Investments in Associates

Question 1

Associate

Answer 1

an entity over which an investor has significant influence

Question 2

Significant Influence

Answer 2

entity can participate in and influence financial and operating policy decisions of an investee but does not have control

ownership typically between 20% - 50%
also consider:

board representation
participation in policy-making processes
material transactions between investor and associate
interchange of managerial personnel
provision of technical information

Question 3

Joint Control

Answer 3

contractually agreed sharing of control of arrangement, where decisions require unanimous consent of parties sharing control

equity method of accounting when joint control provides rights to net assets of the arrangement

Question 4

Acquisition Differential

Answer 4

difference between purchase price and book value (BV) of associate at date of purchase

Question 5

What is acquisition differential composed of?

Answer 5

difference in FV and BV of identifiable assets and liabilities

goodwill represent the expected value of future financial performance and = purchase price - FV of identifiable assets and liabilities

Question 6

Equity Method

Answer 6

initially recognized at cost

subsequent measurement: % ownership
ADD: equity income for the period

DEDUCT: dividends received from associate during the period

Question 7

Equity Income

Answer 7

Associate’s net income x % ownership = Share associate’s income
+/- FV differential amortization, net of tax
+ Realized intercompany profits/gains from PY, net of tax
- Unrealized intercompany profits/gains in CY, net of tax
= Equity Income

Question 8

Unrealized Profit in Inventory that mus be Eliminated at the End of any Period

Answer 8

Sales in ending inventory x % gross profit x % investor ownership