Group Accounting - Part 3

Preparation of Consolidated Statement of Financial Position

ASSOCIATES

LKAS 28 Investments in Associates and Joint Ventures deals with identifying and

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accounting for an associate. The principles of equity accounting are applied.

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An investment in which a parent company has significant influence is known as an
associate and is equity accounted. Before considering the mechanics of equity
accounting, it is important to understand what is meant by significant influence. The

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definition of significant influence is one of those provided in the standard.

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DEFINITIONS

An associate is an entity over which the investor has significant influence and which

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is neither a subsidiary nor a joint venture of the investor.

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Significant influence is the power to participate in, but not control, the financial and
operating policy decisions of an entity. LKAS 28 states that:
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 Significant influence is usually evidenced by representation on the board of
directors, which allows the investing entity to participate in policy decisions.
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 A holding between 20% and 50% of the voting power is presumed to give significant
influence, unless it can be clearly demonstrated that this is not the case.
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 It is presumed that a holding of less than 20% does not give significant influence,
unless such influence can be clearly demonstrated.
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The existence of significant influence is evidenced in one or more of the following ways.
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a) Representation on the board of directors (or equivalent) of the investee

b) Participation in the policy making process
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c) Material transactions between investor and investee

d) Interchange of management personnel
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e) Provision of essential technical information

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THE EQUITY METHOD

LKAS 28 requires that all investments in associates are accounted for in the
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consolidated financial statements using the equity method unless an exemption applies.
LKAS 27 permits use of the equity method when accounting for investments in
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subsidiaries, joint ventures and associates in an investor’s separate financial

statements.

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 Exemption from application of equity method

LKAS 28 states that if an investment in an associate is classified as 'held for sale' in

accordance with SLFRS 5, it should be accounted for under SLFRS 5

An entity is also exempt from applying the equity method in its consolidated financial

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statements where the following applies.

a) It is a parent exempt from preparing consolidated financial statements under

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SLFRS 10, or
b) All of the following apply:

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1. The investor is a wholly owned subsidiary or it is a partially owned
subsidiary of another entity and its other owners, including those not

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otherwise entitled to vote, have been informed about, and do not object
to, the investor not applying the equity method
2. The investor's securities are not publicly traded
3. It is not in the process of issuing securities in public securities markets

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4. The ultimate or intermediate parent publishes consolidated financial

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statements that comply with International Financial Reporting Standards

When an investment in an associate is held through an investment entity, the entity may
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elect to measure the associate at fair value through profit or loss in accordance with
SLFRS 9. This election is available on an investment-by investment basis at initial
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recognition.
C

Discontinuation of the equity method

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The use of the equity method should be discontinued from the date that the investor
ceases to have significant influence. From that date, the investor shall account for the
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investment in accordance with SLFRS 9. The carrying amount of the investment at the
date that it ceases to be an associate is regarded as its cost on initial measurement as a
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financial asset under SLFRS 9

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Principles of equity accounting

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Under the equity method:

a) A single figure for investment in associates is shown in the consolidated
statement of financial position. At the time of the acquisition, this is stated at
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cost. This is subsequently increased or decreased by the group's share of the

total comprehensive income made in the year by the associate.
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b) In the consolidated statement of profit or loss and other comprehensive income,

the group share of the profit or loss of the associate is recognised together with
group share of the associate’s other comprehensive income.

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 Coterminous accounting periods

The most recent financial statements of the associate should be used, and where
practicable these should be made up to the same reporting date as the financial
statements of the parent company. If this is not practicable, then the difference between
the reporting date of the associate and the parent should be no more than three months

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and adjustments must be made to reflect transactions in this time.

Uniform accounting policies

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Uniform accounting policies should be applied in the financial statements of the

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associate and parent company. Where this is not the case, the associate's accounts are
adjusted.

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ADJUSTMENTS

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1 Equity Accounting
2 Dividend from associate
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Impairment of investment
Inter-company sales & Unrealized profit
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5 Goodwill adjustment
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THE EQUITY METHOD IN THE CONSOLIDATED FINANCIAL STATEMENTS

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Consolidated statement of financial position

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In the consolidated statement of financial position, 'Investment in associate' is shown as

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a non-current asset calculated as:

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Cost X
Associate's retained total comprehensive income since acquisition X group X
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share
Dividend Received (Cash/Declared) (X)
Carrying amount X
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Consolidated statement of profit or loss and other comprehensive income

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In the consolidated statement of profit or loss and other comprehensive income, the
associate is included as two line items:
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 Share of profit (or loss) of associate

 Share of other comprehensive income of associate
The following example illustrates the accounting entries required to achieve equity
accounting.

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 Question 1 – Equity Accounting

On 1 July 2020, the Purijjala Group acquired 40% of the voting shares in Abekoon Co at
a cost of Rs. 300 Mn, paid in cash. Abekoon made profits of Rs. 12 Mn in the year ended
31 December 2020 (which were deemed to accrue evenly throughout the year) and Rs.

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25 Mn in the year ended 31 December 2021. In 2021, Abekoon Co also recognised
revaluation losses in other comprehensive income of Rs. 6 Mn.

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Required:
How this should be accounted as at 31 December 2021.

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Losses in associates

In the last example, we saw losses (other comprehensive income) being made by the

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associate. The group share of losses made by an associate reduce the carrying amount of
the associate in the consolidated statement of financial position until such time as the
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carrying amount is reduced to nil. After this, additional losses are provided for as a
liability, recognised to the extent that the parent has legal or constructive obligations to
make or has made payments on behalf of the associate.
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If the associate later returns to profit, the parent resumes recognising its share of profits
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only after they equal the share of losses not recognised.

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Dividends from associates

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Where an associate has declared or paid a dividend, this reduces the carrying amount of
the investment in associate to ensure that the investment is calculated as cost plus
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retained total comprehensive income.

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Question 2 – Dividend from associate

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On 1 January 2020, Pacific Plants Group acquired 25% of Atlantic Aquatics Co at a cost
of Rs. 150 Mn. Atlantic Aquatics made profits in the year ended 31 December 2020 of
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Rs. 30 Mn and no other comprehensive income. On 17 July 2020, Atlantic Aquatics Co

declared an interim dividend of Rs. 5 Mn.
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Required:
How this should be accounted as at 31 December 2020.
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 Allocation of cost price to net assets acquired

As we have seen, an associate is always carried at cost when initially recognised.

Despite this, on acquisition, the consideration paid is notionally allocated to the fair
value of the net assets acquired.
a) Where the cost of the investment exceeds the fair value of net assets acquired,

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notional goodwill exists within the carrying amount of the investment in the
statement of financial position. This is not recognised separately as goodwill and
is not amortised. When preparing a set of consolidated financial statements no

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adjustment is required.
b) Where the cost of the investment is less than the fair value of net assets acquired,

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the difference is included as income in the determination of the investor's share
of the associate's profit or loss in the period in which the investment is acquired.

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INTER-COMPANY SALES

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An associate is not part of the single economic entity that forms a group. As a result,
there is no need to eliminate intra-group transactions when equity accounting.
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Unrealised profits relating to inter-company sales and transfers of assets do, however,
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require adjustment. These are referred to by LKAS 28 as upstream and downstream
transactions and are dealt with as follows.
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Upstream transactions
C

Upstream transactions are sales from the associate to a group company (parent or
subsidiary). The group share (A%) of unrealised profits or losses resulting from
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upstream transactions is eliminated by:

A

DEBIT Cost of sales (parent or subsidiary) Unrealised profit X A%

CREDIT Group inventory Unrealised profit X A%
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Downstream transactions
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Downstream transactions are sales from a group company (parent or subsidiary) to the
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associate. The group share (A%) of unrealised profits or losses resulting from
downstream transactions is eliminated by:
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DEBIT Cost of sales (parent or subsidiary) Unrealised profit X A%

CREDIT Investment in associate Unrealised profit X A%
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Question 3 – Upstream Transaction

Polgolla Co, a parent with subsidiaries, holds 25% of the equity shares in Alwatta Co.
During the year, Alwatta Co makes sales of Rs. 1,000,000 to Polgolla Co at cost plus a

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 25% mark-up. At the year end, Polgolla Co has all these goods still in inventories.
Polgolla and its subsidiaries have a consolidated year-end inventory balance of Rs. 13
Mn and Alwatta of Rs. 6 Mn.

Required
Prepare the adjustment required on consolidation and calculate the reported group

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inventory balance.

Impairment losses

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An impairment loss is recognised when there is objective evidence that an investment in

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an associate is impaired. LKAS 28 provides a list of indicators that an associate may be
impaired. These include:

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 Significant financial difficulty of the associate
 A breach of contract, such as default, by the associate


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It becoming probable that the associate will enter bankruptcy or other financial
restructuring.
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Any impairment loss in respect of an associate is recognised in accordance with LKAS
36 and reduces the carrying amount of the associate:
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Investments in associates in the separate financial statements of the investor
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An investment in an associate is accounted for in the separate financial statements of

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the investor either:

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 At cost, or
 Using the equity method (LKAS 28), or
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 In accordance with SLFRS 9 (at fair value)

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This treatment applies whether or not consolidated financial statements are prepared.
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Question 4 – Investment in Associate with dividend

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Statement of Financial Position of P S and A are given below as at 31st March 2021.
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P S A
Rs.’000 Rs.’000 Rs.’000
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Non-current assets 10 5 4
Investment in S 6 - -
Investment in A 2 - -
Current Assets 5 2.5 2
Total assets 23 7.5 6

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 Stated Capital 12 3 4
Retained Earnings 5 2.5 1
Liabilities 6 2 1
Total equity and
23 7.5 6
liabilities

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1. On 1st April 2020 P acquired 75% of S when S’s retained earnings stood at 1,000.

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2. On 1st April 2020 P acquired 30% in A when A’s retained earnings stood at 600.
3. During the year ended 31st March 2021, A made a profit of 900 of which 500 was

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declared as dividend.
4. P has accounted for the dividends received as other income.

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Required
Prepare consolidated Statement of Financial Position as at 31stMarch 2021.

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Question 5 – Investment in Associate with revaluation/Impairment
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Statement of Financial Position of P S and A are given below as at 31st March 2021.
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P S A
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Rs.’000 Rs.’000 Rs.’000

Non-current assets 10 5 4
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Investment in S 6 - -
Investment in A 1 - -
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Current Assets 6 2.5 2

Total assets 23 7.5 6
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Stated Capital 12 3 4
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Retained Earnings 5 2.5 1

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Liabilities 6 2 1
Total equity and
23 7.5 6
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liabilities

1. On 1st April 2020 P acquired 75% of S when S’s retained earnings stood at 1000.
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2. On 1st April 2020 P acquired 30% in A when A’s retained earnings stood at 600.
3. During the year ended 31st March 2016, A made a profit of 900 of which 500 was
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declared as dividend.
4. P has not accounted for the dividends receivable.
5. A revalued their assets at the reporting date and fair value gain was 1000.
6. At the year end the goodwill was impaired by 200 and the investment in A was
impaired by 300.

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 Required
Prepare consolidated Statement of Financial Position as at 31stMarch 2016.

Question 7 – Inter group transactions with associate

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Statement of Financial Position of P S and A are given below as at 31st March 2021.

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P S A
Rs.’000 Rs.’000 Rs.’000
Non-current assets 12 6. 5 5.2

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Investment in S 6 - -
Investment in A 2 - -

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Inventories 5 2.5 2
Total assets 25 9 7.2

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Stated Capital 12 3 4
Revaluation Reserve
Retained Earnings
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5
1.5
2.5
1.2
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Liabilities 6 2 1
Total equity and
25 9 7.2
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liabilities
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1. On 1st April 2019 P acquired 75% of S when S’s retained earnings stood at 1,000
and the revaluation reserve stood at 300. The group’s policy is to measure NCI at
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Proportion of net assets.

2. On 1st April 2020 P acquired 30% in A when A’s retained earnings stood at 600
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and the revaluation reserve stood at 200.

3. During the year A sold goods to P amounting to 1000 and 20% of these goods
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were with P at the year end. A sets the selling at a markup of 25% on cost.
4. During the year P sold goods to A amounting to 1200 and 30% of these goods
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were with A at the year end. P sets the selling at a markup of 20% on cost.
5. During the year S sold goods to A amounting to 2000 and 30% of these goods
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were with P at the year end. S sets the selling at a margin of 25%.
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Required
Prepare consolidated Statement of Financial Position as at 31stMarch 2021.
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