The statement of financial position The statement of comprehensive income

Chapter 34 – Associates Page 445 Under the equity method of accounting, the investment in the associate is initially recognised at cost and is subsequently adjusted in each period for changes in the investor’s share of net assets of the associate. The investor’s reported profit or loss for the period will include its share of the associate’s reported profit or loss for the period, presented as a single line item. [IAS 28.2] Where the parent and a number of its subsidiaries have an interest in a single entity, the group’s share in the investment is determined by adding together all the interests held by group entities. An investor’s interest in an associate should be presented in the statement of financial position as a single line under non-current assets. [IAS 28.38] Illustration 1 Pecs has a number of wholly owned subsidiaries and a 40 interest in the share capital of Abs. These shares were acquired three years ago when the balance on Abs’ retained earnings was CU100. Pecs Abs Group CU CU Investment in Abs 120 - Other assets 1,080 650 1,200 650 Liabilities 200 150 1,000 500 Share capital 300 100 Retained earnings 700 400 1,000 500 The consolidated statement of financial position of Pecs should incorporate Abs using the equity method of accounting. The carrying amount of the investment is calculated as: Cost of investment CU120 Share of post acquisition retained earnings 40 x 400 – 100 CU120 CU240 Consolidated statement of financial position Pecs Group CU Investment in Abs 240 Other assets 1,080 1,320 Liabilities 200 1,120 Share capital 300 Pecs 700 plus share of Abs’ Retained earnings 820 post acquisition profit 120 1,120 Chapter 34 – Associates Page 446 Illustration 2 The consolidated statement of comprehensive income of Pecs and its subsidiaries and the statement of comprehensive income of Abs for the current year are shown below. Pecs Abs Group CU CU Revenue 1,100 600 Cost of sales 200 150 Gross profit 900 450 Expenses 130 150 Profit from operations 770 300 Finance income 90 - Finance costs 40 10 Profit before tax 820 290 Tax 270 70 Net profit for the year 550 220 The consolidated statement of comprehensive income of Pecs will only include its share of the profit after tax of Abs. Pecs Group CU Revenue 1,100 Cost of sales 200 Gross profit 900 Expenses 130 Profit from operations 770 Finance income 90 Finance costs 40 Share of profits of associates 40 × 220 88 Profit before tax 908 Tax 270 Net profit for the year 638

4.1 Procedures to be used

The procedures used in the preparation of the consolidated financial statements in accordance with IAS 27 are used in the application of equity accounting. Where transactions take place between an investor and its associates, adjustment should be made to eliminate any internally generated profit or loss that arises. The amount eliminated is only the element that relates to the investor’s share, since this is the amount that is essentially internally generated by the group.