Chapter 28 Associates and Equity Accounting I: Basic Elements

Chapter 28Chapter 28

Associates and Equity Associates and Equity

Accounting I: Basic ElementsAccounting I: Basic Elements

Chapter 28Chapter 28

Associates and Equity Associates and Equity

Accounting I: Basic ElementsAccounting I: Basic Elements

Lecture TopicsLecture Topics

• The investor and the associate• Decisions on accounting and reporting

methods• Illustration of the equity accounting

method • Disclosures

Lecture ReferencesLecture References

• Text - Chapter 28• AASB - 1016

Key ConceptsKey Concepts

• Associated entity• Investor/associate relationship• Significant influence• Equity accounting

The Investor and the AssociateThe Investor and the Associate

• Investor/associate relationship– associate - an investee, not being:

• a subsidiary• a partnership• a short-term investment

– over which investor has significant influence

The Investor and the AssociateThe Investor and the Associate

• Does not establish new entity• Nature of significant influence

– % of voting power– Board representation– Extent of material inter-company transactions

The Investor and the AssociateThe Investor and the Associate

• Nature of significant influence– Management or technology transfer– Operating relationships or dependencies– Restrictions on distributions

Decisions on Accounting and Decisions on Accounting and Reporting MethodsReporting Methods

• Alternative accounting methods– Cost method– Consolidation method– Equity method

Equity method - exampleEquity method - example

• Associate 20% owned by investor• Associate:

– owner’s equity start X4 $600 000– profit for X4 $80 000– no dividends– owner’s equity end X4 $680 000

• Investor:– carrying value of inv. $124 000

Equity method - exampleEquity method - example

Dr Investment in associate 16 000Cr Revenue from associates 16 00020% share of associates reported results for 19X4

Dr Investment in associate 16 000Cr Revenue from associates 16 00020% share of associates reported results for 19X4

• Investment has new carrying value of $140 000• Investor will report revenue of $16 000

Decisions on Accounting and Decisions on Accounting and Reporting MethodsReporting Methods

• Application of the methods– Potential application– Accounting standard requirements

• AASB 1016

Financial StatementsInvestor’s Consolidated

Parent InvestorInvestments in Subsidiaries Cost Consolidation Associates Cost Equity Method Other Cost CostInvestor not ParentInvestments in

Associates Equity Method - Other Cost -

Financial StatementsInvestor’s Consolidated

Parent InvestorInvestments in Subsidiaries Cost Consolidation Associates Cost Equity Method Other Cost CostInvestor not ParentInvestments in

Associates Equity Method - Other Cost -

Application of Investment Accounting MethodsApplication of Investment Accounting Methods

Decisions on Accounting and Decisions on Accounting and Reporting MethodsReporting Methods

• Criteria for applying the equity method– Significant influence– Materiality– Must meet both

The Equity MethodThe Equity Method

• Recording issues– Data requirements

• Based on most recent financial statements• Must only convey information available to

associate’s shareholders• Fair value of associates assets at investment date• Goodwill and amortisation

The The Equity MethodEquity Method

– Data requirements• Discount, assets written off against and

accumulated depn.• Unrealised profit adjustments• Share of associates profits available and non-

distributable• Carrying amount of investment

The The Equity MethodEquity Method

• Recording equity accounting– Disclosed in accounts

• Equity method– Recorded in formal records

• Cost method

The The Equity MethodEquity Method

• Record in accounting records:– Purchase of investment– Receipt of dividends– Share of proposed dividends

• Disclose in accounts– All of above– Share of associates profits

The The Equity MethodEquity Method

• Recording dividends– AASB 1016

• Investor must account for dividends as a deduction to the investment account

• Dividends a partial realisation of investment asset

Cost Equity method method

Purchase dateDr Investment in associate xxx xxxCr Cash xxx xxxpurchase of investment

During the yearDr Cash xx xxCr Dividend revenue xx xxreceipt of dividend

Cost Equitymethod

method End of year - associates a/csDr Investment in associate xxCr Revenue from associate xxshare of associates profits retained by associate

Dr Dividend receivable xx xxCr Dividend revenue xx xxshare of associates proposed dividend

The Equity MethodThe Equity Method

• The recording of profit share and dividends– Investors share of profits = profit x % interest– AASB 1018 requirements for profit share– AASB 1016 requirements for dividends

The Equity MethodThe Equity Method

• Disclosure - AASB 1016– Details about associates and investment– Investors share of:

• Profit before tax• Income tax expense• Extraordinary items

– Amount included in profits and reserves attributable to associates

The Equity MethodThe Equity Method

• Disclosre - AASB 1016– Movements in carrying amount of investments

in associates– Financial effects of material events occurring

after associates balance date– Impact of different accounting policies

• ASX rules

Where to get more informationWhere to get more information

• Other courses• List books, articles, electronic sources