IAS 28 Notes PDF

Preview

Summary

1. Objective: Accounting for investments in associates Application of equity method for investments in associates and joint ventures 2. Definitions: Associate: entity over which investor has significant influence Significant Influence: power to participate in financial operating policy decisions of ...

Description

1. Objective:  

Accounting for investments in associates Application of equity method for investments in associates and joint ventures

2. Definitions:   

Associate: entity over which investor has significant influence Significant Influence: power to participate in financial & operating policy decisions of investee (not control or joint control) Equity Method: investment is initially recognised at cost & adjusted for post-acquisition ∆ investor’s share of investee’s net assets i.e. o Share of investee’s profit or loss o Share of investee’s OCI

3. Significant Influence:   

If entity holds directly or indirectly (through subsidiaries) ≥20% voting power of investee = significant influence Majority/substantial ownership by another investor doesn’t prevent an entity from having significant influence Evidenced in one of following ways: o representation on Board of Directors o participation in policy-making & decisions about dividends o material txs o interchange of managerial personnel o provision of essential technical info

4. Equity Method:  

Initial recognition at cost CA of investment is ↑ed or ↓ed to recognize: 1

o

o

 

Investor’s share of profit or loss after acquisition  Do NOT combine 100% of line items as with a subsidiary  Do NOT add share of line items as with joint operation  SFP: “Investment in associate/JV” → non-current asset  SPLOCI: “Share of profit of associate/JV” (after-tax) Investor’s share of ∆OCI e.g. revaluation of PPE  SPLOCI: “Share of OCI of associate/JV” (after-tax)  SCE: account for each reserve, even though only 1 line item in SPLOCI

Distributions from investee reduce CA of investment e.g. dividend income Investment = Non-Current Asset

a. Exemptions from Equity Method (EM) 

Need not apply if entity is a parent that is exempt from preparing consolidated FS (IFRS 10) or if all of following apply: o Entity is wholly-owned/partially-owned subsidiary and its other owners informed + do not object to entity not applying EM o Debt/equity instruments not traded in public market o Entity didn’t file/not in process of filing FS with securities commission (to issue instruments in a public market) o Ultimate or any intermediate parent of entity produces consolidated FS

b. Discontinuing the use of the Equity Method  

Discontinue when investment ceases to be associate/joint venture If associate becomes JV or JV becomes associate – continue to apply EM

c. Equity Method Procedures 

Group’s share in associate/JV is sum of holdings by the parent & it’s subsidiaries but NOT the holdings of group’s other associates/JVs



Gains & losses from “upstream” (associate/JV sells to investor) and “downstream” (investor sells to associate/JV) txs bet. entity (incl. subsid.) and its associate/JV recognised to extent of investors’ interest :. investor’s share in gains/losses is eliminated DO NOT eliminate unrealized losses if loss is indicative of: o Write down to NRV o Impairment loss



2

Equity Method  

  

Txs between entity & its associate/JV = intragroup IAS 28: o Eliminate only unrealized gains/losses o Eliminate share of intra-group gains/losses No NCI Direction of sale impacts jnls NEVER ON Analysis Of Equity (AOE)! Adjust on FS

 

Use equity method from date investment becomes associate/JV On acquisition, any difference between cost & entity’s share of net fair value: o Goodwill included in CA of investment o Gain on Bargain Purchase included as income in period investment is acquired

  

Most recent FS of associate/JV used in applying equity method If end of rep. period differs, associate/JV prepares FS as of same date as entity unless impracticable If impracticable, adjustments made for effects of significant txs/events that occur between associate/JV rep date and entity’s rep date – difference between dates no more than 3 months Same accounting policies

 

Associate/JV has outstanding cumul. pref shares (classified as equity) held by parties other than entity – entity calculates share of profit/loss after adjusting for dividends on such shares, whether or not declared o If investor owns preference shares → apply IFRS 9 (Don’t eliminate!) o If loan to associate/JV → apply IFRS 9 (Don’t eliminate!)



If entity’s share of losses ≥ interest in associate/JV – discontinue recognizing share of further losses o Interest = CA of investment det. using equity method + long-term interests o Long-term interest = item for which settlement neither planned nor likely to occur e.g. pref shares; Long term receivables or loans o Excess losses applied to other components of entity’s interest in reverse order of seniority:  Ordinary Shares  Pref Shares  Loans o Associate/JV subsequently reports profits, entity resumes recognizing share of profit only after its share of profits = share of losses not recognised

3

5. Practical Application: Analysis of Equity → no column for NCI a. Goodwill & Gain on Bargain Purchase (GOBP)  

Cost of investment > investor’s share = GOODWILL → no jnl entry Cost of investment < investor’s share = GOBP → jnl entry (Dr to Investment) o Recognise in P/L @ acquisition o Adjust RE in following yrs

Dr Investment in associate (SFP) Retained Earnings – Opening Balance Revaluation Surplus – Opening Balance Correct opening balances

xxx

Investment in associate (SFP) Share of profit in associate (P/L) Share of profit of associate for CY

xx

Investment in associate (SFP) Share of OCI of associate (OCI) Share of since acquisition revaluation surplus of associate

x

Dividend income (P/L) Investment in associate (SFP) Eliminate dividend against investment

x

Cr

xx x

xx

x

x

b. Fair Value of A/L @ Acquisition   

Add GOBP here!

Adjust A/L to fair value @ acquisition → revaluation surplus/deficit is AFTER TAX! Adjustments in subsequent periods REVALUATION DEFICIT: o Deduct from RE @ (in AOE – after tax) o Amortise over RUL & add back to RE since & PFY

c. Losses of Associates/JVs

4

 

Limit accumulated loss “since acquisition” to cost of investment (+ GOBP if applicable) Carry forward unrecognized loss (doesn’t impact FS) until profit in subsequent period → offset



See Example 3 in class notes

Dr Share of loss of associate (P/L) Investment in associate (SFP) Investment in preference shares (SFP) Loan to associate (SFP)

Cr

xxx x x x

d. Sale of Inventories by INVESTOR to ASSOCIATE Our share ONLY! :. x % [e.g. 35%] 

Don’t have associate’s inventories on our SFP :. use “Investment in associate”

Dr Retained Earnings – Opening Balance Deferred tax (SFP) Investment in associate (SFP) Correct opening balances for PY.

x x

Investment in associate (SFP) Cost of Sales (COS) (P/L) Revenue (P/L) Unrealised profit from PY realizing in CY.

xx x

Income Tax Expense (P/L) Deferred Tax (SFP)

x

Revenue (P/L) [e.g. CB x 35%] COS (P/L) [e.g. CB x 100/150 x 35%] Investment in associate (SFP) [e.g. CB x 50/100 x 35%] Eliminate unrealized profit for CY

xxx

Deferred tax (SFP) Income Tax Expense (P/L)

x

Cr

xx

xxx

x

xx x

x

5

  

No intragroup on AOE Adjust for intragroup txs when calculating amounts on FS Impacts: o Revenue, Cost of sales & Income Tax Expense on SPLOCI o “Investment in associate” on SFP

e. Sale of Inventories by ASSOCIATE to INVESTOR Our share ONLY! :. x % 

Don’t have Revenue & Cost of sales or Income Tax Expense of associate in our SPLOCI :. use “Share of Profit of Associate”

Dr Retained Earnings – Opening Deferred Tax (SFP) Inventories (SFP) Correct opening balances for PY.

xx x

Inventories (SFP) Deferred Tax (SFP) Share of profit of associate (P/L) Unrealised profit of PY realizing in CY.

xxx

Share of profit of associate (P/L) Deferred Tax (SFP) Inventories (SFP) Eliminate unrealized profit for CY.

xx x

  

Cr

xxx

x xx

xxx

No intragroup on AOE Adjust for intragroup txs when calculating amounts on FS Impacts: o “Share of Profit of Associate” on SPLOCI o “Inventories” on SFP

6

f. Sale of Depreciable PPE by INVESTOR to ASSOCIATE Our share ONLY! :. x %

Subsequent

Initial

Dr Profit on sale of equipment (P/L) Investment in associate (SFP) Eliminate unrealized profit initially.

x

Deferred Tax (SFP) Income Tax Expense (P/L)

x

Retained Earnings – Opening Balance Deferred Tax (SFP) Investment in associate (SFP) Adjust opening balances subsequently.

x x

Investment in associate (SFP) Profit on sale of equipment (P/L) Unrealised profit realizes in CY.

x

Income Tax Expense (P/L) Deferred Tax (SFP)

x

  

Cr

x

x

xx

x

x

No intragroup in AOE Adjust for intragroup in FS calcs Impacts: SPLOCI o Other Income – eliminate profit & add back realization of profit o Income Tax Expense SCE o OB RE – deduct remaining unrealized profit; add GOBP; o PFY – deduct intragroup dividend; add back profit realizing SFP o “Investment in Associate” – jnls relating to sale of PPE (pre-tax) o RE – adj. to OB less profit realizing add related income tax

7

g. Sale of Depreciable PPE by ASSOCIATE to INVESTOR Our share ONLY! :. x % NB! ∆ Line Items used!

Subsequent

Initial

Dr Share of profit of associate (P/L) Deferred Tax (SFP) Equipment – cost (SFP) Accumulated Depreciation - Equipment (SFP) Eliminate unrealized profit initially.

After tax # Tax # Diff. in CPs

Accumulated Depreciation – Equipment (SFP) Deferred Tax (SFP) Share of profit of associate (P/L) Unrealised profit realizes by reversal of excess depr.

xx

Retained Earnings – Opening Balance Deferred Tax (SFP) Equipement – cost (SFP) Accumulated Depreciation - Equipment (SFP) Adjust opening balances subsequently.

x x x

  

Cr

Balancing

x x

xxx

No intragroup in AOE Adjust for intragroup in FS calcs Impacts: SPLOCI o Other income – eliminate dividend o “Share of profit of associate” – add CY realization (after tax) SCE o OB RE – deduct remaining unrealized profit; add GOBP; o PFY – deduct intragroup dividend; add back profit realizing SFP o “PPE” – jnls relating to sale of PPE (deduct acc. depr & add back realization for yr) o RE – adj. to OB less profit realizing add related income tax

8

6. Equity Accounting & Complex Groups: a. Horizontal Group 

  

Direct stakes in: o Subsidiaries & Associate/JV o More than 1 Associate/JV Do each consolidation separately Do each equity accounting separately Add results together

See Example 8 in class notes

b. Vertical Group 



Subsidiary has an Associate/JV o Consolidate subsidiary’s consolidated FS o Equity accounting applied in consolidated FS Start at the bottom!

See Example 9 in class notes

9...