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Hi
I would appreciate some guidance on the below question I’m not sure how to answer thanks:
On 1 January 2014, Bolo purchased 45% of the ordinary shares of Kata. Consideration
paid was $3 million. The carrying amounts of the net assets of Kata at that date were
$2.4 million and approximated their fair values. The statement of financial position
for Kata as at 31 December 2014 was as follows:
$m
Property, plant & equipment 14
Inventories 1
–––––
Total assets 15
–––––
Share capital 1
Retained earnings 2
Loans 12
–––––
Equity and liabilities 15
–––––
The directors of Bolo are unsure whether to treat Kata as an associate or a subsidiary
in the consolidated financial statements. They believe that this decision will have a
minimal impact on the consolidated financial statements and is therefore
unimportant.
When relevant, Bolo measures non-controlling interests using the proportion of net
assets method.
Required:
Discuss and compare the impact on the consolidated financial statements of Bolo if
the investment in Kata is accounted for as:
• a subsidiary, or
• an associate. (9 marks)I am not going to attempt the whole question for you, but I can go into a bit of discussion and this discussion can be backed up by calculations:
1. First of all, it can be seen that Kata is an Associate, as it has a holding of 45%, between 20-50% is considered as an Associate and the company (Bolo) is expected to exert significant influence over the Associate.
The percentage is not effectively a “be all and end all” even if less than the percentage bracket given but it can be established from the scenario that significant influence can be exerted it can be classified as an Associate.
IMPACT OF ASSOCIATE ON SOFP:
1. If Associate you first of all do not consolidate, as you do not CONTROL.
2. All you do is take a percentage (i.e. 45% of their Profits), which you need to do a working for, known as Investment in Associate.
3. Inter company trading will be allowed, no need to deduct intra-group balances.
4. No line in SOFP for NCI, as CONTROL is not acquired/gained.
5. No Goodwill in Non-Current Assets.The IMPACT OF SUB ON SOFP:
All the points that I have mentioned for Associate above, for the SUB they are the exact opposite, for example for Associate no consolidation, for Sub you have to consolidate etc etc.
This is how I would most probably attempt this question, backed up perfectly with calculations showing/comparing the differences between the two different accounting treatments.
Hope this helps.
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