Acquisition method of accounting

Chapter 34 – Associates Page 452 8. The Hanwell Company acquired a 30 equity interest in The Northfield Company for CU400,000 on 1 January 20X6. In the year to 31 December 20X6 Northfield earned profits of CU80,000 and paid no dividend. In the year to 31 December 20X7 Northfield incurred losses of CU32,000 and paid a dividend of CU10,000. In Hanwells consolidated statement of financial position at 31 December 20X7, what should be the carrying amount of its interest in Northfield, according to IAS28 Investments in associates? A CU438,000 B CU411,400 C CU414,400 D CU400,000 Chapter 35 – Joint Ventures Page 453 Chapter 35 JOINT VENTURES 1 Business Context Investments can take a number of different forms. Typically where one entity acquires the majority of the voting rights in another, it gains control. However, in some industries and in particular circumstances, it is more beneficial to share such investments with other interested parties. By sharing the investment, each investor contributes different skills; alternatively the arrangement benefits all parties through reduced costs. Such arrangements are commonly known as joint ventures. Joint venture arrangements are quite common in the investment property sector. For example, British Land plc reported a number of significant joint ventures holding £2.9billion of properties in its financial statements for the year ended 31 March 2007. Such arrangements were said to provide British Land access to properties that were not otherwise on the market and to reduce the risks associated with property investment and development. 2 Chapter Objectives This chapter deals with the financial reporting by an investing entity where it has joint control over another entity. In such circumstances the investing entity is described as a ‘venturer’ and the investee is described as a joint venture of the investor. On completion of this chapter you should be able to:  understand the objectives and scope of IAS 31 Interests in joint ventures;  interpret the important terminology and definitions which relate to such investments;  understand the key principles relating to the recognition and measurement of such investments;  demonstrate knowledge of the principal disclosure requirements of IAS 31; and  apply knowledge and understanding of IAS 31 in particular circumstances through basic calculations. 3 Objectives, Scope and Definitions of IAS 31 IAS 31 sets out the accounting requirements in relation to interests in joint ventures and the appropriate recognition of joint venture assets, liabilities, income and expenses in the financial statements of investors. [IAS 31.1] A joint venture is where two or more parties described as venturers act together under contractual arrangements to carry out activities that are under their joint control, i.e. the parties agree to share control and to require unanimous agreement for all strategic decisions. Control is the power to govern the financial and operating activities of an economic activity so as to obtain benefits. An entity that invests in a joint venture but does not have joint control is known simply as an ‘investor’. IAS 31 does not apply where the venturer is a venture capital organisation or where the joint venture interest is owned by a mutual fund or unit trust or similarly structured entity and such investments have been accounted for under IAS 39 Financial instruments: recognition and measurement. Under IAS 39 the investment will be either measured at fair value or classified as a financial asset ‘held for trading’. [IAS 31.1]