Chapter 34 – Associates Page 447
Illustration 3
If an investor holds a 30 share in an associate and made a profit of CU100 from a sale to the associate of goods still held in the associate’s inventory, then only CU30 i.e. the
investor’s share would be eliminated from the investor’s reported profit.
As equity accounting does not involve the aggregating of the individual asset and liability balances with those of the parent and subsidiaries, the receivables and payables balances
due from and to associates are not eliminated.
At the acquisition date the investment in the associate should be recognised at its cost. This represents the share of the fair value of the net assets acquired and the future economic
benefits attributable to assets which cannot be separately identified and recognised i.e. goodwill. Fair value is generally market value, although where no market exists for the
transfer of such items, fair value may need to be assessed using a different basis. The calculation of fair values is consistent with the application of IFRS 3.
If the goodwill is a positive figure it should be included as part of the carrying amount of the investment. If the cost was less than the fair value of the net assets acquired, then a discount
was achieved on the purchase which is unlikely to occur in practice. The discount should be included as part of the investor’s share of the associate’s profit or loss for the period in which
the investment was made.
The associate’s most recent set of financial statements should be used for equity accounting purposes. If the end of the reporting period of the associate is different from that of the
investor, then financial statements should be prepared to the end of the investor’s reporting period, unless it is impracticable to do so. The additional financial statements should be
based on the associate’s financial statements prepared to the end of its last reporting period and adjusted for significant events that have occurred during the period between the two
dates. The end of the reporting periods of the associate and its investor should not be more than three months different to each other. [IAS 28.24, 28.25]
The associate’s accounting policies should be consistent with those of its investor. Where any of the main accounting policies are different, adjustments should be made to the associate’s
financial statements for equity accounting purposes. [IAS 28.26]
If an associate makes losses, then the investor should equity account for these in the same way as it recognises profits, by reducing the carrying amount of the share of the associate’s
net assets. If, however, losses continue, the carrying amount of the associate should only be reduced as far as nil. Any excess loss should only be recognised by the investor as a liability
where it has an obligation to make payments on behalf of the associate. If the associate makes profits in future periods, the investor should resume equity accounting for its share.
4.2 Impairment losses
The requirements of IAS 39 should be applied to determine whether an impairment loss should be recognised in respect of the investment. An impairment arises where the
recoverable amount of the asset has fallen below its current carrying amount. Where IAS 39 indicates that an impairment has arisen, IAS 36 Impairment of assets should be applied to
assess its size.
The recoverable amount of the investor’s share in an associate is determined by considering the net realisable value i.e. net selling price of the investment and its value in use. The value
in use is determined either by estimating the present value i.e. taking into account the time value of money of the future cash flows that are expected to be generated by the associate
or by estimating the present value of the expected future dividend stream.
Chapter 34 – Associates Page 448
5 Investors Separate Financial Statements
An interest in an associate should be accounted for in the individual financial statements of the investor by applying the requirements of IAS 27 for separate financial statements.
[IAS 28.35]
6 Disclosures
IAS 28 requires a number of detailed disclosures to be made about an entity’s investment in its associates. Such disclosures include the fair value of an associate where published price
quotations are available, and summarised financial information of the associate. The summarised financial information should include the main items in the associate’s financial
statements, including assets, liabilities, revenue and profit or loss for the period. [IAS 28.37]
Where an investor has overruled the presumption that significant influence exists once the 20 holding of voting rights has been achieved, this fact should be disclosed along with the
reason why a holding of less than this has led to the investor having a significant influence or why a holding of more than 20 has not. [IAS 28.37]
The associate’s reporting date should be disclosed and, if this is different from that of the investor, the reason why this date has been used. If there are any significant restrictions on
the associate’s ability to transfer funds to the investor, then this should be disclosed. Where an associate has made significant losses that have led to the investor’s share of the
associate’s net assets being recorded as nil with the entity no longer recognising those losses, then the amount of any unrecognised losses should be disclosed. [IAS 28.37]
Where the equity method of accounting has not been used for the recognition of an investment in an associate, this fact should be disclosed along with summary financial
information about the associate. [IAS 28.37]
Where the investor has a share in the associate’s contingent liabilities, accounted for in accordance with IAS 37 Provisions, contingent liabilities and contingent assets, the amount
should be disclosed. [IAS 28.40]
7 Chapter Review
This chapter has been concerned with the accounting requirements for an investment which gives rise to significant influence over an investee.
This chapter has covered: the scope of IAS 28;
the critically important definitions of an associate and significant influence; the method of accounting for associates; and
the disclosure requirements of IAS 28.
Chapter 34 – Associates Page 449
8 Self Test Questions
Chapter 34
1. According to IAS28 Investments in associates, which ONE of the following
statements best describes the term significant influence?
A The holding of a significant proportion of the share capital in another
entity
B
The contractually agreed sharing of control over an economic entity
C The power to participate in the financial and operating policy decisions
of an entity
D
The mutual sharing in the risks and benefits of a combined entity
2. Which ONE of the following investments in an associate is not within the
scope of IAS28 Investments in associates?
A An associate held by a subsidiary and measured at amortised cost
B
An associate held by a venture capital organisation and measured at amortised cost
C An associate held by a venture capital organisation and measured at
fair value with changes in fair value recognised in profit or loss
D An associate held by a subsidiary and measured at fair value with
changes in fair value recognised in profit or loss
Chapter 34 – Associates Page 450
3. The Tatai Company equity accounts for its 40 interest in The Southall
Company. Southalls financial statements include the following:
CU000
Revenue 600,000
Cost of sales 250,000
350,000
Operating expenses
285,000 65,000
Tax 20,000
45,000
Are the following statements true or false, according to IAS28 Investments in associates?
1 Tatais consolidated revenue should include CU240,000 in respect of
Southall. 2
Tatais consolidated profit before tax should include CU26,000 in respect of Southall.
Statement 1 Statement 2
A
False False
B
False True
C True
False
D
True True
4. The Partage Company owns 80 of The Moody Company and 35 of The
Otter Company. The tax charges in their individual statements of comprehensive income are:
Partage CU200,000
Moody CU560,000
Otter CU800,000
According to IAS27 Consolidated and Separate Financial Statements and IAS28 Investments in associates, what amount should be shown as the tax
charge in the consolidated statement of comprehensive income?
A CU1,040,000
B CU928,000
C CU1,560,000
D CU760,000
Chapter 34 – Associates Page 451
5. The Champlain Company owns 25 of The Berger Company. The following
figures are from their separate financial statements: Champlain:
Trade receivables CU840,000, including CU30,000 due from Berger.
Berger: Trade receivables CU215,000, including CU50,000 due from
Champlain. According to IAS28 Investments in associates, what figure should appear for
trade receivables in Champlains consolidated statement of financial position?
A CU840,000
B CU832,500
C CU1,035,000
D CU1,055,000
6. The Teletsko Company has a 35 interest in its associate, The Saimaa
Company. At the current year end Teletsko holds inventory purchased from Saimaa on which Saimaa earned a profit of CU1,000,000.
The groups consolidated statement of financial position has been drafted without any adjustments in relation to this holding of inventory.
Under IAS28 Investments in associates, what adjustments should be made to the draft consolidated statement of financial position figures for inventories
and retained earnings?
Inventories Retained earnings
A Reduce by CU350,000
Reduce by CU122,500
B Reduce by CU1,000,000
Reduce by CU350,000
C
Reduce by CU350,000 Reduce by CU350,000
D Reduce by CU1,000,000
Reduce by CU1,000,000
7. The Michi Company owns 40 of The Nipigon Company. On 31 December
20X7 Nipigon sold to Michi a non-current asset for CU1,020,000. The carrying amount in Nipigons books on 31 December 20X7 was CU820,000.
The consolidated statement of financial position has been drafted without any adjustments in relation to this non-current asset.
Under IAS28 Investments in associates, what adjustments should be made to the consolidated statement of financial position figures for non-current assets
and retained earnings?
Non-current assets Retained earnings
A Reduce by CU200,000
Reduce by CU200,000
B
Reduce by CU80,000 Reduce by CU80,000
C
Reduce by CU80,000 Reduce by CU32,000
D Reduce by CU200,000
Reduce by CU80,000
