Session 6: Associates

Accounting for Associates

Session 6
AC2091: Financial Reporting

Learning Outcomes
• describe associates and joint ventures and
how to account for them in consolidation
• prepare consolidated profit and loss or income
statements using the acquisition, equity and
proportional consolidation methods

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 Session 6: Associates

Relevant Accounting Standards

o IFRS 3 Business Combinations (revised 2008)
o IFRS 10 Consolidated Financial Statements
(from 2013 onwards)
o IFRS 9 Financial Instruments
o IAS 27 Consolidated and Separate Financial
Statements
o IAS 28 Investments in Associates and Joint
Ventures

Investments in Associates
• Associate
– Entity over which the investor has
but not control or joint control
– Includes unincorporated entities such as
partnership
– Not subsidiary nor an interest in joint venture
[IAS 28]

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 Session 6: Associates

Investments in Associates
• Significant influence
– Power to participate in the financial and
operating policy decisions but not control or
joint control over these policies
– Ownership of substantial equity interest
– Holds, directly or indirectly,
of the voting power of the investee
– Upper limit not prescribed in IAS 28, but
practically set at
o usually qualifies investee as subsidiary

Investments in Associates
• Significant influence
– Besides shareholding, significant influence may
be evidenced by other indicators. E.g.:
o Representation on the board of directors
o Participation in investee’s policy making process
o Interchange of managerial personnel
o Provision of essential technical information
o Material transactions between investor and
investee

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 Session 6: Associates

Investments in Associates
• Equity method of accounting
– IAS 28 requires that an investment in
associates to be accounted for in consolidated
financial statements using the
– Cost/fair value measurement in separate
financial statements
• Non-current asset recognized at

• Dividend income recognized when right to

receive dividend is established

Investments in Associates
• Equity method of accounting
– Exemptions from equity method
o Entity is exempted from presenting consolidated
financial statements under IFRS 10
 Parent is a wholly-owned or partially-owned subsidiary
and owners do not object to it not preparing
consolidated financial statements
 Its securities are not publicly traded
 It is not in the process of issuing securities
 Ultimate/immediate parent publishes consolidated
financial statements and comply with IFRS

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 Session 6: Associates

Investments in Associates
• Equity method of accounting
– Exemptions from equity method
o Entity is venture capital organization, mutual
fund, unit trust and similar entities may elect to
measure investment in associates as “fair value
through profit or loss” as per IFRS 9 Financial
Instruments
o Investment acquired and classified as “held for
sale” in accordance with IFRS 5 Non-current
Assets Held for Sale & Discontinued Operations

Investments in Associates
• Equity method – accounting treatment
– Investment initially recorded at cost and
subsequently adjusted for investor’s share of
increase or decrease in
– Investment income consists of the investor’s
of the
investee’s periodic profit or loss

Investment
Share of
in
Associate's
Associates
Net Assets
account

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 Session 6: Associates

Investments in Associates
• Investment in associate
– in consolidated balance sheet

Investment in associate account

Carrying amount (opening balance)
Add: Share of associate’s profit & other comprehensive income*
Less: Dividends received & impairment
Carrying amount (closing balance)

– Cost of investment + share of associate’s post

acquisition profits and reserves - impairment

* nett of any adjustments (e.g. unrealized profits, tax paid etc.)

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Investments in Associates
• Equity method – accounting treatment
– Share of investee’s loss is restricted to carrying
amount of investment (i.e. nil balance)
– If other account balances due from/to
associates (e.g. long-term loans), share of loss
is restricted to interest in associate
o Interest in associate = investment in shares +
long-term interests
– Subsequent profit earned by associate
recognized after including share of losses not
recognised

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 Session 6: Associates

Investments in Associates
• Equity method – accounting treatment
– Goodwill is included in carrying amount of
investment and
– Investor should test the carrying amount for
impairment as per IAS 36
No
– When recoverable amount of asset increases
subsequently, the impairment amount is
reversed (including goodwill impairment)

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Investments in Associates
• Accounting treatment & presentation
– Financial statements not added line-by-line
– Share of shown as
single item in consolidated income statement
Share of
– Share of associate’s tax added to total tax
expense for the year
– Share of net assets shown as single item in
consolidated balance sheet
Investment in associate

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 Session 6: Associates

Investments in Associates
• Intercompany transactions
– Intercompany account balances from
transactions between parent and associate

– Unrealised profits from both upstream and

downstream transactions eliminated partially
Only investor’s share in intercompany profits
and losses is eliminated
– Dr
Cr

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Illustration : Associates
The financial statements of P Ltd and A Ltd as at 31 Dec
20X9 are as follows:
Balance sheets as at 31 Dec 20X9 P Ltd A Ltd
£’000 £’000
Property, plant & equipment 420 150
Investment in A Ltd 200 -
Trade receivables 180 120
Bank 70 60
870 330
Share capital (£1 each) 400 120
Retained earnings 320 130
Trade payables 150 80
870 330

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 Session 6: Associates

Illustration : Associates
Income Statements for the year ended P Ltd A Ltd
31 Dec 20X9
£’000 £’000
Sales 500 300
Cost of Sales 200 100
Gross profit 300 200
Dividend income from A Ltd 20 0
Other income 130 20
Operating expenses 100 80
Profit before tax 350 140
Tax 30 20
.Profit after tax 320 120
Dividends paid 110 50
Profit for the year 210 70
Retained profit brought forward 110 60
Retained profit carried forward 320 130

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Illustration : Associates
P Ltd acquired 40% interest in A Ltd on 1 January 20X6 for
total consideration of £200,000. The retained earnings for A
Ltd on the acquisition date were £30,000.

During the year ended 31 December 20X9, P sold goods to A

for £80,000. The closing inventory of A Ltd included £50,000
of these goods. P earns a margin of 10% on all its sales.
Trade receivables and payables for P and A included £40,000
owed by A to P. Other income revenue of A comprises
£20,000 gain on sale of machinery carried at £10,000 to P in
August 20X9.

Required:
Prepare a consolidated income statement for year ended 31
December 20X9 and balance sheet of P Ltd as at the same
date.

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