Investment in Associate

This looks suspiciously like a homework assignment that you’re asking me to do … and that’s not we’re here for!

I’ll help you, sure

You tell me what you think and then I’ll correct you if it’s necessary

Besides, I assume that if it’s not homework then it must be from a text and there should be an answer available

Try to work through the answer (having tried your own attempt first) and then, if you still don’t understand the printed solution, come back to me

OK?

Patents – agreed

There’s a pup in the transfer of the plant – carrying value $300, transfer value $400

In addition, Associate B is now depreciating over 5 years at $80 per annum, but plant WAS being depreciated at $100 per annum ($900/9)

If the transfer had not happened, that plant would be shown as $900 cost and $700 accumulated depreciation ie a carrying value of $200

As it is, it’s now in the Associate B’s records at $320 ($400 – $80) so that needs adjustment

“Company A sells goods to Assoc B for $100m, cost is $80m. 50% of goods have been sold. Assoc A has paid 60% of amount owing to company A.”

3 issues here – the pup, the sale / purchase and the intra-entity balance

1) the pup. My way of dealing with pups where they arise from a transaction with an associate is to adjust them ALWAYS in the records of the associate. The effect is to eliminate the investor’s share of unrealised profits automatically (we reduce in full the profit after tax in the associate and then take the investor’s share of that reduced profit after tax)

The pup is $20 * 50% (the proportion still unsold by the associate) = $10

Reduce the associate profits by $10 and then take the investor’s share of that adjusted profit after tax

2) the sale / purchase. Because an associate is not a member of the group (we have only a significant influence and not control) no adjustment is made to cancel from revenue and from cost of sales the value of the inter-entity trade

3) the inter-entity balance. For the same reasons that we don’t eliminate the inter-entity sale and purchase, we also don’t cancel the inter-entity outstanding balance at the year end

Same again with the loan – no cancellation because the associate is not under our control

The dividend of $45 (I assume that’s the full dividend of which the investor will receive $22.5) should not be included in the final statement of profit or loss. The investor will record as a pre-tax income their share of the associate’s profit after tax and it is out of those associate’s profits after tax that the associate will be taking the dividend

Thus, by taking our 50% share of that profit after tax, we are automatically taking our share of the dividend paid by the associate

The goodwill impairment of 40% – we no longer call it goodwill in the case of an investment in an associate – it’s now a “premium on acquisition” and that premium is shown as part of the calculation of the figure in the statement of financial position “Investment in Associate”

That calculation is: Cost of investment + share of post-acquisition retained earnings – any impairment in the value of the investment

Your question shows: “Company A has 50% interest in Associate B. Investment value is $500m” so it’s not clear what is the value of the “goodwill”

Whatever that value, we can calculate 40% and put that amount in as the third element of the calculation necessary to arrive at “Investment in Associate”

OK?

Now … what a silly question! An investment of 50% suggests either that company A is in a 50 / 50 joint venture where the remaining 50% is owned by another single investor or alternatively, if the remaining 50% is spread over a number of other investors, then under IFRS 10 it would suggest that company A has effective control in which case we’re looking at a subsidiary and not an associate

In addition, if Associate B is the ONLY investment held by company A, then no consolidation exercise would be carried out … because there’s no group of companies

Your post does not tell me whether you are expected to prepare adjustments for a consolidation

OK?