Chapter 25

Investments in Associates

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Key to chapter content ICONS

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CHAPTER 25: Investments in Associates

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Significant Influence

Parent Associate – an entity over which an

investor has significant influence

Significant influence – the power to

Subsidiary participate in financial and operating policy
Associate
decisions but not control or joint control

I AS 2
8

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Significant Influence
0% 20% 50% 100%

Significant influence

Indicators:
 Representation on board or
similar Significant
 Participation in policymaking
influence
 Material transactions
 Interchange of management
presumed to exist
personnel unless can be
 Essential technical demonstrated
information provided otherwise

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Accounting for an Associate

Separate FS of investor Consolidated FS

 Cost, or  Equity method
 IFRS 9, or
 Equity method IAS IAS
Unless: 28
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 Parent exempt from
preparing FS
 Held for sale (IFRS 5)

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Equity Method

Cost
X
Investor’s share of post-acq retained earnings
Consolidated
X
statement of
Less: Impairment losses since acquisition
financial position
(X)
Investment in associate
X

Group Investor’s share of post-acquisition P/L

reserves and OCI less impairment losses

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 Activity: Investment in Associate

What is the investment in associate in the consolidated statement of

financial position at 31 December 20X7?

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Answer to Activity: Investment in Associate

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Activity: Consolidation with Associate

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Answer to activity: Consolidation with Associate
$ P S Total GW Imp’t To NCI Ass Con

Investment in S 800 - 800 (800) -

Investment in A 600 - 600 1,280 1,880
Non-current assets 1,600 800 2,400 2,400
Goodwill - - - 64 (64) -
Current assets 2,200 3,300 5,500 5,500
5,200 4,100 9,300 9,780
Share capital 1,000 400 1,400 (400) 1,000
Ret’d earnings 4,000 3,400 7,400 (520) (64) (576) 1,280 7,520
NCI - - - 184 576 760
Liabilities 200 300 500 500
5,200 4,100 9,300 9,780

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Answer to activity: Consolidation with Associate
(W1) Goodwill $ $ (W2) Profit to NCI $

Cost 800 20% (3,400 – 520) 576

NCI (920 x 20%) 184

Net assets at acquision (W3) Share of associate’s profit

SC 400 40% (3,600 – 400) 1,280

Retained earnings 520

(920)

64

Impairment (64)

Carrying amount 0

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Answer to activity: Consolidation with Associate

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Equity Method: Performance

Two line items:

Consolidated  Share of profit of associate

statement of Investor’s share of associate’s P/L
profit or loss and is recognised in investor’s P/L
OCI  Share of OCI of associate
Investor’s share of associate’s OCI is Pro-r
at
recognised in investor’s OCI for m e
id-
year
acqu
isition

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Activity: Income from Associate

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Answer to activity: Income from Associate
$ P S Adjust’s Consol
Revenue 14,000 12,000 26,000
Cost of sales (9,000) (4,000) (13,000)
Gross profit 5,000 8,000 13,000
Administrative expenses (2,000) (6,000) (8,000) Dr Dividend
Dividend from associate 400 - - income $400
Cr Investment
(400) (CSOFP) $400
Share of profit of associate 800 - 800
(40% x 2,000) Dr Investment
Income taxes (1,000) (1,200) (2,200) (CSOFP) $800
Cr Share of profit
Profit for the year 2,800 800 3,600
of associate $800
Profit attributable to
Owners of the parent 2,800 640 3,440
NCI (20%) 160 160
3,600
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Impairment

Impairment
test (IAS 36) Recognise
Indicators
as a single loss
asset
 Significant financial Dr P’s P/L
difficulty Cr Investment in
 Breach of contract associate
 Bankruptcy is probable
 Active market for
investment disappeared

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Transactions with an Associate

Intercompany transactions/balances are not eliminated

Unrealised profit

Associate Group Co Group Co Associate

‘Upstream’ ‘Downstream’

Dr Share of profit of Dr Group cost of sales of

associate Group selling company
Cr Group inventories % Cr Investment in associate
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Activity: Unrealised Profit

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Answer to Activity: Unrealised Profit

1. Calculate unrealised profit: $150 – $100 = $50

2. Calculate group share $50 x 40% = $20
3. Eliminate:

P is the selling company and makes the profit; A holds the goods,
therefore:

DR cost of sales (P) Group$20

retained earnings
CR Investment in associate $20

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 Activity: Consolidation with Associate

(a) Prepare the consolidated statement of profit or loss and other

comprehensive income of Perro Co for the year ended 31 December 20X8.
(b) Calculate the carrying amount of the investment in Aire Co in the consolidated
statement of financial position of Perro Co as at 31 December 20X8.

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Answer to Activity: Consolidation with Associate

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Exam focus

Section C
Consolidated FS
• Preparation
OTQs • Analysis, or
• Calculations • “Add on”
• Indicators of Associates
significant
influence • Do NOT consolidate A
• DO take only the group % of
any URP
• DO time apportion results if
necessary
• DO use spreadsheet
functionality to show
workings

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Chapter 25: Summary

 Where an investor has significant influence over an investee, the investee

is an associate and equity accounting applies
 Significant influence is assumed for equity shareholdings of 20-50%
 The associate is measured at:
Cost + group % profit and OCI – dividends received – impairment losses
 Group % of profit and group % of OCI of an associate are recognised as
two line items in the consolidated SoPL and OCI
 A bargain purchase reduces the share of profit of the associate in the year
significant influence is achieved
 An impairment loss is recognised in the investor’s profit or loss
 The group share of unrealised profits on transactions between an
associate and group companies is eliminated.
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 Chapter 25: Practice questions

Study Question Bank

Priority
Haley 20 mins*
Additional
Pedantic (part (b))
Hamish
* plus time for tutor guidance

For FR
Attempt the Study Question Bank questions listed above after studying this chapter
Attempt Revision Question Bank questions in your revision phase, after studying all chapters

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Technical article: Consolidation and equity
accounting
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Thank you

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