Chapter 28 Associates and Equity Accounting I: Basic Elements

Lecture Topics The investor and the associate Decisions on accounting and reporting methods Illustration of the equity accounting method Disclosures

Lecture References Text- Chapter 28 AASB- 1016

Key Concepts Associated entity Investor/associate relationship Significant influence Equity accounting

The Investor and the Associate Investor/associate relationship – associate - an investee, not being: a subsidiary a partnership a short-term investment – over which investor has significant influence

The Investor and the Associate Does not establish new entity Nature of significant influence – % of voting power – Board representation – Extent of material inter-company transactions

The Investor and the Associate Nature of significant influence – Management or technology transfer – Operating relationships or dependencies – Restrictions on distributions

Decisions on Accounting and Reporting Methods Alternative accounting methods – Cost method – Consolidation method – Equity method

Equity method - example Associate 20% owned by investor Associate: – owner’s equity start X4$ – profit for X4 $ – no dividends – owner’s equity end X4$ Investor: – carrying value of inv.$

Equity method - example Dr Investment in associate Cr Revenue from associates % share of associates reported results for 19X4 Dr Investment in associate Cr Revenue from associates % share of associates reported results for 19X4 Investment has new carrying value of $ Investor will report revenue of $16 000

Decisions on Accounting and Reporting Methods Application of the methods – Potential application – Accounting standard requirements AASB 1016

Financial Statements Investor’sConsolidated Parent Investor Investments in SubsidiariesCostConsolidation AssociatesCostEquity Method OtherCostCost Investor not Parent Investments in AssociatesEquity Method - OtherCost - Financial Statements Investor’sConsolidated Parent Investor Investments in SubsidiariesCostConsolidation AssociatesCostEquity Method OtherCostCost Investor not Parent Investments in AssociatesEquity Method - OtherCost - Application of Investment Accounting Methods

Decisions on Accounting and Reporting Methods Criteria for applying the equity method – Significant influence – Materiality – Must meet both

The Equity Method Recording issues – Data requirements Based on most recent financial statements Must only convey information available to associate’s shareholders Fair value of associates assets at investment date Goodwill and amortisation

The Equity Method – Data requirements Discount, assets written off against and accumulated depn. Unrealised profit adjustments Share of associates profits available and non- distributable Carrying amount of investment

The Equity Method Recording equity accounting – Disclosed in accounts Equity method – Recorded in formal records Cost method

The Equity Method Record in accounting records: – Purchase of investment – Receipt of dividends – Share of proposed dividends Disclose in accounts – All of above – Share of associates profits

The Equity Method Recording dividends – AASB 1016 Investor must account for dividends as a deduction to the investment account Dividends a partial realisation of investment asset

Cost Equity method method Purchase date DrInvestment in associatexxx xxx CrCashxxx xxx purchase of investment During the year DrCashxx xx CrDividend revenuexx xx receipt of dividend

Cost Equitymethod End of year - associates a/cs DrInvestment in associate xx CrRevenue from associate xx share of associates profits retained by associate DrDividend receivablexx xx CrDividend revenuexx xx share of associates proposed dividend

The Equity Method The recording of profit share and dividends – Investors share of profits = profit x % interest – AASB 1018 requirements for profit share – AASB 1016 requirements for dividends

The Equity Method Disclosure - AASB 1016 – Details about associates and investment – Investors share of: Profit before tax Income tax expense Extraordinary items – Amount included in profits and reserves attributable to associates

The Equity Method Disclosre - AASB 1016 – Movements in carrying amount of investments in associates – Financial effects of material events occurring after associates balance date – Impact of different accounting policies ASX rules

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