associate co. questions

8/16/2019 Associate Co. Questions

1/3Page 1 of 3 Accounting for Associate Companies By Leonard Sigei_0723 501798

ASSOCIATE (IAS 28)

An associate is an entity (including an unincorporated entity such as a partnership) over which the investor

has significant influence and that is neither a subsidiary nor an interest in a joint venture.

Significance Influence

Significant influence is the power to participate in the financial and operating policy

decisions of the investee but is not control or joint control over those policies.

For examination purposes the significant influence test will centre on the percentage shareholding of one

company in another.

IAS 28 provides that:

(a) If an investor holds, directly or indirectly, ≥ 20% of the voting power it is presumed that the investor

has significant influence; therefore associate status will be presumed unless it can be demonstrated

otherwise.

(b) If an investor holds, directly or indirectly, < 20% of the voting power it is presumed that the investor

does not have significant influence; therefore no associate status, again unless demonstrated otherwise.

IAS 28 states significant influence can be shown by:

- Representation on the board of directors

- Participation in policy making processes

- Material transactions between the investor and investee

- Interchange of managerial personnel

- Provision of essential technical information

Accounting treatment

Investor’s separate financial statements

The investment is initially recognised at cost.

From then on, the associate can be;

(a) Carried at cost (recognising dividend income in the income statement); or

(b) Accounted for as an available-for-sale financial asset as described in IAS 39 Financial Instruments:

Recognition and Measurement .

An available-for-sale financial asset in this case represents an investment in shares in another company not

held for short-term profit-making by trading those shares. It should be held at fair value.

In this course we will assume that the investment remains in the parent's separate financial statements at its

initial fair value, i.e. at cost.

Points to note

- Because the investment is normally retained at its historical cost there will be no reflection of any

increase in value of the associate in the investing company's balance sheet. By showing only dividend

income in the income statement, no account is taken of the investing company's share of retained profits

of the associate.

- Remedy

In the consolidated financial statements only, account for what the business actually owns as a result of

its significant investment, i.e. use equity accounting.



Consolidated financial statements

An investment in an associate is accounted for in consolidated financial statements using the equity method .

Equity Method

Statement of financial position

Non-Current Assets (Workings)

Investment in Associate

Initial cost xxAdd/less: Post acquisition share of profit/loss (before dividends) xx/(xx)

Add/less: Post acquisition share of gain/losses not on the I/S xx/(xx)

Less: Post acquisition dividends received (to avoid double counting) (xx)

Less: impairment losses on associate to date (xx)

xx

In practice, at this level, it is quicker to calculate the figure in the following way as you

may not be given profit and dividend information for each year since acquisition:

Initial cost xx

Add/less: Share of Post-acquisition reserves xx/(xx)

Less: impairment losses on associate to date (xx)

xx

Income Statement

A's profit for the period x Group's percentage(shown before group's profits before tax) xx

Points to note

(a)

An associate is not a group company; therefore no cancellation of 'intragroup' transactions should beperformed. However, IAS 28 states that the investor's share of unrealised profits and losses on

transactions between investor and associate should be eliminated in the same way as for group

accounts.

This is done as follows:

Dr Retained earnings of UP x A%

Cr Investment in associate UP x A% (if the associate holds the inventories)

Cr Group inventories UP x A% (if the parent holds the inventories)

(b) Uniform accounting policies should be used, or adjustments must be made.

(c) The most recent available financial statements of the associate are used. Where the reporting dates are

different, adjustments are made for the effects of significant transactions in the intervening period. Thedifference between parent and associate reporting dates must be no more than 3 months.

(d) After application of the equity method, any impairment losses are considered re the investor's net

investment in the associate as a whole.



EXAMPLE 1

Statement of financial position

Portus purchased a 60% holding in Sanus on 1 January 20X0 for Sh.6.1m when the retained earnings of

Sanus were Sh.3.6m and a 30% holding in Allus on 1 July 20X1 for Sh.4.7m when its retained earnings

were Sh.6.2m. At 31 December 20X4 the statement of financial position of Portus, Sanus and Allus were as

follows:

Portus Sanus AllusSh."000" Sh. "000" Sh. "000"

Property, plant and equipment 42,100 15,800 16,100

Investments in Sanus and Allus (at cost) 10,800

52,900 15,800 16,100

Current assets 7,900 3,700 5,600

60,800 19,500 21,700

Share capital 3,000 2,400 2,800

Retained earnings 41,600 10,600 9,200

44,600 13,000 12,000

Liabilities 16,200 6,500 9,70060,800 19,500 21,700

An impairment test conducted at the year-end revealed cumulative impairment losses of Sh.0.7m in respect

of the investment in Allus, of which Sh.0.2m relates to the current year. This loss is not reflected in Portus'

separate financial statements as the investment is not impaired below its original cost. No impairment losses

were found to be necessary on the investment in Sanus.

During the year Allus sold goods to Portus for Sh.3m at a profit margin of 20%. Sh.1m of these goods

remained in Portus' inventories at the year end.

Required

Prepare the consolidated balance sheet of the Portus Group as at 31 December 20X4.

EXAMPLE 2

Income statement

Continuing from lecture example 1, the income statements of Portus, its subsidiary Sanus and its associate

Allus the year ended 31 December 20X4 are as follows:

Portus Sanus Allus

Sh. "000" Sh. "000" Sh. "000"

Revenue 28,400 7,200 9,600

Cost of sales (17,100) (2,800) (5,800)

Gross profit 11,300 4,400 3,800

Expenses (4,400) (1,800) (1,600)

Finance income 100 - 100

Finance costs (400) (200) (300)

Profit before tax 6,600 2,400 2,000

Income tax expense (2,100) (700) (600)

Profit for the period 4,500 1,700 1,400

Required

Prepare the consolidated income statement for the Portus Group for the year ended 31 December 20X4.

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