties participate in the activity that is the subject of the arrangement.

Question 10

The contractual arrangement generally deals with such matters as:

Answer 10

The contractual arrangement generally deals with such matters as:
 The purpose, activity and duration of the joint arrangement;
 How the members of the board of directors, or equivalent governing body, of the joint arrangement, are appointed.
 The decision-making process: the matters requiring decisions from the parties, the voting rights of the parties and the required level of support for those matters.
 The capital or other contributions required of the parties; and
 How the parties share assets, liabilities, revenues, expenses or profit or loss relating to the joint arrangement.

Question 11

whether the arrangement is a joint venture or joint operation.

Answer 11

The terms of the contractual arrangement are key to deciding whether the arrangement is a joint venture or joint operation.
 Joint operation: joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.
 Joint venture: joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Question 12

Joint operation:

Answer 12

Joint operation:
 The parties share all interests in the assets relating to the arrangement in a specified proportion
 The parties share all liabilities, obligations, costs and expenses in a specified proportion. The parties are liable for claims by third parties.
 The contractual arrangement establishes the allocation of revenues and expenses on the basis of the relative performance of each party.

Question 13

Joint venture

Answer 13

Joint venture
 The assets brought into the arrangement or subsequently acquired by arrangement are the arrangement’s assets. Parties have no interests in the assets.
 The joint arrangement is liable for the debts and obligations of the arrangement. The parties are liable to the arrangement only to extent of their respective investment or obligation to contribute any unpaid or additional capital. Creditors of the joint arrangement do not have rights of recourse against any party.
 The contractual arrangement establishes each party’s share in the profit or loss relating to the activities of the arrangement.

Question 14

Accounting for joint operations.

Answer 14

Accounting for joint operations. In its separate financial statement, a joint operator recognizes:
 Its own assets, liabilities and expenses
 Its share of assets held, and expenses and liabilities incurred jointly
 Its revenue from the sale of its share of the output arising from the joint operation
 Its share of revenue from the sale of output by the joint operation itself.
No adjustments are necessary on consolidation as the figures are already incorporated correctly into the separate financial statements of the joint operator.

Question 15

Accounting for joint ventures.

Answer 15

Accounting for joint ventures.
 Parent’s separate financial statements. Investments in subsidiaries, associates and joint ventures are carried in the investor’s separate financial statements: at cost, at fair value or using the equity method. Where a joint venture has no subsidiaries, the equity method must be used.
 Consolidated financial statements. Joint ventures are accounted for using the equity method in the consolidate financial statements in exactly the same way as for associates.

Question 16

Structured entity:

Answer 16

Structured entity: an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangement (often set-up for narrow range of activities and backed by financing arrangements).

Question 17

IFRS 12 Disclosure of interests in Other Entities

Answer 17

. This covers disclosures for entities which have interests in: subsidiaries, joint arrangements, associates and unconsolidated structured entities.
The main disclosures required by IFRS 12 are:
 The significant judgements and assumptions made in determining whether the entity has control, joint control or significant influence over the other entities, and in determining the type of joint arrangement.
 Info to understand the composition of the group and the interest that NCI have in the group’s activities and cash flows
 The nature, extent and financial effect of interests in joint arrangements and associates, including the nature and effects of the entity’s contractual relationship with other investors.
 The nature and extent of interests in unconsolidated structured entities
 The nature and extent of significant restrictions on the entity’s ability to access or use assets and settle liabilities of group.
 The nature of, and changes in, the risks associated with the entity’s interests in consolidated structured entities, joint ventures, associates and unconsolidated structured entities.
 The consequences of changes in the entity’s ownership interest in a subsidiary that do not result in loss of control
 The consequences of losing control of a subsidiary during the reporting period.