1. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-1 Chapter 33 Accounting for equity investments

2. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-2 Objectives of this lecture Be aware of how to account for equity investments Be aware that investments in associates (defined as investees over which the investor has significant influence) must be accounted for by using the equity method of accounting, and know how to apply this method of accounting Understand that if the investor is a parent entity (that is, it has at least one subsidiary) then the cost method of accounting is to be used in its own individual financial statements and the equity method in the consolidation worksheet to account for the investments in associates Understand that if an investor is not a parent entity (it has no subsidiaries) the equity method of accounting is to be used in its own accounts to account for investments in associates

3. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-3 Objectives (cont.) Be aware of tests that can be applied to determine the existence of significant influence Be aware of the disclosure requirements of AASB 128 Investments in Associates

4. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-4 Introduction to accounting for equity investments The lecture considers how to account for equity investments where the investor does not have control over the investee To determine the correct accounting treatment for equity investments a number of factors should be considered: –What is the nature of the investor’s operations? –Is the investment held for trading purposes?

5. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-5 Introduction to accounting for equity investments (cont.) If the investor has significant influence over the investee, the equity method of accounting must be applied –Investment in an associate is increased by any post- acquisition movements in the associate’s earnings and reserves An equity investment is deemed to exist where (AASB 132): –the investor has acquired an equity instrument, which can be defined as:  any contract that evidences a residual interest in an entity’s assets after deducting all its liabilities

6. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-6 Why do firms make equity investments? Instead of leaving cash in low interest bank deposits To have ready access to funds for dividend payments, taxes and periodic capital works When sources of cash are needed in the short term, firms invest in marketable securities readily convertible to cash –Disclosed as current assets Marketable securities: –are debentures, shares, options or bonds readily sold at reasonably short notice

7. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-7 Why do firms make equity investments? (cont.) Long-term investments –Shares in listed companies to yield income from dividends and increases in market value –Diversified portfolio of shares to reduce overall risk exposure –Larger stake in a specific company in anticipation of a takeover bid or to gain representation on the board

8. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-8 Types of investments Equity investments –Usually shares in an organisation –Give investor an ownership interest and therefore share in profits Bonds –Instrument that binds one party to repay funds to another party at a specified time and rate –For example, debentures and unsecured notes –Can be issued at face value, discount or premium –Some can have both debt and equity characteristics, e.g. convertible bonds

9. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-9 Types of investments (cont.) Cash investments –Can be converted to cash at short notice –For example, interest-bearing deposits Property investments –Various investments in physical property –For example, land and buildings –Held to earn rentals and/or capital appreciation –Can be purchased directly or through a property trust Also derivative instruments (Chapter 15) –Derive their value from other underlying assets –For example, futures and options

10. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-10 Accounting standards for equity investments There are a number of accounting standards that apply to equity instruments (and equity instruments are a subset of financial instruments), including: –AASB 7 Financial Instruments: Disclosure –AASB 132 Financial Instruments: Presentation –AASB 139 Financial Instruments: Recognition and Measurement Financial instrument (AASB 132) is: –any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity Categories of financial instruments in which equity investments can be included (AASB 139): –Financial asset or financial liability at fair value through profit and loss –Available-for-sale financial assets

11. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-11 Accounting standards for equity investments (cont.) Financial asset at fair value through profit or loss –Equity investments (current or non-current assets) can be recorded at fair value –Any periodic adjustments for movements in fair value are included in the profit or loss for the period –Classified as held for trading or, upon initial recognition, designated at fair value through profit or loss

12. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-12 Accounting standards for equity investments (cont.) Available-for-sale financial assets –Includes all financial assets that do not fall within other categories in AASB 139 –Are to be measured at fair value with changes in fair value to be recognised directly in equity –When financial asset is derecognised, e.g. through sale, changes in fair value are to be transferred out of equity and recognised in profit or loss

13. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-13 Investments in associates Key terms: –Associate: investee over which the investor has significant influence –Investee: entity in which another entity has an ownership interest –Investor: entity/person that has an ownership interest in another entity –Significant influence: power to participate in investee’s financial and operating policy decisions (but not control or joint control)

14. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-14 Equity method of accounting AASB 128 requires that: –where an investor does significantly influence an investee, the investor must adopt the equity method of accounting

15. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-15 Equity method of accounting (cont.) AASB 128 requires: –use of equity accounting within the financial statements, and –application of equity accounting to include corporate investments and non-corporate investments Significant influence –Used in determining whether the equity method is to be applied –Falls short of control –Normally stems from investor’s voting power in the investee –Assumed to exist where investor holds 20% or more of investee’s voting power

16. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-16 Equity method of accounting (cont.) Significant influence (cont.): –20% is not intended as an absolute cut-off point and significant influence may exist with an equity holding below this rather arbitrary amount of voting power –Other indicators  representation on board of directors  participation in policy-making processes  material transactions between investor and investee  interchange of managerial personnel  provision of essential technical information –If the investor subsequently ceases to have significant influence, they must cease using equity accounting

17. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-17 Application of the equity method of accounting As with the materiality application in other accounting standards, if investments are not material, investor not required to comply with AASB 128 Investment in associate is initially recognised at cost Carrying amount of investment is increased or decreased to recognise investor’s share of investee’s post- acquisition profits Investor’s share of investee’s profit or loss to be included in investor’s profit or loss Distributions (e.g. dividends) from investee reduce the investment’s carrying amount

18. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-18 Application of the equity method of accounting (cont.) Adjustments to carrying amount also for: –changes in investor’s proportionate interest in investee from changes in investee’s equity not included in investee’s profit or loss For example, revaluations of property, plant and equipment and foreign exchange translation differences Investor’s share of changes recognised directly in investor’s equity

19. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-19 Application of the equity method of accounting (cont.) If investor is required to prepare consolidated financial statements they should: –recognise investment in associate by applying equity method in consolidated financial statements, and –apply cost or fair value methods in own individual financial statements If investor does not prepare consolidated financial reports they should: –apply the equity method to their own ‘separate’ financial report (the above is summarised on the following slide)

20. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-20 Is the investor a parent entity?

21. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-21 Application of the equity method of accounting (cont.) At acquisition, the difference between investor’s share of adjusted values of investee’s net assets and cost of investment is regarded as: –goodwill, or –discount on acquisition Goodwill is not separately disclosed; however, any impairment of goodwill is taken into account in calculating the investor’s share of the associate’s profit or loss When recognising investor’s share of associate’s post- acquisition profits: –adjustments are to be made to profit share to take into account depreciation based on fair values of associate’s asset

22. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-22 Application of the equity method of accounting (cont.) Rationale for adopting the equity method –Stream of dividend receipts (revenue under the cost method) might provide inaccurate guide to investee’s performance and value –Provides a better indication of investment’s underlying worth Criticisms by opponents of equity method –Breaches realisation principle tied to notion of conservatism –Investor reports its share of investee’s profits, even without any dividends –Account balance of investment is neither cost nor fair value

23. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-23 Application of the equity method of accounting (cont.) Refer to Worked Example 33.1 (p. 1077)—Comparison of cost method and equity method of accounting Cost method To recognise initial acquisition of shares DrInvestment in X Ltd Cr Cash at bank To recognise receipt of pre-acquisition dividend DrCash at bank Cr Investment in X Ltd

24. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-24 Application of the equity method of accounting (cont.) Cost method (cont.) To recognise dividends provided by associate from post-acquisition profits DrDividend receivable Cr Dividend revenue To recognise receipt of previous dividend provided DrCash at bank Cr Dividend receivable

25. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-25 Application of the equity method of accounting (cont.) Equity method (where investor is a parent) In consolidation worksheet (Year 1) To record investor’s share of associate’s profit Dr Investment in X Ltd Cr Share of associate’s profit To recognise investor’s share of dividends DrDividend revenue Cr Investment in X Ltd

26. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-26 Application of the equity method of accounting (cont.) In consolidation worksheet (Year 2) Prior period share of profits Dr Investment in X Ltd Cr Retained earnings (opening) To recognise share of associate’s losses Dr Share of associate’s profit/loss Cr Investment in X Ltd

27. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-27 Application of the equity method of accounting (cont.) To recognise investor’s share of dividends DrDividend revenue Cr Investment in X Ltd Investor’s share of associate’s increase in revaluation reserve DrInvestment in X Ltd Cr Revaluation surplus

28. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-28 Application of the equity method of accounting (cont.) Equity method (where investor is not a parent) In investor’s accounts (Year 1) Initial acquisition DrInvestment in X Ltd Cr Cash at bank Dividends from associate’s pre-acquisition earnings Dr Cash at bank Cr Investment in X Ltd Share of associate’s profit Dr Investment in X Ltd Cr Share of associate’s profit Investor’s share of associate’s declared dividends DrDividend receivable Cr Investment in X Ltd

29. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-29 Application of the equity method of accounting (cont.) In investor’s accounts (Year 2) Receipt of dividend declared in previous period Dr Cash at bank Cr Dividend receivable Investor’s share of current loss of associate Dr Share of associate’s profit/loss Cr Investment in X Ltd Investor’s share of dividend declared by associate DrDividend receivable Cr Investment in X Ltd Investor’s share of increase in associate’s revaluation surplus DrInvestment in X Ltd Cr Revaluation surplus

30. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-30 Application of the equity method of accounting (cont.) Investor’s share of associate’s profit/loss to be adjusted for (AASB 128): –any depreciation differences caused by reassessing values of associate’s assets to fair value at date of acquisition Carrying amount of investment to be adjusted by (AASB 128): –post-acquisition increments or decrements in associate’s total reserves except to the extent that movements have already been reflected in associate’s or in carrying amount of investment

31. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-31 Worked Example 33.1—Comparison of the cost and equity methods of accounting On 1 July 2011 Cassie Ltd acquires a 30% interest in Joy Ltd for a cash consideration of $540 000 On the date of the acquisition, the assets of Joy Ltd are reported at their fair value. The total share capital and reserves of Joy Ltd as at the date of the acquisition are: Share capital $1 320 000 Retained earnings $480 000 Total shareholders’ funds $1 800 000 Additional information For the year ending 30 June 2012, Joy Ltd records an after-tax profit of $100 000. A dividend of $40 000 is declared and ratified by Joy Ltd on 30 June 2012, with the dividend coming from profits earned in the 2011–12 financial year In October 2012 Joy Ltd pays the $40 000 dividend provided for on 30 June 2012 For the year ending 30 June 2013, Joy Ltd records an after-tax loss of $50 000. On 30 June 2013 Joy Ltd declares dividends of $20 000, to be paid out of the profits earned in the 2012 financial year On 30 June 2013 Joy Ltd revalues its land upwards by an amount of $400 000 Cassie Ltd recognises dividends as revenue when the investee declares the dividends (that is, Cassie Ltd also recognises a dividend receivable) The corporate tax rate is 30%

32. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-32 Worked Example 33.1—Solution (a) Journal entries using the cost method in the accounts of Cassie Ltd Year ending 30 June 2012 July 2011 Dr Investment in Joy Ltd 540 000 Cr Cash at bank 540 000 June 2012 Dr Dividend receivable 12 000 Cr Dividend revenue 12 000 Year ending 30 June 2013 October 2012 Dr Cash at bank 12 000 Cr Dividend receivable 12 000 June 2013 Dr Dividend receivable 6 000 Cr Dividend revenue 6 000

33. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-33 Worked Example 33.1—Solution (cont.) (b) Journal entries using the equity method in the consolidated financial statements of Cassie Ltd (a parent entity) 30 June 2012 (in consolidation worksheet) Dr Investment in Joy Ltd 30 000 Cr Share of associate’s profit 30 000 Dr Dividend revenue 12 000 Cr Investment in Joy Ltd 12 000 30 June 2013 (in consolidation worksheet) Dr Investment in Joy Ltd 18 000 Cr Retained earnings—30 June 2012 18 000 Dr Share of associate’s profit/loss 15 000 Cr Investment in Joy Ltd 15 000 Dr Dividend revenue 6 000 Cr Investment in Joy Ltd 6 000 Dr Investment in Joy Ltd 84 000 Cr Revaluation surplus 84 000

34. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-34 Worked Example 33.1—Solution (cont.) Journal entries using the equity method in the accounts of Cassie Ltd (not a parent entity) Year ending 30 June 2012 July 2011 Dr Investment in Joy Ltd 540 000 Cr Cash at bank 540 000 30 June 2012 Dr Investment in Joy Ltd 30 000 Cr Share of associate’s profit 30 000 Dr Dividend receivable 12 000 Cr Investment in Joy Ltd 12 000

35. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-35 Worked Example 33.1—Solution (cont.) Year ending 30 June 2013 October 2012 Dr Cash at bank 12 000 Cr Dividend receivable 12 000 30 June 2013 Dr Share of associate’s profit/loss 15 000 Cr Investment in Joy Ltd 15 000 Dr Dividend receivable 6 000 Cr Investment in Joy Ltd 6 000 Dr Investment in Joy Ltd 84 000 Cr Revaluation surplus 84 000

36. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-36 Worked Example 33.2—Adoption of equity accounting in the presence of a difference between the fair values and book values of depreciable assets; and a post-acquisition asset revaluation On 1 July 2010 Rankin Ltd, a parent entity acquires a 25% interest in the issued capital of Coombes Ltd for a cash consideration of $80 000 At the date of acquisition, the shareholders’ equity of Coombes Ltd is $225 000, represented by: Share capital $165 000 Retained earnings $60 000 Total shareholders’ equity $225 000 Additional information On the date of acquisition, land and buildings have carrying amounts in the books of Coombes Ltd of $200 000 and $400 000 respectively. The market value of the land at the time is $225 000, and the buildings’ market value is $450 000. The buildings have a remaining expected useful life from 1 July 2010 of 20 years. For the year ending 30 June 2011 Coombes Ltd reported an after-tax profit of $50 000 from which it declared a dividend of $20 000 For the year ended 30 June 2012, Coombes Ltd reports an after-tax profit of $100 000, from which it declared a dividend of $50 000 Coombes Ltd revalues its land to $250 000 in June 2012 Rankin Ltd recognises dividends as revenue on receipt of the dividends. It is assumed that any goodwill acquired has not subsequently been impaired The tax rate is 30%

37. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-37 Worked Example 33.2—Solution Extra depreciation expense pertaining to buildings: ($50 000 ÷ life of the buildings) × Rankin Ltd’s ownership interest = ($50 000 ÷ 20) × 25% = $625. The after-tax effect of this is $625 × (1 – 0.30) = $437.50 Associate’s profit for the year ending 30 June 2011 $50 000 Rankin Ltd’s equity interest in Coombes Ltd × 25% $12 500 less Building depreciation adjustment (see above) (437.50) Rankin Ltd’s share of Coombes Ltd’s adjusted profit $12 062.50 As Rankin’s policy is to recognise dividends as revenue only as they are received, the dividend provided by Coombes in the 2011 financial year, but unpaid at year end, will not be recognised in calculating Rankin’s share of the associate’s profits June 2011 (in consolidation worksheet) Dr Investment in Coombes Ltd 12 062.50 Cr Retained earnings as at 30 June 2011 12 062.50

38. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-38 Worked Example 33.2—Solution (cont.) June 2012 (in consolidation worksheet) Dr Investment in Coombes Ltd 24 562.50 Cr Share of associate’s profit 24 562.50 Dr Dividend revenue 5 000 Cr Investment in Coombes Ltd 5 000 We increase the investment account for the share in the post- acquisition movement in the revaluation surplus, after tax, which is calculated as: ($250 000 – $225 000) × (1 – tax rate) × 25% = $4375. Dr Investment in Coombes Ltd 4 375 Cr Revaluation surplus 4 375

39. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-39 Inter-entity transactions Carrying amount of investment in associate must be increased or decreased by: –amount of investor’s share of associate’s post- acquisition profit or loss after adjustments for certain inter-entity transactions Investor required to adjust share of associate’s profit or loss for its share of any unrealised profits or losses from transactions between: –associate and investor (or any controlled entities), and –associate and any other associate of the investor

40. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-40 Inter-entity transactions (cont.) Transactions between associate and member of economic entity –The proportion of unrealised profits or losses to be eliminated is investor’s ownership interest in associate Transactions between two associates of the investor –The proportion of unrealised profits or losses to be eliminated is product of investor’s ownership interest in each associate

41. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-41 Inter-entity transactions (cont.) Refer to Figure 33.2 — Investor Company and its subsidiaries and associates — on the next slide Investor Company –Subsidiary A: 100% owned –Subsidiary B: 80% owned –Associate A: 40% owned –Associate B: 30% owned

42. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-42

43. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-43 Inter-entity transactions (cont.) Figure 33.2 (cont.) Transaction 1 –Associate A sells goods to Subsidiary A for a profit of $10 000 –At reporting date, Subsidiary A still has 50% of the goods on hand –Amount of unrealised gain = 50% of $10 000 = $5000 –Amount to be eliminated = 40% of $5000 = $2000

44. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-44 Inter-entity transactions (cont.) Figure 33.2 (cont.) Transaction 2 –Same circumstances as Transaction 1, except goods sold by Associate A to Subsidiary B –Same amount to be eliminated, even though Subsidiary B is only 80% held Transaction 3 –Associate A sells goods to Associate B for a $20 000 profit –At reporting date, 75% of goods on hand –Amount of unrealised gain = 75% of $20 000 = $15 000 –Amount to be eliminated = 12% (0.40 X 0.30) of $15 000 = $1800

45. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-45 Inter-entity transactions (cont.) Investor might not be able to access necessary information owing to lack of control over associate Refer to Worked Example 33.3 (p. 1066) — Sale of inventory and a depreciable asset from an associate to an investor –Journal entries as per previous examples

46. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-46 Losses incurred by an associate Equity method to be discontinued when: –effect of equity-accounting losses or revaluation decrements causes investment carrying amount to fall below zero When it is possible that associate will generate accounting profits or recognise revaluation increments in a subsequent period: –investment in associate to be increased only by investor’s share of profits or revaluation increments when such increases offset losses and revaluation decrements not recognised following suspension of the equity method

47. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-47 Carrying amount of the investment in an associate If investment carrying amount exceeds recoverable amount: –carrying amount to be written down to recoverable amount, and –write-down to be recognised in the income statement as an impairment loss If recoverable amount then increases above carrying amount: –reversal required up to maximum of previous write-down(s) –reversal amount to be recognised in income statement Maximum amount to be shown for investment in associate is carrying amount from equity method

48. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-48 Disclosure requirements As per AASB 128 –Fair value of investments in associates with published price quotations –Summarised financial information of associates, including the aggregated amounts of assets, liabilities, revenues and profit or loss –Reasons why investor concludes it has significant influence when it has less than 20% voting power –Reasons why investor concludes it does not have significant influence when it has more than 20% voting power –Reporting date of associate’s financial reports if different from that of investor

49. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-49 Disclosure requirements (cont.) As per AASB 128 (cont.) –Nature and extent of significant restrictions on associates’ ability to transfer funds to the investor –Unrecognised share of associate’s losses –The fact that an associate is not accounted for under the equity method –Summarised financial information of associates not accounted for using the equity method –Various details of significant associates –Amount of investor’s share of associates’ profit or loss before income tax and income tax expense –Amount of impairment losses and reversals –Amount of investor’s share of associates’ capital and other expenditure commitments

50. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-50 Disclosure requirements (cont.) As per AASB 128 (cont.) –Investments in associates accounted for using the equity method to be classified as non-current assets –Investor’s share of associates’ profit or loss to be separately disclosed –Investor’s share of changes recognised directly in associates’ equity to be recognised directly in equity by the investor

51. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-51 Disclosure requirements (cont.) In accordance with AASB 137 an investor shall disclose  its share of associate’s contingent liabilities incurred jointly with other investors  those contingent liabilities arising because investor is severally liable for associate’s liabilities

52. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 33-52 Summary The lecture considers issues relating to the valuation and disclosure of equity investments If an active market, equity investments to be valued at fair value (AASB 139) If investor has significant influence over investee (i.e. an associate), equity accounting must be used to account for investor’s interest in associate If an entity is deemed to be an associate, various disclosures are required in notes to investor’s financial statements (regardless of whether equity accounting is applied)