Investments in Associates

Question 1

When is the equity method applied?

Answer 1

• the equity method is applied by entities that have joint control or significant influence over an investee (associate)

Question 2

Associate

Answer 2

• entity which investor has significant influence

Question 3

Significant influence

Answer 3

• entity can participate in/influence financial and operating decisions of an investee but does not have control
• ownership between 20%-50% = control
• consider: BOD representation, policy making decisions, transactions between the 2 entities, management interchange, technical information

Question 4

Joint control

Answer 4

• contractually agreed sharing of control of arrangement, where decisions required unanimous consent of parties sharing control
• equity method of accounting when joint control provides rights to the net assets of the arrangement

Question 5

Equity method: initial and subsequent measurement

Answer 5

• Initial: Cost
• Subsequent measurement: Add: equity income for the period, Deduct: dividends received from associate during the period

Question 6

Acquisition differential

Answer 6

• difference between purchase price and BV at the date of purchase
• adjust for FV differentials that existed on acquisition
• Acquisition differential is composed of: difference in FV and BV of identifiable assets and liabilities, and Goodwill represents the expected value of future financial performance and equals purchase price - FV of identifiable assets and liabilities

Question 7

How to find acquisition differential

Answer 7

acquisition differential
- BV of associates net assets x ownerships %
= Acquisition differential
+ / - FV differential (reduce the FV difference by the total FV differential x tax rate) x ownership %
= Goodwill (or negative goodwill)

Question 8

Equity income

Answer 8

• associate continue to report at BV
• investor report at FV
• this is how FV differentials are taken into consideration

Question 9

How to calculate equity income

Answer 9

Associate net income
x ownership %
= share of associates net income
+ / - FV differential (amortization) net of tax (reduce the FV difference by the total FV differential x tax rate)
+ realized intercompany G/L of prior years, net of tax
- unrealized intercompany G/L in current year, net of tax
= Equity income

Question 10

Intercompany transactions

Answer 10

• when one company sells to the other and all the goods are not sold during the current year, the earnings should not be recognized
• the year that intercompany sale takes place: reduce equity income
• the year that inventory sold to third party: increase equity income
• the unrealized profit in inventory that must be eliminated at the end of the period: sales in ending inventory x gross profit x inventory ownership %

Question 11

ASPE differences

Answer 11

• under ASPE when there is significant influence there is choice of equity method or cost method (IFRS = equity only)
• under ASPE, if the shares are public shares, there is choice to report at equity or FV method (IFRS = equity only)