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Accounting for Associate

IAS 28 outlines the accounting treatment for investments in associates, defined as entities where the investor has significant influence, typically indicated by owning 20% or more of the voting power. The equity method is used for accounting, where the investment is recorded at cost and adjusted for the investor's share of the associate's profits or losses. Additionally, transactions between the parent and associate must eliminate unrealized profits to reflect accurate financial positions in consolidated statements.

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11 views

Accounting for Associate

IAS 28 outlines the accounting treatment for investments in associates, defined as entities where the investor has significant influence, typically indicated by owning 20% or more of the voting power. The equity method is used for accounting, where the investment is recorded at cost and adjusted for the investor's share of the associate's profits or losses. Additionally, transactions between the parent and associate must eliminate unrealized profits to reflect accurate financial positions in consolidated statements.

Uploaded by

Huong Nguyen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IAS 28 INVESTMENT IN ASSOCIATE

Associate. An entity, including an EQUITY ACCOUNTING:


unincorporated entity such as a Equity method. A method of accounting
partnership, over which an investor has whereby the investment is initially
significant influence and which is neither recorded at cost and adjusted thereafter
a subsidiary nor an interest in a joint for the post-acquisition change in the
venture. investor's share of net assets of the
1, SIGNIFICANT INFLUENCE: Holds investee. The profit or loss of the
20% or more of the voting power (directly investor includes the investor's share of
or through subsidiaries)
the profit or loss of the investee.
Power: participate in financial and operating
policy decision 1, Recognized at cost
Power = represent in BOD, participate 2, Adjusted for change in the investor's
policy making, interchange management share of the investee's net assets => SOFP =
personnel, provisional of essential technical COST + SHARE RE – IMPAIRMENT
information LOSS ON ASSOCIATE (IAS 36)
3, Share of the P&L (PROFIT AFTER
SEPARATE FS
TAX) and OCI
TRANSACTIONS WITH ASSOCIATES
EITHER OR JOINT VENTURES
1, Cost Profits and losses resulting from upstream
2, IFRS 09 and downstream transactions are eliminated
to the extent of the investor's interest in
3, Equity method
the associate or joint venture.
Unrealized losses are not recognized
Dr Retained earnings of parent/ Share of
Standard answer for IAS 28

1, Significant influence and investment in associate (2 marks)

The entity A own …. % share of B entity, hence it has significant influence on …..

Entity B, therefore, is an associate of entity A

Entity B should use equity method to account investment in A in consolidated financial


statement

2, Initial recognition
At, initial recognition, investment in associate recorded at cost $.......
Journal entry: Dr Investment in associate / Cr Cash
3, Subsequent recognition: Income
The entity should record share profit from associate related its signficiant influence as
income in the period
Share profit from associate in the period: ……..
Journal entry: Dr Investment in associate / Cr Share profit of associate
4, Subsequent recognition: Dividend from associate
Dividend from associate should be deducted from investment in associated
Amount of dividend from associate in the period: …….
Journal entry: Dr Cash $250,000 / Cr Investment in associate $250,000
5, Transaction between parent and associate

Parent sell to associate:

Unrealized profit in transaction between parent and associate should be deducted from
investment in associate and retained earning in consolidated statement of financial position

Or increase in cost of sale in consolidated income statement

Unrealized profit adjusted should be: $.......

Journal entry: Dr Retained earnings / Cr Investment in associate

Associate sell to parent:

Unrealized profit in transaction between associate and parent should be deducted from
inventory and retained earning

Or reduce share profit of associate in consolidated statement of profit or loss

Unrealized profit adjusted should be: $.......

Journal entry: Dr Retained earning / Cr Inventory

6, Investment in associate in consolidated statement of financial position


Investment in associate in consolidated statement of financial position should be: …….

It should be presented as non-current asset

7, Consolidated statement of profit or loss

Share profit or loss in consolidated SOPL should be: $......

It should be presented as ..........


PART 1: THEORY QUESTION
Question 1:

How should an associate be accounted for in the consolidated financial statement?

Question 2:

Explain equity accounting method?

Question 3:

Explain significant influence? Give 3 examples of significant influence?

Question 4:

Explain how to account investment in associate in consolidated financial statement

Question 5:

Explain how to account intra group sale of inventory between parent and associate in
consolidated financial statement
PART 2: PRACTISE QUESTION
Question 1:

On 1 October 20X8 Pace acquired 40 million of Vkool's 100 million shares in exchange for
80 million of its own shares. The stock market value of Pace and Vkool at the date was $1.2
and $1.60.

Profit for the year ended 31 March 20X9 of Vkool was $100 million ($20 million of this
profit was made from 1 April 20X8 to 30 September 20X8).

Required: Explain with journal entry how to account these transactions on consolidated
financial statement for the year ended 31 March 20X9? (15 marks)

Question 2:

On 1 October 20X8 Pace acquired 40 million of Vkool's 100 million shares in exchange for
80 million of its own shares. The stock market value of Pace and Vkook at the date was $1.2
and $1.60.

Profit for the year ended 31 March 20X9 of Vkool was $120 million (all items of income and
expenditure accrue evenly throughout the year).

Required: Explain with journal entry how to account these transactions on consolidated
financial statement for the year ended 31 March 20X9? (15 marks)

Question 3:

Jarvis owns 35% of McLintock. During the year to 31 December 20X4 McLintock sold $4
million of goods to Jarvis, of which 60% were still held in inventory by Jarvis at the year end.
McLintock applies a margin of 20% on all goods sold.

Required: Explain with journal entry how to account these transactions on consolidated
financial statement for the year ended 31 December 20X4? (10 marks)

Question 4:

Ulysses owns 30% of Grant, which it purchased on 1 May 20X8 for $8 million. At that date
Grant had retained earnings of $7.0 million. On 31 October 20X8, Grant had retained
earnings of $8.5 million after paying out a dividend of $2 million (dividend paid on 1 October
20X8). On 30 September 20X8 Ulysses sold $800,000 of goods to Grant, on which it made
30% profit margin. Grant had sold 40% (unsold 60%) of these goods by 31 October.

Required: Explain with journal entry how to account these transactions on consolidated
financial statement for the year ended 31 October 20X8? (15 marks)

Question 5:

On 1 February 20X3 Pinot acquired 30% of the equity shares of Noir, its only associate, for
$10 million in cash. The post-tax profit of Noir for the year to 30 September 20X3 was $6
million. Profits accrued evenly throughout the year. Noir made a dividend payment of $1
million on 1 September 20X1 (20x3). At 30 September 20X3 Pinot decided that an
impairment loss of $800,000 should be recognized on its investment in Noir.

Required: Explain with journal entry how to account these transactions on consolidated
financial statement for the year ended 30 September 20X3? (15 marks)

Question 6:

Ruby owns 30% of Emerald and exercises significant influence over it. Emerald sold goods to
Ruby for $160,000. Emerald applies a one third mark up on cost. Ruby still had 25% of these
goods in inventory at the year end.

Required: Explain with journal entry how to account this transaction? (5 marks)

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