Chapter 10
Accounting for
associates
• Accounting for associates
• The equity method
• Statement of profit or loss
and statement of financial
position
Chapter summary diagram
Accounting for
associates
Definition
Significant
influence
Accounting
treatment
Consolidated
financial
statements
Accounting for associates
Definition (IAS 28)
• An associate is an entity over which the investor has
significant influence.
• Where significant influence is the power to participate in
the financial and operating decisions of the investee but is
not control or joint control over those policies.
Accounting for associates
• In the exam you should apply the '20% rule'.
• If an investor holds, directly or indirectly, ≥ 20% of the voting
power it is presumed that the investor has significant influence.
Therefore the investment is presumed to be an associate unless it
can be demonstrated otherwise.
• Conversely, if an investor holds, directly or indirectly < 20% of the
voting power it is presumed that the investor does not have
significant influence. Therefore the investment is not presumed to
be an associate unless it can be demonstrated otherwise.
Accounting for associates
• IAS 28 also states that significant influence can be shown by:
– Representation on the board of directors
– Participation in policy making processes
– Material transactions between the investor and the
investee
– Interchange of managerial personnel
– Provision of essential technical information
Accounting for associates
Investor's separate financial statements
• Just as with the subsidiary, the investor can record the
investment in the investee in its separate financial
statements either:
– At cost; or
– At fair value  IFRS 9 – Financial instruments
– Equity method  IAS 28
Consolidated financial statements  Equity method
The equity method
• An investment in an associate is accounted for in the
consolidated financial statements using the equity method.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Non-current assets
Investment in associate (Working)
X
Working
Cost of associate
Share of post-acquisition retained reserves
Less impairment losses on associate to date
X
X/(X)
(X)
X
The equity method
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME
Profit or loss
A's Profit for the year × Group %
X
Shown before group profit before tax
Other comprehensive income
A's OCI x Group %
X
Note. In order to be able to account for an associate using the equity method a parent
must already be producing consolidated accounts, ie it must have at least one subsidiary.
The equity method
Points to note
• The associate is not a group company and so no cancellation of 'intragroup' transactions is performed.
• However, to avoid double counting, the investor's share of unrealised
profits and losses on transactions between the investor and the associate
are eliminated in the same way as for group accounts.
• The adjustments are (if the sale is by the associate):
– DEBIT Gr share of A’s PFTY * /Group retained earnings (P's colum)
– CREDIT Group inventories**
* The convention is to increase (Dr) the cost of sales of the seller and so
when we DEBIT Cost of sales of A we actually debit the share of associate's
profit line.
** Another approach to upstream transaction when A sold goods to P is to
CREDIT Investment in A
Dr Gr RE
Cr Investment in Associate
The equity method
Points to note (continued)
• The adjustments are (if the sale is by the parent):
– DEBIT Cost of sales of P/group retained earnings (P's column)
– CREDIT Investment in associate*
*Here, we credit the investment in associate rather than group
inventories because A holds the inventories
• The value of the adjustment at all times is the group
percentage of the unrealised profit amount. So if there was a
30% associate and the unrealised profit was $100 the
adjustment would be:
– PUP × A%, ie $100 × 30% = $30
Question: Lecture example 1
At 31 December 20X4 the statements of financial position of Portus, Sanus and Allus were as follows.
Portus
Non-current assets
Property, plant and equipment
Investment in Sanus (at cost)
Current assets
Inventories
Trade receivables
Cash
Equity
Share capital ($1 shares)
Reserves
Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables
Sanus
Allus
$'000
$'000
$'000
56,600
13,800
70,400
16,200
–
16,200
16,100
–
16,100
2,900
3,300
1,700
7,900
78,300
1,200
1,100
100
2,400
18,600
500
1,100
300
1,900
18,000
8,000
54,100
62,100
2,400
10,600
13,000
2,800
9,200
12,000
13,200
4,800
5,100
3,000
78,300
800
18,600
900
18,000
Question: Lecture example 1 (continued)
Notes
1
On 1 April 20X4 Portus purchased a 80% holding in Sanus for $13.8 in cash.
Sanus' total comprehensive income for the year ended 31 December 20X4 was
$2.0m, accruing evenly over the year. Sanus did not pay any dividends in the
year.
Portus also acquired a 30% holding in Allus on 1 July 20X4 for 500,000 of its
own shares. The stock market value of Portus' shares at the date of this share
exchange was $9.40 each. Portus has not yet recorded the investment in
Allus. Allus' reserves were $8.6m on 1 July 20X4.
Question: Lecture example 1 (continued)
2
3
At the date of acquisition, the fair value of Sanus' assets were equal to their
carrying amounts with the exception of the items listed below which exceeded
their carrying amounts as follows.
$'000
Inventories
300
Plant and equipment (ten-year remaining useful life)
1,200
1,500
Sanus has not adjusted the carrying amounts as a result of the fair value exercise.
The inventories were sold by Sanus before the year end.
The non-controlling interest in Sanus is to be valued at its fair value of $3.2m at the
date of acquisition.
An impairment test conducted at the year end revealed that the consolidated
goodwill of Sanus was impaired by $150,000.
Additionally, an impairment loss of $40,000 is to be recognised in respect of
Portus' investment in Allus in the group financial statements.
Question: Lecture example 1 (continued)
4
On 1 October 20X4, Sanus sold goods to Portus for $200,000 at a gross profit
margin of 40%. The goods were still in Portus' inventories at the year end. No other
sales were made between Portus and Sanus in the year.
At 31 December 20X4 Portus' current account with Sanus was $130,000 (credit).
This did not agree with the equivalent balance in Sanus' books due to cash in
transit of $70,000 which was not received by Sanus until after the year end.
After the acquisition, Allus sold goods to Portus for $400,000 at a mark-up on cost
of 25%. A quarter of these goods remained in Portus' inventories at the year end.
Required
Prepare the consolidated statement of financial position of the Portus Group as at 31
December 20X4.
Question: Lecture example 2
Continuing from Lecture example 1 and the previous chapter, the statements of profit
or loss and other comprehensive income of Portus, its subsidiary Sanus and its
associate Allus for the year ended 31 December 20X4 are as follows.
Revenue
Cost of sales
Gross profit
Expenses
Finance costs
Dividend income from Allus
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income:
Gains on property revaluation
TOTAL COMPREHENSIVE INCOME FOR THE
YEAR
Portus
$'000
28,500
(17,100)
11,400
(4,400)
(400)
60
6,660
(2,100)
4,560
Sanus
$'000
11,800
(7,000)
4,800
(2,200)
(200)
Allus
$'000
9,500
(5,800)
3,700
(1,600)
(200)
2,400
(800)
1,600
1,900
(600)
1,300
900
400
300
5,460
2,000
1,600
Question: Lecture example 2 (continued)
Required
Prepare the consolidated statement of profit or
loss and other comprehensive income for the
Portus Group for the year ended 31 December
20X4.