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Dear Mr Tutor,
I saw in questions relating to acquisition in stages (Associate becomes Subsidiary), the FV of previous held interest sometimes is calculated as (Purchase price of additional %/ Additional %) x previous %. But sometimes, the question gives us the share price, then the FV = previous shares x share price. Of course, the result is different then I would like to know which one is more correct?
By the way, I am also struggling with accounting treatment of investment in associate/ subsidiary in parent’s FS when consolidating. It is easy if the investment is treated as cost method. However, if parent uses Fair value model through either P/L or OCI then how the gain/loss of the investment would be treated in consolidation process? I am more confused when part of the gain/loss happens before the control/influence is established or happens before the relationship changes (i.e an associate >> sub).
Could you please explain with number example as I am not a bright one 🙂
Thank you in advance!
# Update to my question:
I’ve read notes about Financial Instrument and IAS 27. IAS 27 states that in separate F/S investment in subsidiary could be accounted either of 3 method: cost; IFRS 9 or equity method. So:
+ Cost method: it means historical method? I usually see it on past questions.
+ Accordance to IFRS 9: I currently understand that investment in sub is satisfied as financial asset. However, as investment in sub does not have specified date of payment so is it correct if I conclude that FVTPL is only choice for parent when preparing their separate F/S? FVTOCI is prohibited, not able to use as I used to think in above question?
+ Equity method: does it mean that investment in sub now can be accounted as: Initial value + % holding x change in net assets of sub (from acquisition date)?
Hi,
I think you’re trying to over complicate it all. There is no better method, you just have to use whichever method works based on the information given in the question. You will only ever be able to use one method in the exam.
With regards to your second point, as the investment is removed on consolidation of either the subsidiary or the associate, then any associated gain or loss also needs to be removed.
Hope this helps.
Thanks
Thank you for your reply.
How about my question in the second post? I would like to know which are allowable methods for investment in sub in separate F/S of parent.
Hi,
You can’t use the equity method you mention as that is for an associate where we have influence.
You can use the other methods but it is much more likely that it would be FVTOCI and not FVTPL as the investment in the subsidiary is not held for trading purposes.
Thanks
“You can’t use the equity method you mention as that is for an associate where we have influence.”
But IAS 27 (amended 2014) says we could apply it in individual (separate) financial statement, sir? (The last paragraph of 1st page of IAS 27).
“You can use the other methods but it is much more likely that it would be FVTOCI and not FVTPL as the investment in the subsidiary is not held for trading purposes.”
It’s ok to me for FVTPL. But FVTOCI must satisfy business model which indicates contractual cash flows on specified dates. Investment in sub of course does not give us any date, so how can it be accounted as FVTOCI. I see some past question (especially Q1) uses FVTOCI. I am not sure if these questions followed old IAS 39.
Hi,
Accounting for an associate doesn’t just apply to group accounts, we could if we opted for it account for it in the individual company accounts, which answers your first point.
On your second one, FVTOCI is in no way related to business model tests or contractual cash flow tests. That is how we determine if a financial asset is held at amortised cost.
Thanks
Hi Binh
I’m thinking what you need to understand in your first question to the tutor is the CHANGES IN OWNERSHIP which I had challenges in understanding but I’m happy now that I do. There are four forms in it and dependent on what you are asked you will then be able to determine whether its profit on disposal etc etc it starts from understanding the following:
Relationships Entity
Control Subsidiary
Influence Associate
neither Investmentso from the above, relationships and entities may move in any direction such that @ times you may come from an associate to Subsidiary of vise versa and the four ways in Changes in ownership is as follows:
1. Acquisition – (say from 10% sub, purchase additional 40 percent and in substance you have moved from Investment to Subsidiary).
2 Disposal – from a subsidiary to either Associate or Investment (you calculate profit/loss on disposal)
and the other two are two forms of transfer which are:
3. From NCI to CI (use proportionate method) and
4. From CI to NCI (use the percentage method)
not sure if this will help and I stand to be corrected by the tutor where I have missed it.
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