Chapter21 Associates

8/13/2019 Chapter21 Associates

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Chapter 21 Associates

1. Objectives

1.1 Define an associate.

1.2 Explain the principles for the use of equity accounting.

1.3 Prepare a consolidated statement of financial position to include a single subsidiary

and an associate.

1.4 Prepare a consolidated income statement to include a single subsidiary and an

associate.

A s s o c i a t e

i g n i f i c a n t

! n f l u e n c e

E q u i t y

" e t h o d

D e f i n i t i o n s

! n # o n s o l i d a t e d

$ P %

& o n % c u r r e n t A s s e t s

' a l a n c e ( i t h A s s o c i a t e

% & o t # a n c e l

) n r e a l i s e d P r o f i t %

A d * . D e p e n d s o n

+ h o e l l e r i s

# o n s o l i d a t e d

$ P

, r a d i n g ( i t h A s s o c i a t e

% D o n o t E l i m i n a t e

a l e s o r P u r c h a s e s

D i - i d e n d s f r o m A s s o c i a t e

% E x c l u d e f r o m # !

# o n s o l i d a t e d

!

A s s o c i a t e s

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2. Investments in Associates

2.1 Definitions

a/ Associate 0 An entity including an unincorporated entity such as a

partnership o-er (hich an in-estor has significant influenceand (hich is

neither a subsidiary nor an interest in a *oint -enture.

b/ Significant influence 0 is the power to participate in the financial and

operating polic decisionsof the in-estee but is not control or *oint control

o-er those policies. ignificant influence is assumed (ith a shareholding of

2 to .

c/ !"uit method0 A method of accounting (hereby the in-estment is initially

recorded at cost and ad*usted thereafter for the post%acquisition change in the

in-estor5s share of net assets of the in-estee. ,he profit or loss of the in-estor

includes the in-estor5s share of the profit or loss of the in-estee.

#. Associates in the Consolidated Statement of $inancial %osition

3.1 ,he associate is included as a non%current asset in-estment calculated as6

7

#ost of in-estment 8

hare of post acquisition profits 8

9ess6 !mpairment losses 8/

9ess6 )nrealised profit 8/

8

3.2 !&ample 1

: 9td acquired 2 interest in A 9td for 71 on 1 ;anuary 21. At the date of

the acquisition A 9td has the follo(ing shareholders5 funds6

7

$or the year ended 31 December 21 A 9td records profit after tax of 71> and

declared di-idend of 71.

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;ournal entries6

1 ;anuary 21 Dr 7/ #r /7/

!n-estment in associate 1

'an? 1'eing in-estment in associates recorded at cost./

31 December 21 in boo?s of : 9td5s consolidated financial statements/

!n-estment in associate 71> x 2/ 4

hare of profit of associate 4

'eing equity account for 2 interest in the associate5s profit./

'an? 71 x 2/ 2

!n-estment in associate 2'eing di-idend recei-ed from associate./

3.3 !"uit method is meaningfulbecause it allows a measure of responsibilitof an

in-estor for the performance of an associate by including the associate5s profits or

losses into account.

3.4 !n addition the carrying -alue of in-estment may better appro&imate its current

value than the cost value. ,he carrying -alue of in-estment is deemed to be increased(hen the associate ma?es profits (hile a decrease in -alue of in-estment is recorded

(hen the associate sustains losses.

3. Steps for %reparing the CS$% including associate

+1/ hareholding in the subsidiary

+2/ #onsolidation ad*ustments.

+3/ &et assets of subsidiary

At date of ac"uisition At the reporting date

7 7

hare capital 8 8

=eser-es6

hare premium 8 8

=etained earnings 8 8

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8 8

+4/ @ood(ill

7

Parent holding in-estment/ at fair -alue 8

! -alue at acquisition / 8

8

9ess6

$air -alue of net assets at acquisition +2/ 8/

@ood(ill on acquisition 8

!mpairment of good(ill 8/#arrying good(ill 8

/ !f fair -alue method adopted ! -alue B fair -alue of !5s holding at

acquisition number of shares 'CI own ( subsidiar share price/.

/ !f proportion of net assets method adopted 'CI value ) 'CI * ( fair value of

net assets at ac"uisitionfrom +2/.

+/ &on controlling interest

7

! -alue at acquisition as in +3/ 8

! share of post%acquisition reser-es +2/ 8

! share of impairment fair -alue method only/ 8/

8

+>/ @roup retained earnings

7

Parent retained earnings 1/ 8

@roup of sub5s post%acquisition retained earnings 8

@roup of associate post%acquisition retained earnings 8

9ess6 Parent share of impairment C A/ +4/ 8/

8

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+/ !n-estment in associate

7


Post%acquisition profits +>/ 89ess6 !mpairment 8/

9ess6 )nrealised profits 8/

8

3.> !&ample 2

'elo( are the statements of financial position of three companies as at 31 December

21.

: 9td 9td A 9td

'on+current assets 7 7 7

Property plant and equipment 112 F F4

!n-estments

>2 shares in 9td >44 % %

1>F shares in A 9td 224 % %

1FF F F4

Current assets!n-entory 3F >4 1

=ecei-ables 1 31 1

'an? 3 F 4>

> 1F 33>

,otal assets 23 1FF 11>

!"uit and liabilities

!"uit

71

=etained earnings 1232 >2 44F

232 1442 1F

Current liabilities

,rade payables 1 4F 13>

,axation 1 >> 32

241 4> 1>F

,otal equity and liabilities 23 1FF 11>

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Gou are also gi-en the follo(ing information6

1. : 9td acquired its shares in 9td on 1 ;anuary 21 (hen 9td had retainedlosses of 7>.

2. : 9td acquired its shares in A 9td on 1 ;anuary 21 (hen A 9td had retained

earnings of 714.

3. An impairment test at the year end sho(s that good(ill for 9td remains

unimpaired but the in-estment in A 9td has impaired by 72F.

4. ,he : @roup -alues the non%controlling interest using the fair -alue method.

,he fair -alue on 1 ;anuary 21 (as 71>.

-e"uired

Prepare the consolidated statement of financial position as at 31 December 21.

Solution

+1 hareholdings

9td A 9td

@roup F 3

&on%controlling interest 2 %

1

+2 &et asset of 9td

At date of

acquisition

At the

reporting date

7 7

hare capital F4 F4

=etained earnings >/ >2

F4 1442

+3 #alculation of @ood(ill

7

#ost of in-estment >44

$air -alue of ! 1>

F4

9ess6 1 net assets at acquisition F4/

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@ood(ill 2

+4 &on%controlling interest

7$air -alue of ! 1>

2 post%acquisition profit H2 x > C >2/I 131.>

21.>

+ @roup retained earnings

7

: 9td 1232

9td HF x > C >2/I 2>.4A 9td H3 x 44F 0 14/I 2.4

9ess6 !mpairment of associate 2.F/

1F4F

+> !n-estment in associate

7


Post acquisition profits +/ 2.4

9ess6 !mpairment 2.F/

313.>

Consolidated statement of financial position as at #1 December 2/1/

'on+current assets 7 7

@ood(ill +3/ 2

Property plant and equipment 112 C F/ 21

!n-estment in associate +>/ 313.>

2433.>

Current assets

!n-entory 3F C >4/ 12

=ecei-ables 1 C 31/

#ash 3 C F/ 3 1>13

,otal assets 44>.>

!"uit and liabilities

!"uit

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71 ordinary shares 112

=etained earnings +/ 1F4F

2>F

&on%controlling interest +4/ 21.>32.>

Current liabilities

,rade payables 1 C 4F/ >3

,axation 1 C >>/ 1 F

,otal equity and liabilities 44>.>

3. 0alance with associate

@enerally the associate is considered to be outside the group. ,herefore balances

bet(een group companies and the associate (ill remain in the consolidated

statement of financial position.

!f a group company trades (ith the associate the resulting payables and recei-ables

(ill remain in the consolidated statement of financial position.

3.F nrealised profit in inventor

)nrealised profits on trading bet(een group and associate must be eliminated to the

extent of the in-estor5s interest i.e. o(ned by parent/.

a/ %arent selling to associate 0 the profit elements is included in the parent

company5s accounts and associate holds the in-entory.

Dr. @roup retained earnings

#r. !n-estment in associate

b/ Associate selling to parent compan0 the profit element is included in the

associate company5s accounts and the parent holds the in-entory.

Dr. @roup retained earnings

#r. @roup in-entory

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. Associates in the Consolidated Income Statement

4.1 Associate in consolidated income statement

a/ !"uit accounting0 @roup shares of the associate3s profit after ta& less

an impairmentof the associate in the year.

b/ ,rading with the associate0 sales or purchasesbetween groupcompanies

and the associate are not normall eliminatedand (ill remain part of the

consolidated figures in the income statement. !t is normal practice to instead

adjust for the unreali4ed profit in inventor.

c/ Dividends from associates0 they are excluded from the consolidated income

statementJ the group share of the associate5s profit is included instead.

4.2 !&ample #

'elo( are the income statements for : and A for the year ended 31 December

21.

: 9td 9td A 9td

7 7 7

=e-enue F 4 3


1. : acquired F of se-eral years ago.

2. : acquired 3 of the equity share capital of A on 1 ;anuary 2.

3. During the year : sold goods to A for 71 million at a mar?%up of 2. At the

year%end A still held one quarter of these goods in in-entory.

4. At 31 December 21 it (as determined that the in-estment in the associate

(as impaired by 73 of (hich 72 related to the current year.

-e"uired

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Prepare the consolidated income statement for the group for the year ended 31

December 21.

Solution+1 hareholdings

9td A 9td

@roup F 3

&on%controlling interest 2 %

1

+2 )nrealised profit in in-entory

B 71 x 2K12 x 1K4 x 3

B 71

!ntercompany balances bet(een the parent and associate are not eliminated as

the associate is outside the group. ,herefore no ad*ustment in respect of the

sale for 71 million needs to be made.

!n the consolidated income statement unrealiLed profit in in-entory (ill

increase cost of sales since the parent is selling company.

Consolidated income statement for the ear ended #1 December 2/1/

7

=e-enue F C 4/ 12

/

Profit from operations 3

hare of associate H3 x >/ 0 2 impairmentI 1>

$inance costs C 1/ F/

Profit before tax 434

,axation C / 12/

Profit for the year 314

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!&amination Stle 5uestions

5uestion 1

'elo( are the statements of financial position of three entities as at 3 eptember 211.

P A

'on+current assets 7 7 7

Property plant and equipment 14 3

!n-estments 1 % %

24 3

#urrent assets > 3 1

,otal assets 3 1 4

Equity and liabilities

Equity

hare capital 71 each/ 1 1

=etained earnings 2

1 > 3

&on%current liabilities F 12

#urrent liabilities 4 2 1

3 1 4

$urther information

1. P acquired of the equity share capital of se-eral years ago paying 7 million in

cash. At this time the balance on 5s retained earnings (as 73 million.

2. P acquired 3 of the equity share capital of A on 1 million.

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-e"uired

Prepare the consolidated statement of financial position of the P group as at 3 eptember

211.

5uestion 2

P acquired F of on 1 December 2F paying 74.2 in cash per share. At this date the

balance on 5s retained earnings (ere 7F.


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,otal equity and liabilities 44 1>F 1

,he follo(ing information is rele-ant6

1. As at 1 December 2F plant in the boo?s of (as determined to ha-e a fair -alue of7 in excess of its carrying -alue. ,he plant had a remaining life of years at this

time.

2. During the post%acquisition period sold goods to P for 74 at a mar?%up of 2.

P had a quarter of these goods still in in-entory at the year%end.

3. !n eptember A sold goods to P for 71. ,hese goods had cost A 71. P had

7 at cost to P/ in in-entory at the year%end.

4. As a result of the abo-e inter%company sales P5s boo?s sho(ed 7 and 72 as

o(ing to and A respecti-ely at the year%end. ,hese balances agree (ith the amounts

recorded in 5s and A5s boo?s.

. &on%controlling interests are measured using the fair -alue method. ,he fair -alue of the

non%controlling interest at the date of acquisition (as 73>F. @ood(ill has impaired

by 71 at the reporting date. An impairment re-ie( found the in-estment in the

associate (as to be impaired by 71 at the year%end.

>. A5s profit after tax for the year is 7>.

-e"uired

Prepare the consolidated statement of financial position as at 3 &o-ember 211.

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5uestion #

9aurel acquired F of the ordinary share capital of :ardy for 71> and 4 of the

ordinary share capital of #omic for 7 on 1 ;anuary 28 (hen the retained earnings

balances (ere 7>4 in :ardy and 724 in #omic. 9aurel #omic and :ardy are public

limited companies.

,he statements of financial position of the three companies at 31 December 28 are set out

belo(6


1.


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4. #umulati-e impairment losses on recognised good(ill amounted to 71 at 31

December 28. &o impairment losses ha-e been necessary to date relating to the

in-estment in the associate.

-e"uired

Prepare a consolidated statement of financial position for 9aurel and its subsidiary as at 31

December 28 incorporating its associate in accordance (ith :MA 2F.

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5uestion

and the mar?et price of each a-annah

share at the date of acquisition (as 73.2.

3 of the equity shares of Axle at a cost of 7N per share in cash.


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-alue of this customer based contract has a fair -alue of 71 million and an indefinite life

and has not suffered any impairment.

ii/


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5uestion 6

:edra a public listed company acquired the follo(ing in-estments6

i/


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,he follo(ing information is rele-ant.

a/ $air -alue ad*ustments and re-aluations6

i/ :edraOs accounting policy for land and buildings is that they should be carried at

their fair -alues. ,he fair -alue of al-adorOs land at the date of acquisition (as72 million in excess of its carrying -alue. 'y 3 eptember 28 this excess had

increased by a further 7 million. al-adorOs buildings did not require any fair

-alue ad*ustments. ,he fair -alue of :edraOs o(n land and buildings at 3

eptember 28 (as 712 million in excess of its carrying -alue in the abo-e


ii/ ,he fair -alue of some of al-adorOs plant at the date of acquisition (as 72

million in excess of its carrying -alue and had a remaining life of four years

straight0line depreciation is used/.

iii/ At the date of acquisition al-ador had unrelie-ed tax losses of 74 million from

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pre-ious years. al-ador had not accounted for these as a deferred tax asset as its

directors did not belie-e the company (ould be sufficiently profitable in the near

future. :o(e-er the directors of :edra (ere confident that these losses (ould be

utilised and accordingly they should be recognised as a deferred tax asset. 'y 3

eptember 28 the group had not yet utilised any of these losses. ,he income

tax rate is 2.

b/ ,he retained earnings of al-ador and Aragon at 1


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5uestion 7

'elo( are the summarised statements of financial position for three companies as at 31 "arch

26

&otes6

Pacema?er is a public listed company that acquired the follo(ing in-estments6

i/ !n-estment in yclop

million shares in yclop for an immediate

cash payment of 721 million and issued at par one 1 71 loan note for e-ery 2

shares acquired. yclopOs retained earnings at the date of acquisition (ere 712 million.

ii/ !n-estment in Qardine


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,here has been no impairment to good(ill or the -alue of the in-estment in Qardine.

-/ At the date of acquisition of yclop o(ned a recently built property that (as carried at

its depreciated/ construction cost of 7>2 million. ,he fair -alue of this property at the

date of acquisition (as 7F2 million and it had an estimated remaining life of 2 years.

$or many years yclop has been selling some of its products under the brand name of

OMy?lopO. At the date of acquisition the directors of Pacema?er -alued this brand at 72

million (ith a remaining life of 1 years. ,he brand is not included in yclopOs


-i/ ,he in-entory of yclop at 31 "arch 2 includes goods supplied by Pacema?er for

7> million at selling price from Pacema?er/. Pacema?er adds a mar?%up of 4 on

cost (hen selling goods to yclop. ,here are no intra%group recei-ables or payables at

31 "arch 2.

-ii/ QardineOs profit is sub*ect to seasonal -ariation. !ts profit for the year ended 31 "arch

2 (as 71 million. 72 million of this profit (as made from 1 April 2F to 3

eptember 2F.

-iii/ &one of the companies ha-e paid any di-idends for many years.

-e"uired

Prepare the consolidated statement of financial position of Pacema?er as at 31 "arch 2.

2 mar?s/

Adapted A##A $ $inancial =eporting ;une 2 1/

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5uestion 8

'elo( are the statements of comprehensi-e income of ,yson its subsidiary Douglas and

associate $ran? at 31 December 28F. ,yson Douglas and $ran? are public limited

companies.


1. ,yson acquired F shares in Douglas for 71FF 3 years ago (hen Douglas had a

credit balance on its reser-es of 74. Douglas has 1 71 ordinary shares.

2. ,yson acquired 4 shares in $ran? for 7> 2 years ago (hen that company had

a credit balance on its reser-es of 72. $ran? has 1 71 ordinary shares.

3. During the year Douglas sold some goods to ,yson for 7>> cost 74F/. &one of

the goods had been sold by the year end.

4. @roup policy is to measure non%controlling interests at acquisition at fair -alue. ,he fair

-alue of the non controlling interests in Douglas at acquisition (as 74. An

impairment test carried out at the year end resulted in 71 of the recognised

good(ill relating to Douglas being (ritten off and recognition of impairment losses of724 relating to the in-estment in $ran?.

-e"uired

Prepare the consolidated statement of comprehensi-e income for the year ended 31 December

28F for ,yson incorporating its associate.

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5uestion 9

:oldrite purchased of the issued share capital of taybrite and 4 of the issued share

capital of Allbrite on 1 April 284.

Details of the purchase consideration gi-en at the date of purchase are6

taybrite6 a share exchange of 2 shares in :oldrite for e-ery 3 shares in taybrite plus an

issue to the shareholders of taybrite F loan notes redeemable at par on 3

;une 28> on the basis of 71 loan note for e-ery 2 shares held in taybrite.

Allbrite6 a share exchange of 3 shares in :oldrite for e-ery 4 shares in Allbrite plus 71 per

share acquired in cash. ,he mar?et price of :oldriteOs shares at 1 April 284 (as

7> per share.

,he summarised income statements for the three companies for the year to 3 eptember

284 are6


i/ A fair -alue exercise (as carried out for taybrite at the date of its acquisition (ith the

follo(ing results6

,he fair -alues ha-e not been reflected in taybriteOs financial statements. ,he increase

in the fair -alue of the plant (ould create additional depreciation of 7 in the

post acquisition period in the consolidated financial statements to 3 eptember 284.

Depreciation of plant is charged to cost of sales.

ii/ ,he details of each companyOs share capital and reser-es at 1


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iii/ !n the post acquisition period :oldrite sold goods to taybrite for 71 million. :oldrite

made a profit of 74 million on these sales.


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5uestion :


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iii/ Prior to its acquisition ardonic had been a good customer of Patronic. !n the year to 31

"arch 2F Patronic sold goods at a selling price of 71N2 million per month to

ardonic both before and after its acquisition. Patronic made a profit of 2 on the cost

of these sales. At 31 "arch 2F ardonic still held in-entory of 73 million at cost to

ardonic/ of goods purchased in the post acquisition period from Patronic.

i-/ An impairment test on the good(ill of ardonic conducted on 31 "arch 2F

concluded that it should be (ritten do(n by 72 million. ,he -alue of the in-estment in

Acerbic (as not impaired.

-/ All items in the abo-e income statements are deemed to accrue e-enly o-er the year.

-i/ !gnore deferred tax.

-ii/ !t is the group policy to -alue the non%controlling interest at its proportionate share of

the fair -alue of the subsidiaryOs identifiable net assets.

-e"uired

a/ #alculate the good(ill arising on the acquisition of ardonic at 1 August 2.

> mar?s/

b/ Prepare the consolidated income statement for the Patronic @roup for the year ended 31

"arch 2F.

&ote. assume that the in-estment in Acerbic has been accounted for using the equity

method since its acquisition. 1 mar?s/

c/ At 31 "arch 2F the other equity shares / in Acerbic (ere o(ned by many

separate in-estors. hortly after this date pe?ulate a company unrelated to Patronic/

accumulated a > interest in Acerbic by buying shares from the other shareholders. !n

"ay 2F a meeting of the board of directors of Acerbic (as held at (hich Patronic lost

its seat on AcerbicOs board.

-e"uired

Explain (ith reasons the accounting treatment Patronic should adopt for its in-estment

in Acerbic (hen it prepares its financial statements for the year ending 31 "arch 2.

4 mar?s/

,otal 2 mar?s/

Adapted A##A $ $inancial =eporting ;une 2F 1/

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5uestion 1/

:osterling purchased the follo(ing equity in-estments6

are6


i/ ,he other income is a di-idend recei-ed from unlee on 31 "arch 28>.

ii/ ,he details of unleeOs and AmberOs share capital and reser-es at 1


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,he fair -alues ha-e not been reflected in unleeOs financial statements.

Plant depreciation is included in cost of sales.

&o fair -alue ad*ustments (ere required on the acquisition of Amber.

i-/ !n the year ended 3 eptember 28> :osterling sold goods to unlee at a selling price

of 71F million. :osterling made a profit of cost plus 2 on these sales. 7. million at

cost to unlee/ of these goods (ere still in the in-entories of unlee at 3 eptember

28>.

-/ !mpairment tests for both unlee and Amber (ere conducted on 3 eptember 28>.

,hey concluded that the good(ill of unlee should be (ritten do(n by 71.> million

and due to its losses since acquisition the in-estment in Amber (as (orth 721.

million.

-i/ All trading profits and losses are deemed to accrue e-enly throughout the year.

-ii/ !t is group policy to -alue the non%controlling interest at acquisition at its proportionate

share of the fair -alue of the subsidiaryOs identifiable net assets.

-e"uired

a/ #alculate the good(ill arising on the acquisition of unlee at 1 under

the equity method prior to the impairment test. 4 mar?s/

c/ Prepare the consolidated income statement for the :osterling @roup for the year ended

3 eptember 28>. 1> mar?s/

,otal 2 mar?s/

Adapted A##A 2. $inancial =eporting December 2> 1/

Documents

Chapter21 Associates