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Associate Co. Questions

The document defines an associate as an entity over which an investor has significant influence but is neither a subsidiary nor a joint venture. Significant influence is the power to participate in financial and operating policy decisions but not control them. An investment in an associate is accounted for using the equity method in consolidated financial statements. The equity method involves initially recognizing the investment at cost and subsequently adjusting it for the investor's share of post-acquisition profits or losses, dividends received, and impairment losses. Unrealized profits on transactions between the investor and associate are eliminated.

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1K views

Associate Co. Questions

The document defines an associate as an entity over which an investor has significant influence but is neither a subsidiary nor a joint venture. Significant influence is the power to participate in financial and operating policy decisions but not control them. An investment in an associate is accounted for using the equity method in consolidated financial statements. The equity method involves initially recognizing the investment at cost and subsequently adjusting it for the investor's share of post-acquisition profits or losses, dividends received, and impairment losses. Unrealized profits on transactions between the investor and associate are eliminated.

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Sigei Leonard
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© © All Rights Reserved
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You are on page 1/ 3

ASSOCIATE (IAS 28)

An associate is an entity (including an unincorporated entity such as a partnership) over which the investor
has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Significance Influence
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.
For examination purposes the significant influence test will centre on the percentage shareholding of one
company in another.
IAS 28 provides that:
(a)

(b)

If an investor holds, directly or indirectly, 20% of the voting power it is presumed that the investor
has significant influence; therefore associate status will be presumed unless it can be demonstrated
otherwise.
If an investor holds, directly or indirectly, < 20% of the voting power it is presumed that the investor
does not have significant influence; therefore no associate status, again unless demonstrated otherwise.

IAS 28 states significant influence can be shown by:


-

Representation on the board of directors


Participation in policy making processes
Material transactions between the investor and investee
Interchange of managerial personnel
Provision of essential technical information

Accounting treatment
Investors separate financial statements
The investment is initially recognised at cost.
From then on, the associate can be;
(a)
(b)

Carried at cost (recognising dividend income in the income statement); or


Accounted for as an available-for-sale financial asset as described in IAS 39 Financial Instruments:
Recognition and Measurement.

An available-for-sale financial asset in this case represents an investment in shares in another company not
held for short-term profit-making by trading those shares. It should be held at fair value.
In this course we will assume that the investment remains in the parent's separate financial statements at its
initial fair value, i.e. at cost.
Points to note
-

Because the investment is normally retained at its historical cost there will be no reflection of any
increase in value of the associate in the investing company's balance sheet. By showing only dividend
income in the income statement, no account is taken of the investing company's share of retained profits
of the associate.
Remedy
In the consolidated financial statements only, account for what the business actually owns as a result of
its significant investment, i.e. use equity accounting.

Page 1 of 3

Accounting for Associate Companies By Leonard Sigei_0723 501798

Consolidated financial statements


An investment in an associate is accounted for in consolidated financial statements using the equity method.
Equity Method
Statement of financial position
Non-Current Assets (Workings)
Investment in Associate
Initial cost
xx
Add/less: Post acquisition share of profit/loss (before dividends)
xx/(xx)
Add/less: Post acquisition share of gain/losses not on the I/S
xx/(xx)
Less: Post acquisition dividends received (to avoid double counting)
(xx)
Less: impairment losses on associate to date
(xx)
xx
In practice, at this level, it is quicker to calculate the figure in the following way as you
may not be given profit and dividend information for each year since acquisition:
Initial cost
xx
Add/less: Share of Post-acquisition reserves xx/(xx)
Less: impairment losses on associate to date
(xx)
xx

Income Statement
A's profit for the period x Group's percentage
(shown before group's profits before tax)
xx

Points to note
(a)

(b)
(c)

(d)

An associate is not a group company; therefore no cancellation of 'intragroup' transactions should be


performed. However, IAS 28 states that the investor's share of unrealised profits and losses on
transactions between investor and associate should be eliminated in the same way as for group
accounts.
This is done as follows:
Dr Retained earnings of UP x A%
Cr Investment in associate UP x A% (if the associate holds the inventories)
Cr Group inventories UP x A% (if the parent holds the inventories)
Uniform accounting policies should be used, or adjustments must be made.
The most recent available financial statements of the associate are used. Where the reporting dates are
different, adjustments are made for the effects of significant transactions in the intervening period. The
difference between parent and associate reporting dates must be no more than 3 months.
After application of the equity method, any impairment losses are considered re the investor's net
investment in the associate as a whole.

Page 2 of 3

Accounting for Associate Companies By Leonard Sigei_0723 501798

EXAMPLE 1
Statement of financial position
Portus purchased a 60% holding in Sanus on 1 January 20X0 for Sh.6.1m when the retained earnings of
Sanus were Sh.3.6m and a 30% holding in Allus on 1 July 20X1 for Sh.4.7m when its retained earnings
were Sh.6.2m. At 31 December 20X4 the statement of financial position of Portus, Sanus and Allus were as
follows:
Portus
Sh."000"
Property, plant and equipment
42,100
Investments in Sanus and Allus (at cost) 10,800
52,900
Current assets
7,900
60,800
Share capital
3,000
Retained earnings
41,600
44,600
Liabilities
16,200
60,800

Sanus
Sh. "000"
15,800

Allus
Sh. "000"
16,100

15,800
3,700
19,500
2,400
10,600
13,000
6,500
19,500

16,100
5,600
21,700
2,800
9,200
12,000
9,700
21,700

An impairment test conducted at the year-end revealed cumulative impairment losses of Sh.0.7m in respect
of the investment in Allus, of which Sh.0.2m relates to the current year. This loss is not reflected in Portus'
separate financial statements as the investment is not impaired below its original cost. No impairment losses
were found to be necessary on the investment in Sanus.
During the year Allus sold goods to Portus for Sh.3m at a profit margin of 20%. Sh.1m of these goods
remained in Portus' inventories at the year end.
Required
Prepare the consolidated balance sheet of the Portus Group as at 31 December 20X4.
EXAMPLE 2
Income statement
Continuing from lecture example 1, the income statements of Portus, its subsidiary Sanus and its associate
Allus the year ended 31 December 20X4 are as follows:
Portus
Sh. "000"
Revenue
28,400
Cost of sales
(17,100)
Gross profit
11,300
Expenses
(4,400)
Finance income
100
Finance costs
(400)
Profit before tax
6,600
Income tax expense (2,100)
Profit for the period
4,500

Sanus
Sh. "000"
7,200
(2,800)
4,400
(1,800)
(200)
2,400
(700)
1,700

Allus
Sh. "000"
9,600
(5,800)
3,800
(1,600)
100
(300)
2,000
(600)
1,400

Required
Prepare the consolidated income statement for the Portus Group for the year ended 31 December 20X4.
Page 3 of 3

Accounting for Associate Companies By Leonard Sigei_0723 501798

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