Set 5 FR 25 Investments in Associates Flashcards
Define joint control of a business
Contractual sharing of control of arrangement - decisions require unanimous consent of parties sharing control.
How are investments measured if joint control is confirmed to provide rights to net assets of arrangement?
Equity method is used.
Define significant influence
Where an entity can influence and participate in decision-making, but does not have control. Typically between 20-50% of shares.
Sometimes parties can have significant influence without 20-50% control. When?
Represented on board of directors Participation in policy-making processes Material transactions between investor and associate Interchange of managerial personell Provision of technical info
Initial measurement of equity investments
Cost
Subsequent measurement - how are dividends sent from investee to investor accounted for? journals?
Add % share of investment of net income
Deduct % share of dividends received during period
Dr Investment (Net Income) Cr Equity income
Dr Cash (Dividends) CR Investment
Why are dividends not treated as revenue?
They are taken from retained earnings and the net income has already been recognized in the books of the “owner”.
How to calculate goodwill and acquisition differential
Acquisition price
- BV of associate’s net assets x ownership %
= acquisition differential
+/- FV differences x ownership % (NET OF TAX - ALWAYS INCLUDE DEFERRED TAXES)
= Goodwill (+ = goodwill, - = negative goodwill)
FV differences - how to calculate
BV - FV
How does associate do their FS? How is this different from the aquirer?
at BV - same way as before. Acquirer does it at FV.
How to calculate amount of equity income to recognize
Associate net income
x Ownership %
= Share of associate’s income
+/- FV differential amortization, NET OF TAX
+ Realized i/co profits/gains (or losses) from PRIOR YEAR, NET OF TAX
- Unrealized i/co profits/gains (or losses) from CURRENT YEAR, NET OF TAX
= EQUITY INCOME
Why is inventory not sold to outsiders removed from equity income?
The earnings process is not complete
Formula for calculating unrealized profit in inventory
Sales in ending inventory x Gross Profit % x Investor ownership %
How is unrealized inventory accounted for?
Previous years when sold - realized (net of tax) = added to equity income
Current years not sold - unrealized (net of tax) = deducted from equity
ASPE differences
Where significant influence exists, can use either equity or cost method. If shares are publicly traded with quoted price, choice is equity or FV method.
