Simonpage F1 Lesson7

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LESSON 11:Accounting for Investments in Subsidiaries and Associates

FINANCIALO P E R A T I O N SPAPER: F1

LECTURER : ABIODUN MAMORA

Sunday, May 13, 2012

LAGOS

Introduction

The extent of investment often determine the appropriate

accounting treatment. Degree of investment can be

classified as

• Basic- less than 20%

• Investment in associate- between 20% and 50%

• Investment in subsidiary- more than 50%

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LESSON 11: Accounting for Investment in Subsidiaries and Associate

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Reporting Requirement- IAS 27

SN Type of investment Reporting requirement

1 Basic investment Disclose dividend received

2 Investment in associate

Report share of realized and recognized gain

3 Investment in subsidiary

Prepare consolidated financial statement

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Exclusion from preparing consolidated accounts

A parent need not present consolidated financial statements if and only if;

• the parent is itself an wholly owned subsidiary or partially owned

subsidiary of another entity

• the parent’s debt or equity instruments are not traded in a public market

• the parent did not file, nor is in the process of filling, its financial

statements with a security commission

• the ultimate or any intermediate parent of the parent produces

consolidated financial statements available for public use that comply with

IFRS

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Acquisition AccountingThis requires the following rules to be followed

• add the parent’s and subsidiary’s assets, liabilities, income and expenses

•The cost of the investment in the parent books is eliminated against the

share of subsidiaries net assets at acquisition with any resulting goodwill

being treated in accordance with IFRS 3 (Revised)

•The share capital of the group is always only the share capital of the parent

•Adjustments are made to record the subsidiaries net assets at fair value

•Uniform accounting policies must be used

•Intra group balances and transactions must be eliminated in full

•Profit or losses on intra group transactions that are recognised in assets

should be eliminated in full

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Standard Working Notes for Consolidated Statement of Financial Position

W1. Group structure

W2. Net assets of subsidiary

W3. Good will

W4. Retained earnings-group resrves

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Goodwill

The difference between the cost of investment and the fair value

of the net assets acquired is known as goodwill on acquisition,

and the accounting standard IFRS 3 requires its recognition in

consolidated financial statement

Illustration1

Consolidated Statement of Financial Position

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Pre and Post Acquisition Reserves

In the case where the parent made the purchase some months or years prior

to the reporting date, the subsidiary’s reserves must be split out into pre and

post-acquisition.

The parent has influenced any change in reserves since the acquisition date

only and can only share in the change in asset value after acquisition.

Illustration 3

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Fair Value Adjustment

The group accounts must include the subsidiary’s net assets at their fair

value at the date of acquisition. This reflect the cost to the group at

acquisition and ensures an accurate measurement of goodwill

Depreciation Adjustment

Fair adjustment may involve adjusting non current assets value which will

consequently involve an adjustment to depreciation value. Depreciation must

be based upon the carrying value of the non current assets concerned.

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Intra-group Balances

Intra-group balances must be eliminated in full. The group as a

single entity can not owe or be owed balances to itself.

Intra-group balances may arise in the following situations

•P and S trading with each other resulting in current account

balances i.e. receivables and payable

•Intra-group loans resulting in an investment and loan balance

Cash and Goods in Transit

The treatment will be DR bank or inventory and CR receivables or

payables in the consolidated statements.

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Provisions for Unrealised Profits

P and S may sell goods to each other resulting in a profit being recorded in

the selling company FS. If these goods are still held at year end then there is

need to adjust for the unrealised profits in the groups account. Adjust for

• profit elements on the goods

•inventory

Non-current Assets Provision for Unrealised Profit

P and S may sell non-current assets to each other resulting in a profits being

recorded in the selling company FS. If these non-current assets are still held

at the year end the profits is unrealised from the groups perspective and

should be removed.

Test your understanding 9

Thanks!

Abiodun MamoraAbiodun [email protected]@gmail.com

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