Topic 1 - Inter-Entity Relationships and Accounting for Investments

Question 1

What are four examples of inter-entity relationships?

Answer 1

Investment, Associate, Subsidiary and Joint arrangement

Question 2

In which inter-entity relationship is there control?

Answer 2

Subsidiary and Joint arrangement

Question 3

Why do we need to identify the ‘reporting entity’ for accounting purposes?

Answer 3

• If companies have special relationships (e.g. operate as a ‘group’), this should be reflected in financial reports.
  – Improve information-usefulness of financial reports
  – Prevent manipulations of financial statements

Question 4

What are two examples of manipulations of financial statements?

Answer 4

Inflation in sales, debt defeasance.

Question 5

How is an asset initially measured?

Answer 5

Initial measurement (para. 5.1.1):
at cost (fair value of acquisition)
– + direct acquisition costs capitalized (unless measured at FV through P&L)

Question 6

When can an entity measure asset through OCI (i.e. capitalise acquisition costs)?

Answer 6

Can ONLY do so if the equity instruments are not “held for trading”, i.e. Held for trading = e.g. short-term or speculative selling / purchasing

Question 7

If measured through OCI, where does the debit entry for brokerage costs go?

Answer 7

It is debited to the shares account.

Question 8

when revaluation takes place, how must OCI measurement be taken into account?

Answer 8

remember to use the total share account balance when calculating change due to revaluation.