Investments in associates Flashcards
ASPE and IFRS handbook
IAS 28
ASPE 3051
Equity method when to use (IFRS)
When joint control or significant influence
Joint control
Share control and decisions
Significant influence
Influence financial and operating but cannot control decisions without others (20%-50% of voting shares)
or represent on BOD (up to 20% of seats)
Or if all other shares are widely held
or influence material transactions
Initial measurement (equity method)
DR investment in
CR cash
at amount paid
Subsequent measurement (equity method)
To record income: Income of assoc x ownership
DR Investment in
CR Equity income
To record dividends paid: Dividends declared x ownership
DR Cash
CR Investment in
Acquisition differential
Purchase price - Book value of associates net assets
FV differential
Book value - fair value
Deferred income taxes
Opposite of FV diff x tax rate
Goodwill
Acquisition Differential (PRICE - BV)
+/- FV Differential (BV - FV)
+/- Deferred taxes (opposite)
= Goodwill
Goodwill is basically the Purchase price - FV of net assets
Assets = positive Liabilities = negative
Intercompany transactions
Unrealized profits must be eliminated from profits. These are the amounts that have not been resold to a third party
Realized profit
Amount sold in c/y that was o/s at prior year end x gross profit x AFTER tax rate x ownership %
Unrealized profit
Amout still on hand at y/e x gross profit x AFTER tax rate x ownership
Equity income
Share of net income \+ realized - unrealized \+/- FV diff amort \+/- DIT on FV amort (opposite) = equity income
Why do we get an acquistional differential?
- The Fair value of net assets is higher than BV
2. The company has goodwill meaning it has expected value in its future performances ie from a loyal customer base etc
