Investment in Associates Flashcards
What accounting method is used to account for an investment subject to significant influence?
The equity method.
What accounting method is used to account for an investment in a company subject to significant influence?
The equity method.
What are examples of indicators of significant influence?
<ol>\n \t<li>Investor representation of the board of directors</li>\n \t<li>Investor participation in policy making process</li>\n \t<li>Extent of inter-corporate investments, e.g. investor is a major supplier or customer</li>\n \t<li>Investor provides substantial debt financing, technical assistance, significant patents, trademarks, etc. on which firm relies</li>\n</ol>
ABC Inc. owns 20% of the shares of DEF Inc. and is using the equity method. DEF’s income for the current year is $100,000. At the time of the acquisition of the investment, DEF’s building had a carrying value of $1 million and a fair value of $2 million. Assuming that the building is being amortized over 40 years, what would ABC Inc.’s equity income be for the current year under ASPE, assuming that the tax payable method is being used by ABC?
In using the equity method, ABC would pick up 20% of DEF’s $100,000 of income (i.e. $20,000) but would adjust for its share of the amortization of the $1 million FV increment (i.e. difference between fair value and carrying value of the building).\n\nAmortization of the FV increment is $25K (i.e. $1M/40 years)\n\nInvestor Inc.?s share of the amortization is 20% of $25K = $5K\n\nFinal calculation of equity income reflected in Investor Inc.?s I/S is as follows:\n\n20% of Associate Inc.?s $100,000 income: $20,000\n\nLess: Amortization of FV increment (Investor Inc.?s share): <u> (5,000)</u>\n\n $15,000\n\n
ABC Inc. is using the equity method to account for its investment in DEF. ABC’s year end is Dec. 31 and DEF’s year end is September 30. Would ABC be allowed to use the statements of DEF which have a different year end for the purpose of applying the equity method under IFRS?
Yes - They may be able to do so. When the end of the reporting period of the investor is different from that of the associate, the investor (in this case ABC) prepares financial statements for the associate (DEF) as of the same date as the financial statements of the investor (i.e. as at Dec. 31) unless it is impracticable to do so. in such casethe investor would use the F/S of the associate that are different than from the investor (i.e. that have a Sept 30 year end)but adjustments must be made for significant transactions or events between that date and the date of the investor’s financial statements.
ABC Inc. is using the equity method to account for its investment in DEF. ABC’s year end is Dec. 31 and DEF’s year end is August 31. Would ABC be allowed to use the statements of DEF which have a different year end for the purpose of applying the equity method under ASPE?
Yes - However when the fiscal periods of an investor and an investee are not coterminous and the equity method is used to account for the investee, events relating to, or transactions of, the investee that have occurred during the intervening period and significantly affect the financial position or results of operations of the investor must be disclosed. This disclosure is not necessary if these events or transactions are recorded in the financial statements. There is no rule under ASPE that says that the statements can not be more than 3 months apart.
How often is a company required to assess whether there has been an impairment in an equity accounted investment?
Under both IFRS and ASPE, at the end of each reporting period, an entity must assess whether there are any indications that an equity accounted investment may be impaired. (Under IFRS this rule is in IAS 36 “Impairment of Assets” rather than the section dealing with the equity method (i.e. IAS 28).\n\n<span><span></span></span>\n\n
Can a company reverse an impairment loss on an equity accounted investment if the value of the investment increases in a subsequent period?
Yes - Under Both IFRS and ASPE impairment losses can be reversed
How does a company measure an impairment loss under ASPE on an investment subject to the equity method?
Such an investment would be accounted for using the equity method. The impairment loss would be measured based on the difference between the carrying value of the investment and the higher of:\n\n(a) the present value of the cash flows expected to be generated by holding the investment,discounted using a current market rate of interest appropriate to the asset;and\n\n(b) the amount that could be realized by selling the asset at the balance sheet date.\n\n
Under IFRS, at what value would a company re-measure the remaining share of an investment when it loses significant influence over the investment and stops using the equity method?
The company would re-measure the investment it retains in the former associate at fair value. (The investment would not be revalued at fair value under ASPE).\n\n<span><span></span></span>\n\n
A Ltd., purchases a 20% share of B Ltd. for $1,000,000 at the beginning of year 1. During year 1, B Ltd. has a net loss of $10,000,000 and A Ltd. has no obligation to fund the losses. At what value would A Ltd. value the investment at the end of year 1 and what is the amount of equity loss that would be recognized for the year?
The value of the investment would be 0 as the amount of equity loss recognized would be $1,000,000. Had A Ltd. been required to recognize its full share of the loss of $2,000,000 (i.e.20% of $10 million)carrying value would have been reduced below 0.However carrying value is not reduced below zero in this case as the investor hasno obligation to fund the losses. the company would however keep track of such losses and would only resume including its share of the associates profits in income, after its share of the profits equals the share of net losses that were not recognized.\n\n<span><span></span></span>\n\n
Under IFRS what conditions must be fulfilled in order for a company to be exempt from using the equity method for an investment subject to significant influence?
A company would <strong>not</strong> be required to use equity method ifit is:\n<ol>\n \t<li>Awholly owned sub or partially-owned sub and other owners including those not otherwise entitled to vote, do not object to the investor not applying the equity method;</li>\n \t<li>Not publicly traded;</li>\n \t<li>Not in process of going public; and</li>\n \t<li>Ultimate/intermediate parent of investor produces IFRS compliant financial statements.</li>\n</ol>
If a company is exempt from using the equity method for an associate, how would it account for the investment under IFRS?
The company can choose to (a) use the cost method or (b) treat the investment as a financial instrument.\n\n<span><span></span></span>\n\n
Under IFRS if a company prepares separate financial statements in addition to its statutory financial statements and does not wish to use the equity method for an investment in an associate in these financial statements, how would it measure the investment?
It can choose to (a) use the cost method or (b) treat the investment as a financial instrument.\n\n\n\n<span><span></span></span>\n\n
Under ASPE what conditions must be fulfilled in order for a company to opt to not use the equity method for an investment subject to significant influence?
Under ASPE no conditions have to be met.Rather, the company makes a policy choice to use the equity method or not<em>.</em>
