1. Chapter 28 Associates and Equity Accounting I: Basic Elements

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

3. Lecture References Text- Chapter 28 AASB- 1016

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

5. 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

6. 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

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

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

9. Equity method - example Associate 20% owned by investor Associate: – owner’s equity start X4$600 000 – profit for X4 $80 000 – no dividends – owner’s equity end X4$680 000 Investor: – carrying value of inv.$124 000

10. Equity method - example Dr Investment in associate16 000 Cr Revenue from associates 16 000 20% share of associates reported results for 19X4 Dr Investment in associate16 000 Cr Revenue from associates 16 000 20% share of associates reported results for 19X4 Investment has new carrying value of $140 000 Investor will report revenue of $16 000

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

12. 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

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

14. 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

15. 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

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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. Where to get more information Other courses List books, articles, electronic sources