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Hi Mr Mike, I have question relating investment income in Pco
For instancePco Sco
Revenue x xCost of sales x x
gross profit x x
Distribution
cost x xAdministrative
expense x xFinance cost x x
Investment
income ”x”Profit before
tax x xIncome tax x x
Profit x x
for the yearMy first question is that when i consolidate statement of profit and loss, why i do not add i ”investment income of Pco” over ”consolidated profit before tax” ? I usually do not add it anywhere, I always do without it.
My second question.But when for example, both companies’ (Pco and Sco) has investment income and including associate company, the procedure changes the below
let us assume Pco has 30% share in Associate
Pco Sco
Revenue x xCost of sales x x
gross profit x x
Distribution
cost x xAdministrative
expense x xFinance cost x x
Investment
income ”x” ”x”Profit before
tax x xIncome tax x x
Profit x x
for the yearWhy i do not take into consideration if when only Pco has investment income but in the case of this time, i take into consideration?Shortly i consolidate.
Profit for the year in associate by taking into consideration how many months it belongs to Pc —x*6/12*30%=”xx”
Dividend pay(at the end of accounting year) x*30%=”xx”In this case
Investment Pco Sc
income ”x” + ”x”+xx(profit for the year of Pco in associate)-xx(pco’s share of dividend pay in associate)Let me show it by a real example, the question has been taken from Wednesday 4 June 2014
On 1 October 2013, Penketh acquired 90 million of Sphere’s 150 million $1 equity shares. The acquisition was achieved through a share exchange of one share in Penketh for every three shares in Sphere. At that date the stock market prices of Penketh’s and Sphere’s shares were $4 and $2·50 per share respectively. Additionally, Penketh will pay $1·54 cash on 30 September 2014 for each share acquired. Penketh’s finance cost is 10% per annum. The retained earnings of Sphere brought forward at 1 April 2013 were $120 million.
The summarised statements of profit or loss and other comprehensive income for the companies for the year ended 31 March 2014 are:
Penketh Sphere
$’000 $’000 Revenue 620,000 310,000
Cost of sales (400,000) (150,000)
–––––––– –––––––– Gross profit 220,000 160,000 Distribution costs (40,000) (20,000) Administrative expenses (36,000) (25,000) Investment income (note (iii)) 5,000 1,600
Finance costs (2,000) (5,600)
–––––––– ––––––––
Profit before tax 147,000 111,000
Income tax expense (45,000) (31,000)
–––––––– ––––––––
Profit for the year 102,000 80,000 Other comprehensive income
Gain/(loss) on revaluation of land (notes (i) and (ii)) (2,200) 3,000
–––––––– ––––––––
Total comprehensive income for the year 99,800 83,000
–––––––– ––––––––
The following information is relevant:
(i) A fair value exercise conducted on 1 October 2013 concluded that the carrying amounts of Sphere’s net assets were equal to their fair values with the following exceptions:
– the fair value of Sphere’s land was $2 million in excess of its carrying amount– an item of plant had a fair value of $6 million in excess of its carrying amount. The plant had a remaining life of two years at the date of acquisition. Plant depreciation is charged to cost of sales.
– Penketh placed a value of $5 million on Sphere’s good trading relationships with its customers. Penketh expected, on average, a customer relationship to last for a further five years. Amortisation of intangible assets is charged to administrative expenses.
(ii) Penketh’s group policy is to revalue land to market value at the end of each accounting period. Prior to its acquisition, Sphere’s land had been valued at historical cost, but it has adopted the group policy since its acquisition. In addition to the fair value increase in Sphere’s land of $2 million (see note (i)), it had increased by a further $1 million since the acquisition.
(iii) On 1 October 2013, Penketh also acquired 30% of Ventor’s equity shares. Ventor’s profit after tax for the year ended 31 March 2014 was $10 million and during March 2014 Ventor paid a dividend of $6 million. Penketh uses equity accounting in its consolidated financial statements for its investment in Ventor.
Sphere did not pay any dividends in the year ended 31 March 2014. (iv) After the acquisition Penketh sold goods to Sphere for $20 million. Sphere had one fifth of these goods still in inventory at 31 March 2014. In March 2014 Penketh sold goods to Ventor for $15 million, all of which were still in inventory at 31 March 2014. All sales to Sphere and Ventor had a mark-up on cost of 25%.
(v) Penketh’s policy is to value the non-controlling interest at the date of acquisition at its fair value. For this purpose, the share price of Sphere at that date (1 October 2013) is representative of the fair value of the shares held by the non-controlling interest.
(vi) All items in the above statements of profit or loss and other comprehensive income are deemed to accrue evenly over the year unless otherwise indicated.
Investment income: Share of profit from associate (10,000 x 30% x 6/12) 1,500
Other ((5,000 – 1,800 dividend from associate) + (1,600 x 6/12)) 4,000It looks like, (Investment of Penketh):5000+800=1600*6/12(investment income of Sphere)- 1500=(10,000 x 30% x 6/12)Share of profit from associate-1800=(6000*30%) dividend from associate
overall 5500
Why i take into consideration this case when, Pco and Sco have investment income by making giving some adjustments of Associate’s such as dividend pay and profit for the year.But in the case of just only Pco, I do not add investment income over consolidated profit before tax?COuld you explain it to me?
Dealing with Sphere $1,600 investment income first … none of this $1,600 has been received from any other entity within the Penketh group. So it has all been received from other entities that have nothing to do with either Penketh nor Sphere (other than the fact that Sphere has an investment in those other entities but not sufficient for Sphere to have any significant influence)
But Penketh acquired Sphere only half way into this year so will consolidate only half of that investment income received by Sphere = $800
Now for Penketh and the $5,000 investment income
Of this amount Penketh will have received and recorded 30% of the Ventor dividend = 30% x $6,000 = $1,800 and this amount is included within the $5,000
And it shouldn’t be! So deduct it and that leaves $3,200 received from other investments
If we now add the $800 received by Sphere in the post-acquisition period to the $3,200 received by Penketh from entities outside the group, we arrive at $4,000
Now, back briefly to the associate, Ventor
We have now excluded the dividend that we received from Ventor because we are going to include within the consolidation the group’s share of the associate’s profit after tax … and that figure in the associate’s statement of profit or loss is stated BEFORE the deduction of the dividend paid by Ventor
So if we (correctly) include our share of the associate’s profit after tax, we are automatically incorporating our share of the associate’s dividend payment (30% x $6,000) plus our share of the associate’s retained earnings (30% x ($10,000 – $6,000))
But, of course, this needs to be time-apportioned so multiply that $3,000 by 6/12 to arrive at $1,500
Personally, I would not show this $1,500 as investment income in the consolidated statement of profit or loss
I prefer to label it as “Share of profit after tax of associate” and write in brackets after the narrative (30% x 6/12 x $10,000) – it makes it that bit clearer for a marker to see what I have done and where the figure is calculated from
OK?
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