INVESTMENTS IN ASSOCIATES

IAS 28 Accounting for Investments in Associates and Joint Ventures defines an

associate as “an entity over which the investor has significant influence and that is
neither a subsidiary nor an interest in a joint venture.”
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.
Significant influence is assumed with a shareholding of 20% to 50%.

ACCOUNTING FOR ASSOCIATES

Associates are accounted for using the ‘equity method', whereby the investment is
initially recorded at cost and adjusted thereafter for the post-acquisition change in the
investor's share of the net assets of the associate. In other words, the value of the
investment is the cost plus the group's share of the associate's profits and losses.
The effect of this is that the consolidated statement of profit or loss is:
 100% of the income and expenses of the parent and subsidiary company on a
line-by line basis.
 One line ‘share of profit of associates’ which includes the group share of any
associate’s profit after tax.
In the consolidated statement of financial position:
 100% of the assets and liabilities of the parent and subsidiary company on a line-
byline basis.
 An ‘investments in associates’ line within non-current assets which includes the
cost of the investment plus the group share of post-acquisition reserves.

The associate is included as a non-current asset investment as follows:

Investment in Associate
₦
Cost x
Share of post-acquisition profits x
Less: impairment losses (x)
Less: URP (when the parent sells) (x)
X
The group share of the associate’s post-acquisition profits or losses and the
impairment of associate investment will also be included in the group retained
earnings calculation.

FAIR VALUES AND THE ASSOCIATE

If the fair values of the associate’s net assets at acquisition are materially different
from their carrying amounts, the net assets should be adjusted in the same way as for
a subsidiary.

BALANCES WITH THE ASSOCIATE

Generally, the associate is considered to be outside the group, therefore balances
between group companies and the associate will remain in the consolidated statement
of financial position.Any payables and receivables between the associate and the
group will remain in the consolidated statement of financial position.

UNREALISED PROFIT IN INVENTORY

Unrealised profit on trading between the group and associate must be eliminated to
the extent of the investor’s interest (i.e URP * % of holding).
Adjustment must be made for unrealized profit in inventory as follows:
a) If the parent sells (downstream):
Dr Group retained earnings (share of associate’s profit)
Cr Investment in associate
b) If the associate sells (upstream):
Dr Group retained earnings (share of associate’s profit)
Cr Consolidated inventory

DIVIDENDS FROM ASSOCIATES

Dividends from associates are excluded from the consolidated income statement; the
group share of the associate's profit after tax for the year is included instead.

PRACTICE QUESTIONS ON INVESTMENT IN ASSOCIATE

Question 1
P acquired 80% of S on 1 December 2004 paying $4.25 in cash per share, and a
further $500,000 in four years. P and S's cost of capital are 10% and 11% respectively.
The balance on S's retained earnings on 1 December 2004 was $870,000. On 1 March
2007, P acquired 30% of A's ordinary shares.
The consideration was settled by share exchange of 4 new shares in P for every 3
shares acquired in A. The share price of P at the date of acquisition was $5.00. Only
the cash consideration has been recorded by P.

The statement of financial position of the three companies as at 30 November 2007 is

as follows:
P S A
$000 $000 $000
Non-currents assets:
Property, plant and equipment 1,750 1069 1050
Investment 1,825
Current assets:
Inventory 550 230 200
Receivables 300 340 400
Cash 120 50 140
4,545 1,689 1,790
Equity:
Share capital @$1 per share 1,800 500 250
Share premium 250 80 ---
Retained earnings 1,145 409 1,200
3,195 989 1,450
Non-current liabilities:
10% loan notes 500 300
Current liabilities:
Trade payables 520 330 250
Income tax 330 70 90
4,545 1,689 1,790
Additional information:
 As at 1 December 2004, plant in the books of S was determined to have a fair
value of 50,000 in excess of its carrying value. The plant had a remaining life of 5
years at this time.
 During the post-acquisition period, S sold goods to P for $400,000 at a mark-up
of 25%. P had a quarter of these goods still in inventory at the year-end.
 In September, A sold goods to P for $150,000. These goods had cost A $100,000.
P had $90,000(at cost to P) in inventory at the year-end.
 As a result of the above inter-company sales, P's books showed $50,000 and
$20,000 owing to S and A respectively at the year-end. These balances agreed
with the amounts recorded in S's and A's books.
 The non-controlling interest at measured using the fair value method. The fair
value of the NCI at the date of acquisition was $368,000.
 Goodwill has been impaired by $150,000 at the reporting date. An impairment
review found that the investment in the associate was to be impaired by $15,000
at the year-end.
 A's profit after tax for the year is $600,000.
Required; prepare the consolidated statement of financial position as at 30 November
2007.

Question 2
The statement of financial position of J co and its investee companies, P co and S co
at 31st December 20x5 are shown below
J co P co S co
$000 $000 $000
Non-current assets
Freehold property 1950 1250 500
Plant and machinery 795 375 285
Investments 1500
4,245 1,625 785
Current asset
Inventory 575 300 265
Trade receivables 330 290 370
Cash 50 120 20
5,200 2,335 1,440
Equity
Share capital $1 per share 2,000 1,000 750
Retained earnings 1460 885 390
3,460 1,885 1,140
Non-current liabilities
12% loan stock 500 100
Current liabilities
Trade payable 680 350 300
Bank overdraft 560 - -
5,200 2,335 1,440
Additional information:
 J Co acquired 600,000 ordinary shares in P Co on 1 January 20x0 for $1,000,000
when the retained earnings of P Co were $200,000.
 At the date of acquisition of P Co, the fair value of its freehold property was
considered to be $400,000 greater than its carrying value in P Co's statement of
financial position. P Co had acquired the property in January 20x0 and the
building element (comprising 50% of the total value) is depreciated on cost over
40 years.
 J Co acquired 225,000 ordinary shares in S Co on 1 January 20x4 for $500,000
when the retained earnings of S Co were $150,000.
 P Co manufactures a component used by both J Co and S Co. transfers are made
by P Co at cost plus 25%. J Co held $100,000 inventory of these components at
31 December 20x5. In the same period J Co sold goods to S Co of which S Co
had $80,000 in inventory at 31 December 20x5. J Co had marked these goods up
by 25%.
 The goodwill in P Co is impaired and should be fully written off. An impairment
loss of $92,000 is to be recognized on the investment in S Co.
 Non-controlling interest is valued at full fair value. P Co shares were trading at
$1.60 just prior to the acquisition by J Co.

Required; prepare, in a format suitable for inclusion in the annual report of the J Co
group, the consolidated statement of financial position at 31 December 20x5.

Question 3
Hever has held shares in two companies, Spiro and Aldridge, for a number of years.
As at 31 December 20x4, they have the following statements of financial position:

Hever Spiro Aldridge

₦000 ₦000 ₦000
Non-current assets
Property, plant and equipment 370 190 260
Investments 218
588
Current assets
Inventories 160 100 180
Trade receivables 170 90 100
Cash 360 230 290
1278 610 830
Equity
Share capital (₦1 per share) 200 80 50
Share premium 100 80 30
Retained earnings 568 200 400
868 360 480
Non-Current Liabilities
Loan notes 310 190 280
Current liabilities
Trade payables 100 60 70
1278 610 830
The following information is relevant:
 The investments in the statement of financial position comprise Hever's
investment in Spiro (₦128,000) and in Aldridge (₦90,000).
 48,000 shares in Spiro were acquired when it had a retained earnings balance of
₦20,000. 15,000 shares in Aldridge were acquired when it had a retained
earnings balance of ₦15,000.
 When Hever acquired its shares in Spiro, the fair value of Spiro's net assets
equaled their book values with the following exceptions; -Property, plant and
equipment ₦50,000 higher -Inventories ₦20,000 lower. Depreciation arising on
the fair value adjustment to non-current assets since this date is ₦5,000.
 During the year, Hever sold inventories to Spiro for ₦16,000, which originally
cost Hever ₦10,000. Three-quarters of these inventories have been subsequently
sold by Spiro.
 No impairment losses on goodwill had been necessary by 31 December 20x4.
 It is group policy to value non-controlling interests at full fair value. The fair
value of the non-controlling interests at acquisition was ₦90,000.

Required; prepare the consolidated statement of financial position for the Hever group
(incorporating the associate).

Question 4
On October 31, 2013, Carolina paid ₦70,000 to acquire 40% of the share capital of
Kiwi (which became its associate). Draft financial statements of the two companies
for the year to October 31, 2017:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
OCTOBER 31 2017
Carolina Kiwi
₦000 ₦000
Operating profit 325 70
Dividend received from Kiwi 10 --
Profit before tax 335 70
Income tax expense (85) (15)
Profit for the Year 250 55

STATEMENT OF FINNCIAL POSITION AS AT OCTOBER 31, 2017

Carolina Kiwi
₦000 ₦000
Non-current asset
Property plant and equipment 800 400
Investment in Kiwi at cost 70 --
870 400
Current asset 390 145
1,260 545
Equity
Ordinary share capital 500 100
Retained earnings 605 360
1,105 460
Liabilities
Current liabilities 155 85
1,260 545

STATEMENT OF CHANGES IN EQUITY (RETAINED EARNINGS ONLY)

FOR THE YEAR TO OCTOBER 31, 2017
Carolina Kiwi
₦000 ₦000
Balance at October 31, 2016 355 330
Profit for the year 250 55
Dividend paid ---- (25)
Balance at October 31, 2017 605 360
The following information is also available:
 In the draft financial statements of Carolina, the company's investment in Kiwi
has been recognized at cost and the dividend received from Kiwi has been
recognized as income. The financial statements showed the situation as it would
be without application of the equity method, either in the year October 31, 2017
or in previous year.
 The retained earnings of Kiwi on October 31, 2013 were ₦50,000 and all of its
assets and liabilities were carried at fair value. None of the companies has issued
any share since that date.
 During the year to October 31, 2017 Carolina bought goods from Kiwi for
₦15,000, which had cost Kiwi ₦10,000. One-quarter of these goods were unsold
by Carolina at October 31, 2017.

Required; prepare the separate financial statements of Carolina for the year ended
October 31, 2017, incorporating the result of the associate Kiwi, using the equity
method of accounting.

Question 5
Below are the income statements of the Barbie group and its associated companies as
at 31 December 20X8
Barbie Ken Shelly
$000 $000 $000
Revenue 385 100 60
Cost of sales (185) (60) (20)
Gross profit 200 40 40
Operating expenses (50) (15) (10)
Tax (50) (12) (10)
Profit for the year 100 13 20

Additional information:
 Barbie acquired 45,000 ordinary shares in Ken a number of years ago. Ken has
50,000 $1 ordinary shares. Barbie also acquired 60,000 ordinary shares In Shelly
a number of years ago. Shelly has 200,000 $1 ordinary shares.
 During the year Shelly sold goods to Barbie for $28,000. Barbie still holds some
of these goods in inventory at the year end. The profit element included in these
remaining goods is $2,000.
 Non-controlling interests are valued using the fair value method.
 Goodwill and the investment in the associate were impaired for the first time
during the year as follows; -Shelly $2,000 -Ken $3,000. Impairment of the
subsidiary’s goodwill should be charged to operating expenses.

Required; prepare the consolidated income statement for Barbie including the results
of its associated company