ADVANCED

CORPORATE REPORTING

Associates and Joint Ventures

Investment, Associate or Subsidiary

In general we would expect that if the investor owns:

1 - 20% of the shares the holding will be an investment (no

control, just held for dividends/capital growth)

20 - 50% of the shares the holding will be an associate

Over 50% of the shares the holding will be a subsidiary

BUT these presumptions may be rebutted by other evidence of

influence or control.
What makes a subsidiary?
A group will exist where
one company controls
another company

Control is normally
achieved by the parent
company owning 50% or
more of the VOTING
RIGHTS of the subsidiary
 Definition of Control
The definition of control has 3 elements
ALL of which must be present
Exposure or rights to
Power over the investee
variable returns from the
from existing rights
investee
The ability to use power to
affect the amount of the
investors return that the investor
receives
Associate – IAS 28 (Revised)

An entity, in which an investor has significant

influence and which is neither a subsidiary nor
a joint venture of the investor

Significant influence is the power to participate

in the financial and operating policy decisions
of an entity in which an investment is held but is
not control or joint control over those policies
 Investment
Any investment which is held
for the increase in wealth but
which does not fall into any of
the previous categories – comes
under the Accounting of
Financial Instruments in IFRS 9
 Associates

Parent
Significant Influence
Control
>50% 20-50% Voting Rights

Subsidiary Associate
IAS 28 (revised)
Equity Accounting
Accounting Treatment - Associates

IAS 28 requires the use of ‘the equity method’ in the group

accounts

Statement of Financial Position heading ‘Investment in Associate’

Cost of investment PLUS share of profits since acquisition less any

impairment of the associate.

In the Statement of Comprehensive Income show the parent’s share

of the associate’s profit after tax less any current year impairments
Goodwill and Impairment losses

Goodwill of an associate is not accounted for separately under the equity method
of Accounting.

If, at the date of acquisition, there is an excess of the cost of the investment over
the investing company’s share of the fair value of the net assets of the associate,
then this goodwill is not calculated separately – it is included in the carrying
amount of the investment as it is inherent in the cost of the investment

As Goodwill is not separately recognised, it is not tested for impairment.

However, the carrying amount of the investment in Associate as a whole is
considered for impairment. Any impairment will reduce the Investment in
Associate and reduce consolidated reserves
 Equity Accounting

Consolidated Statement of Financial Position

Non-current assets £
Investment in associate X

Working
Cost of Investment X
P’s share of S’s post acquisition profits X
Impairment losses X
Investment in Associate X
 Consolidated Statement of Financial Position as at ....

Non-current assets £
PPE (P + S) X
Goodwill (S only) X
Investment in associate (A) X
X
Current assets (P + S) X

Total assets X

Equity
Share capital (P only) X
Retained earnings (Include A) X
X
Non-controlling interest (in S) X
X
Liabilities
Non-current liabilities (P + S) X
Current liabilities (P + S) X
Total equity and liabilities X
Equity accounting in the Consolidated Statement
of Comprehensive Income

Show share of associate’s profit after tax

as one line immediately before the pre-
tax profit

Do not include any dividends received

from the associate but leave any interest
income/expense unaltered
Statement of Comprehensive Incomefor the year ended .....(date)

£
Revenue (P + S-intergroup sales with S) X
Cost of sales (P + S-intergroup sales (S) + PUP with S) (X)
Gross Profit X
Distributions costs (P + S) (X)
Administration expenses (P + S +impairment) (X)
Operating profit X
Finance cost (P + S) (X)
Share of profit of associate (Share of A’s PAT less any
impairment of A) X
Profit before tax X
Income tax expense (P + S) (X)
Profit for the year X
Other comprehensive income X
Total comprehensive income X
Attributable to: £
Non-controlling interests (S only) X
Parent shareholders X
Associates and PUP’s

PUP = A% x Unrealised Profit

on Goods in Inventory
 Associates and PUP’s

Parent sells to Associate sells to

Associate Parent

Reduce the Investment in Associate Reduce Group Inventory by A% of

Line by A% of the PUP the PUP

Reduce A’s Retained Earnings by

Reduce Group Reserves by PUP
PUP (Group share only)

Increase cost of sales in

Reduce share of profits of associate
consolidated Income statement by
by the group share of the PUP
group share of PUP
 Joint ventures (IFRS 11)

A contractual arrangement whereby two or

more parties undertake an economic activity
which is subject to joint control

There are three common types of joint

venture: jointly controlled operations, assets or
entities. The first two mainly require
disclosure and separate accounting records
may not be kept.
Accounting Treatment - Joint ventures

In the consolidated accounts jointly

controlled entities should be accounted for
using the equity method according to IAS 28
(Revised)

(Preferred method used to be proportional

consolidation – why was this changed?)
 Approach to Questions
1. Group structure
2. Set up Proformas and deal with intergroup adjustments
3. Do Net assets working for subsidiary
3. Calculate Goodwill for any subsidiary
4. Non-controlling interest in subsidiary
5. Investment in associate / JV = Cost of Associate/JV
plus share of post acquisition profits less any
impairment
6. Group Retained Profits
 Lecture Example
• P Group
Solution
P Group Consolidated statement of financial position as at 31 October 2018.

£ £
Non-current assets
Goodwill (W3) 177.8
Property, plant and equipment (959 +980) 1,939.00
Investment in associate (W6) 298.2
2,415.00
Current assets
Inventory (380 + 640) 1,020.00
Receivables (190 + 310) 500
Bank (35 + 58) 93
1,613.00
4,028.00
Equity
Ordinary £1 shares (P only) 1,120.00
Retained earnings (W5) 1,832.60
2,952.60
Non-controlling interest (W4) 288.4
3,241.00
Current liabilities
Trade payables (150 + 480) 630
Taxation (91 + 66) 157
787
4,028.00
Barbie Consolidated Income Statement for the year ending 31st Dec 2017

£'000s
Revenue (385+100) 485
Cost of sales (185+60+0.6) 245.6
Gross Profit 239.4

Operating Expenses (50+15+3) 68

Operating Profit 171.4

Share of Profits of Associate (W2) 4.0

Profit Before Tax 175.4

Tax (50+12) 62

Profit for the Year 113.4

Attributable to
£'000s
NCI 0
Parent 113.4
113.4

£'000s
Share of Profits of Associate (0.3 x 20) 6

Impairment -2
4.0