IAS 28: Associates

Associates vs Subsidiaries

Initial Recognition

Subsidiaries
Dr Share Capital (SFP) 300 000
Dr Reserves (SFP) 700 000
Dr Goodwill (SFP) 300 000
Cr Investment in S (SFP) 800 000
Cr Non Controlling Interest (SFP) 500 000

Associates
None

Subsequent Pro Forma Journals - Profit Received

Subsidiary
1. Dr Non Controlling Interest (p/l) 100 000
Cr Non Controlling Interest (SFP) 100 000

Associates
1. Dr Investment in A Ltd (SFP) 100 000
Cr Share of Profit of Associates 100 000

Associate Line Item in SFP

Net Assets X Y Jnl Cons
1500 000 100 000 1600 000
Gain on Bargain Purchase
Acquisition Year
1. Dr Investment in A Ltd (SFP) 1400
Cr Share of Profits of Associate (p/l) 1400
Recognize gains in bargain purchase
= Debit investment with amount gained from Bargain Purchase

2. Dr Investment in A Ltd (SFP) 12 000

Cr Share of Profits of Associate (p/l) 12 000
Recognize share of profit of associate
= Debit investment with portion of earnings

Subsequent Years
Dr Investment in A Ltd (SFP) 13 400
Cr Retained Earnings – beginning 13 400
Adjust O/B of RE with profit share of previous year
Equity Method

Pro Forma Journals

1. Dr Investment in A Ltd (SFP) 64 200
Cr Retained Earnings – Since (SCE) 34 000
Cr Revaluation – At (SCE) 24 800
Cr Equity Profit (p/l) 2 000
Cr Revaluation (OCI) 3 400

2. Dr Investment in A (SFP) 4 000

Cr Retained Earnings (SCE) 4 000\

Statement of Comprehensive Income

Profit Share of Associate 8000
- Equity Profit 2000
- Dividends Received 6000
- Gain on Bargain Purchase -
- Interest Received -

Statement of Financial Position

Investment in Associate 148 200
CP (80 000) + Since (64 200) + BP (4 000)
Losses of Associates

Investments Must be limited to a RNil

Carrying Amount = CP + Reserves

CA = Ordinary Shares R40 000
Preference Shares + R10 000
Since Reserves + R10 000
Carrying Amount R60 000

P’s Share of Associates CY Loss = R65 000

Therefore, Limit loss to R60 000

Year 1
Dr Equity Loss (p/l) 60 000
Cr Investment in Ordinary Shares (SFP) 50 000
Cr Investment in Pref Shares (SFP) 10 000

Year 2
Dr Investment in Pref Shares (SFP) 10 000
Dr Investment in Ordinary Shares (SFP) 35 000
Cr Equity Profit 45 000

Note: revalue ordinary shares down 1st & add back Pref shares 1st on return to profit
Example

Analysis Total At Since

Share Capital 500 000

Reval Surplus 77 600
Retained Earnings 900 000
Other Reserves 100 000
1 557 600 631 040
Investment 648 000

Since – to CY
Retained Earnings 500 000 200 000
Other Reserves 200 000 80 000

CY
Equity profit 295 000 118 000
- Profit 495 000
- Dividends (200 000)

Reval Surplus 155 200 62 080

Transfer to Other (100 000) (40 000)
Other Reserves 100 000 40 000
2727600 1160 080

Proforma Journals
1. Dr Investment in Associate (SFP) 460 080
 Cr Equity Profit (p/l) 118 000
Cr Retained Earnings – Begin (SCE) 200 000
Cr Other Reserves – Begin (SCE) 80 000
Cr Revaluation Surplus – Current Year (OCI) 62 080
All Since Reserves (118 000 + 200 000 + 62 080 + 80 000)

2. Dr Retained Earnings (SCE) 40 000

Cr Other Reserves (SCE) 40 000

Statement of Comprehensive Income

Profit Share of Associate 118 000
- Equity Profit 198000
- Dividends Received (80000)
- Gain on Bargain Purchase -
- Interest Received -

Statement of Financial Position

Investment in Associate 1 108 080
CP (648 000) + Since (460 080) + BP (0)

Intragroup Transactions
Property Plant & Equipment

Parent -> Associate

1. Eliminate unrealized profit and tax effect

Dr Profit on Sale (p/l)
Cr Investment in A (SFP)

Dr Deferred tax (SFP)

Cr Income Tax Expense (p/l)

2. Realize through Use and tax effect

Dr Investment in Associate (SFP)
Cr Depreciation (p/l)

Dr Income tax Expense (p/l)

Cr Deferred Tax (SFP)

3. Opening Balance Adjustment

Dr Retained Earnings – since (SCE)
Dr Deferred Tax (SFP)
Cr Investment in Associate (SFP)
Property Plant & Equipment

Associate -> Parent

1. Eliminate unrealized profit and tax effect

Dr Share of Profit of Associate (p/l)
Cr Asset (SFP)
Dr Deferred tax (SFP)
Cr Income Tax Expense (p/l)

2. Realize through Use and tax effect

Dr Accumulated Depreciation (SFP)
Cr Share of Profit of Associate (p/l)
Dr Income tax Expense (p/l)
Cr Deferred Tax (SFP)

3. Opening Balance Adjustment

Dr Retained Earnings – since (SCE)
Dr Accumulated Depreciation (SFP)
Dr Deferred Tax (SFP)
Cr PPE Asset (SFP)

NB For Associate if it affects

SFP = Investment in Associate
SCI = Profit Share of Associate
General notes on Intragroup Transaction

1. If it only affects either SFP or SCI

No Adjustment Required

2. Associate SFP
Investment in Associate

3. Associate SCI
Share of Profit of Associate

4. Asset in Whose Hands?

P->A Decrease profit of A and Increase Investment in A

A->P Decrease Asset and increase Acc Dept