- March 11, 2020 at 12:47 pm #565086AnonymousInactive
- Topics: 43
- Replies: 124
Hi Opentuition Tutor,
Can I ask a couple of questions re accounting treatment for associates?
I understand equity method is used to account for the investment interests in the associates.
Let’s assume there are companies A and B. A has a 30% interest in company B for many years. A does not have any subsidiaries. So there will be no consolidation at the year end. But during the accounting perid, A and B traded with each other, and there are unsold inventories with regard to the trading at the year end.
Q1: When A accounts its past year’s interest in B with equity method, does A need to remove the profit element from the unsold inventory?
Then assume A purchased a controlling interest in company C, and a consolidation is required. From the standards, if A sold goods to associate B and B has the unsold inventory, standards say unrealised profit would need to be removed to the extend of A’s interest in B, the adjustment entries are done as the following:
Dr Cost of Sales (P/L)
Cr investment in associate B (SFP)
Then the increased cost of sales will get transferred to the retained earnings on SFP through the reduced profit on P/L.
Q2: if the associate is the seller, and A has unsold inventory in its books, the adjustment entry is:
Dr Share of the associate’s profit (P/L)
Cr Inventories (SFP)
My question is if equity method means A’s investment value in B is its interest in B, why the hit of the profit on P/L (that debit entry above) does not impact on its investment carrying value on A’s individual SFP (cost of investment + share of associate’s retained earnings movement post acquisition date)?
Thank you.March 11, 2020 at 4:44 pm #565105Stephen WidbergKeymaster
- Topics: 12
- Replies: 2843
First of all, inventory profits with associates are really FR not SBR – this paper is too high level to consider such issues.
Secondly, although we teach a couple of rules in FR – the principles are not really rock solid (unlike subsidiaries).
Thirdly, I’ve seen PUPs deducted from investment in associate or inventory on an almost random basis in past exams of all syllabuses.
So, if you were an FR student, I would tell you not to worry as it will probably get marked right both ways.
In SBR, at worst, you would be saying that, if equity accounting a PUP should be adjusted (with associated deferred tax) if material.
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