KCB WEEK 5 (SUN) - ASSOCIATES & JVS

Question 1

Notes on ‘Associates’

Answer 1

Over which investor has significant influence – not a sub/interest in a JV
Dealt with by IAS28
‘Significant influence’ – contribute to financial/operating policy decisions or joint control over them
Assumed where shareholding of 20-50

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Question 2

IAS28 re associates

Answer 2

• Representation on BoD or equiv
• Participation in policy-making
• Material transactions between investor and investee
• Interchange of management personnel
• Provision of essential technical information

Question 3

IAS28 Equity Method (aka one line consolidation)

Answer 3

• Method initially recognises investment in an associate or JV in the investors’ SOFP at cost.
• It adjusts carrying amount thereafter with the change in investor’s share of the post-acq profit or loss of the investee.
  Ex. I buy 1st year – 40% shares for £100m (cost value)
  MY SOFP – investment in associate £100m
  FY – Associate makes £60m profit
  40% of 60m = £24m after 1 year
  Value of investment has gone up: £100m + £24m (group share) = £124m
  FY subsidiary makes *£80m profit *
  40% of £80m = £32m
  = £124m + £32m = £156m
• Value of investment is cost plus group’s share of the investee’s post-acquisition profits or losses less any impairment losses of the investee
  Changes in investee OCI such as revaluation may also need to be adjusted
• If associate pays a dividend in cash – dividend value is reduce*d** from investment value as value is now received by investing company bank account - dividends are excluded from the statement of profit or loss and OCI as this would be double counting.
• Transactions such as sales or purchases between group companies and the associate or joint ventures are not
  normally eliminated: they will remain part of the consolidated figures in the consolidated statement of profit or loss and OCI. It is normal practice to adjust for the group share of any unrealised profit in inventory.

Question 4

KEY POINTS ON ASSOCIATES AND JOINT VENTURES

Answer 4

• Not controlled – associates and JVs may be made up to another date
• IAS28 allows latitude for differences in yr ends up to 3 months
• If year-end dates further apart – special accounts needed from associate or JV
• Any transactions ex. sales/purchases between group co’s and JV/associates – not normally eliminated, they remain part of the consolidated figures in the consolidated SPLOCI
• Normal practice – adjust for group share of any unrealised profit in inventory)
• IAS28 – equity method will be discontinued where significant influence/joint control if investor’s interest changes to achieve control, as it would become a subsidiary at this point.

Question 5

IAS 28 if significant influence or control lost

Answer 5

As per IAS 28, the equity method is discontinued when significant influence or joint control is lost or if the investor’s
interest changes to achieve control. At this point, the associate or joint venture will become a subsidiary.
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Question 6

Calculating ‘carrying amount of an investment in a JV or associate as per IAS28 equity method

Answer 6

Cost of investment X
Group percentage share of post-acquisition profits or losses and other comprehensive income (since acquisition) X
Less: impairment losses (X)
Less: Group percentage share of unrealised profits (when the investor is the seller) (X)
–
X

Question 7

What is a joint venture? (IFRS11)

Answer 7

Businesses often go into partnership with other businesses on profit-raising ventures under joint ventures, which are
dealt with in IFRS 11 (Joint Arrangements). A joint venture is a business arrangement whereby the parties that have joint
control of the arrangement agree to pool their resources and expertise to achieve a particular goal. They have joint rights
to the assets and obligations for the liabilities relating to the arrangement. The risks and rewards of the enterprise are
also shared.

Question 8

Reasons behind forming a JV

Answer 8

• business expansion
• development of new products
• moving into new markets, such as overseas

Question 9

Reporting requirement for joint ventures?

Answer 9

The parties to a joint venture must recognise their interest in a joint venture as an investment and account for it using the
equity method in accordance with IAS 28.

Question 10

What would the effect of a loss-making associate or joint venture be on the investor company’s financial statements?

Answer 10

A loss-making associate or joint venture will have a negative impact in the investor’s statement of financial position. Any additional losses after the investor’s interest is reduced to zero are provided for and a liability is recognised, only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.

If the associate or joint venture subsequently reports profits, the investor will resume recognising its share of
those profits only after its share of the profits equals the share of losses not recognised.