week 11 Flashcards
when does an equity investment exist
where the investor has acquired an equity instrument
equity instrument
any contract that evidences a residual interest in
an entity’s assets after deducting all its liabilities
(e.g. an ordinary share in a company).
attribute of equity instrument
the holder is
not entitled to a fixed rate of return.
An equity investment
gives the investor
an ownership interest and a share of profits.
The correct accounting treatment for equity investments is determined after considering a number of factors:
- What is the nature of the investor’s operations?
- Is the investment held for trading purposes?
- What is the extent of ownership interest or influence by the investor in the investee?
Factors to consider when accounting for equity investments
1. nature of investor’s operations
entities operating in the general insurance industry, the life insurance industry and those deemed to be superannuation funds are required to value their investments (including their equity investments) at fair value or net market value (for superannuation funds) pursuant to industry-specific accounting standards.
Associate
an investee over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Significant influence:
power or capacity to participate in investee’s financial and operating policy decisions (but not control or joint control):
when does significant influence exist
where investor holds 20% or more of the investee’s voting power (but not only then).
Control:
exposure or rights to variable returns from the involvement with the investee and the ability to affect those returns through the power over the investee:
When does control exist
exists where investor holds 50% or more of the investee’s voting power (but not only then)
Other indicators of significant influence
- representation on board of directors;
- participation in policy-making processes;
- material transactions between parties;
- interchange of managerial personnel;
- provision of essential technical information.
Joint arrangement
joint ventures and joint operations
joint venture
joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement
Joint control:
exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control
Joint ventures are accounted for using
equity method.
Equity method can also be discontinued when
the effect of equity-accounting losses, revaluation decrements or impairment losses causes the carrying amount of the investment (including other long-term interests in the associate besides the equity investment, such as preference shares, long-term receivables, loans) to fall below zero:
Equity method discontinued
if the associate will probably
if the associate will probably generate in the future profits or revaluation increments, the investment in associate can be increased by the investor’s share of profits or increments
only after the increases offset the losses and decrements not recognised following suspension of the equity method.
What is investor holds less than 20% voting power in investee
presumed they do not have significant influence over the investee
key feature of joint arrangement
joint control
joint control
contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
key element of joint control
at least two investors who have shared control of the investee.
