IAS 28 Accounting for associates

Accounting for associates

Definition
• 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
Principles of equity accounting
• Equity accounting is a method of accounting whereby the
investment is initially recorded at cost and adjusted
thereafter for the post­ acquisition change in the investor’s
share of net assets of the associate.
 Accounting for associates
Principles of equity accounting
The effect of this is that the consolidated statement of
financial position includes:
• 100% of the assets and liabilities of the parent and
subsidiary company on a line by line basis
• an ‘investments in associates’ line within non­current
assets which includes the cost of the investment plus the
group share of post­acquisition reserves.
 Accounting for associates
Principles of equity accounting
The consolidated statement of profit or loss includes:
– 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.
 Accounting for associates
Equity method exemption
• the investment is classified as held for sale in
accordance with IFRS 5 or
• the parent is exempted from having to prepare
consolidated accounts on the grounds that it is itself a
wholly, or partially, owned subsidiary of another company
 Accounting for associates
Preparing the CSFP including an associate
$000
Cost of investment X
Share of post-acquisition profits X
Less: Impairment losses (X)
Less: PURP (P = seller) (X)
X
 Accounting for associates
Standard workings
(W1) Group structure
 Accounting for associates
Standard workings
(W2) Net assets of subsidiary
At the date of At the Post-
acquisition reporting date acquisition
$ $ $
Share capital X X -
Reserves:
Share premium X X -
Retained earnings X X X
X X X
 Accounting for associates
Standard workings
(W3) Goodwill – Subsidiary
Parent holding (investment) at fair value X
NCI value at acquisition X
X
Less:
Fair value of net assets at acquisition (W2) (X)
Goodwill at acquisition X
Impairment (X)
Carrying goodwill X
 Accounting for associates
Standard workings
(W4) Non-controlling interest (NCI)
NCI value at acquisition (as in W3) X
NCI share of subsidiary post-acquisition reserves (W2) X
NCI share of impairment (W3) (fair value method only) (X)
X
 Accounting for associates
Standard workings
(W5) Group retained earnings
Parent retained earnings (100%) X
Group % of sub's post-acquisition retained earnings X
Group % of assoc post-acquisition retained earnings X
Less: Impairment losses to date (S) (X)
Less: Impairment losses to date (A)
X
 Accounting for associates
Standard workings
(W6) Investment in associate company
Cost of investment X
Post-acquisition profits (W5) X
Less: Impairment (X)
Less: PURP (P = seller) (X)
X
 Accounting for associates
Fair values and the associate

If the fair value of the associate’s net assets at

acquisition are materially different from their book value
the net assets should be adjusted in the same way as for
a subsidiary.
 Accounting for associates
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.
• If a group company trades with the associate, the
resulting payables and receivables will remain in the
consolidated statement of financial position.
 Accounting for associates
Unrealised profit in inventory
Unrealised profits on trading between group and associate
must be eliminated to the extent of the investor's
interest .
(1) Determine the value of closing inventory which is the
result of a sale to or from the associate.
(2) Use mark­up/margin to calculate the profit earned by the
selling company.
(3) Make the required adjustments as below:
Dr Share of Associate's profit in P/L
(Group retained earnings (W5) in CSOFP)
Cr Investment in associate (W6)
 Accounting for associates
Unrealised profit in inventory
Unrealised profits on trading between group and associate
must be eliminated to the extent of the investor's interest
(1) Determine the value of closing inventory which is the
result of a sale to or from the associate.
(2) Use mark­up/margin to calculate the profit earned by the
selling company.
(3) Make the required adjustments as below:
Dr Share of Associate's profit in P/L
(Group retained earnings (W5) in CSOFP)
Cr Investment in associate (W6)
 Accounting for associates
Trading with the associate
• Generally the associate is considered to be outside the
group.
• Sales or purchases between group companies and the
associate are not normally eliminated and will remain part
of the consolidated figures in the statement of profit or
loss.
• Only P's share of the unrealised profit must be adjusted.
Regardless of which company sells to the other, this
should be adjusted from the share of the associate's
profit.
 Accounting for associates
Dividends from associates
Dividends from associates are excluded from the
consolidated statement of profit or loss; the group share of
the associate’s profit is included instead.