Investments in Associates Flashcards
Monstor Inc. holds 23% of the shares of Alpha Inc. Would Monstor Inc. necessarily have significant influence over Alpha?
No - If the investor holds less than 20 percent of the voting interest in the investee, it is presumed that the investor does not have the ability to exercise significant influence, unless such influence is clearly demonstrated. <strong>On the other hand</strong>, the holding of 20 percent or more of the voting interest in the investee <strong>does not in itself confirm the ability to exercise significant influence.</strong>
What are examples of factors that would indicate 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. 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 30. Would ABC be allowed to utilize the statements of DEF which have a different year end for the purpose of applying the equity method under IFRS?
No - Under IFRS one is not allowed to use F/S of an associate with a year end more than 3 months different from the investor. Therefore the financial statements of DEF would have to be prepared as at December 31 for the purpose of using the equity method.
When the equity method is being applied, under what circumstances would an investor’s share of losses in excess of the carrying amount of its investment be recorded?
<strong><em><u>Comparison with ASPE</u></em></strong>\n\nUnder ASPE an investor’s share of losses in excess of the carrying amount of the investment is recorded if:\n\n(a) the investor has guaranteed the obligations of the investee; or\n\n(b) the investor is otherwise committed to provide further financial support to the investee; or\n\n(c) the investee seems assured of imminently returning to profitability.
ABC Inc. holds an investment in a publicly traded stock that is subject to significant influence and chooses not to use the equity method. Under ASPE how would the investment be measured?
It would be measured at its quoted value. As per HB Section 3051, when an investee’s equity securities are quoted in an active market, and the equity method is not used, the investment is valued at the quoted amount with changes in value from period to period recorded in net income.\n\n<p style="text-align: center;"><a>Return to Free Flashcards</a></p>
An investor sells inventory to a company subject to significant influence in which it holds a 25% interest for $100 and makes a profit of $40. The investor is using the equity method. The goods are still in the investee’s warehouse at year end. How much profit would the investor be allowed to recognize?
The investor would only be allowed to recognize $30 (i.e. 75% of the profits). This is due to the fact that any gain or loss that occurs would be recognized in income at the time of the transfer or sale only to the extent of the interests of the <strong>other non-related investors.</strong>\n
