week 11

Question 1

when does an equity investment exist

Answer 1

where the investor has acquired an equity instrument

Question 2

equity instrument

Answer 2

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).

Question 3

attribute of equity instrument

Answer 3

the holder is

not entitled to a fixed rate of return.

Question 4

An equity investment

Answer 4

gives the investor

an ownership interest and a share of profits.

Question 5

The correct accounting treatment for equity investments is determined after considering a number of factors:

Answer 5

1. What is the nature of the investor’s operations?
2. Is the investment held for trading purposes?
3. What is the extent of ownership interest or influence by the investor in the investee?

Question 6

Factors to consider when accounting for equity investments

1. nature of investor’s operations

Answer 6

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.

Question 7

Associate

Answer 7

an investee over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.

Question 8

Significant influence:

Answer 8

power or capacity to participate in investee’s financial and operating policy decisions (but not control or joint control):

Question 9

when does significant influence exist

Answer 9

where investor holds 20% or more of the investee’s voting power (but not only then).

Question 10

Control:

Answer 10

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:

Question 11

When does control exist

Answer 11

exists where investor holds 50% or more of the investee’s voting power (but not only then)

Question 12

Other indicators of significant influence

Answer 12

• representation on board of directors;
• participation in policy-making processes;
• material transactions between parties;
• interchange of managerial personnel;
• provision of essential technical information.

Question 13

Joint arrangement

Answer 13

joint ventures and joint operations

Question 14

joint venture

Answer 14

joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement

Question 15

Joint control:

Answer 15

exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control

Question 16

Joint ventures are accounted for using

Answer 16

equity method.

Question 17

Equity method can also be discontinued when

Answer 17

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:

Question 18

Equity method discontinued

if the associate will probably

Answer 18

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.

Question 19

What is investor holds less than 20% voting power in investee

Answer 19

presumed they do not have significant influence over the investee

Question 20

key feature of joint arrangement

Answer 20

joint control

Question 21

joint control

Answer 21

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.

Question 22

key element of joint control

Answer 22

at least two investors who have shared control of the investee.