Associates

My way of dealing with the pup arising on a transaction with an associate differs from the Kaplan way and the BPP way .... sometimes!

Under the IFRIC, it IS appropriate to eliminate the GROUP's share of any pup arising from a transaction involving an associate whether the associate was the seller or the buyer.

If you adjust for the pup ALWAYS in the associate, it is automatic that we shall eliminate the group's share of that pup because we only bring in to the consol ret ears the group's share of the associate's retained earnings ( and they have been reduced by the pup )

Your point number 3, by reducing the associate's ret ears by the pup, when we calculate for W5B the group's share of Assoc's ret ears, that automatically makes the adjustment for the correct amount of pup elimination

A Steve Scott question would not expect you to calculate the impairment of the Investment in an Associate. He will, if applicable, say something like "....the goodwill in the subsidiary is impaired by 20% ( or say $5,000 ) and the Investment in the Associate is impaired by ( say ) $1,500"

Sir, I couldn't get it. I want to get it with a straight example.

1. Associate sale to parent, pup is 1000
Dr.Consolidated reserves 1000
Cr. Inventory 1000
Valuation of Associate has no effect


2. Parent sale to Associate, pup is 1000, Associate % 30
Dr.Consolidated reserves 300
Cr. Inventory 300
Valuation of associate fall by 300.


Is this right or wrong?

In number 1, there is an effect on the valuation of the associate - the associate's profits are overstated by the $1,000 so, when calculating parent's share of associate's post acquisition retained, that $1,000 needs to be deducted from the Retained Earnings of the associate.

In number 2, this is correct, but it's not the way I do it. My way is to deduct the full $1,000 from the Associate's retained earnings and then, when we take our 30% of the associate's post acquisition profits, we automatically take into account the elimination of the parent's share of the pup

Is that better?

Sir, In no 2, there should not be (Cr Inventory 300) because there is no effect on group inventory.

The only entry is:

Dr Investment on Associate Dr 300
Cr. Consolidated Reserves Cr 3000


Is that Okay?

Thank You in advance.
2. Parent sale to Associate, pup is 1000, Associate % 30
Dr.Consolidated reserves 300
Cr. Inventory 300
Valuation of associate fall by 300.

Is this right or wrong?

Number 1, No. By making the adjustment in the Associate, ie by debiting the Associate's retained earnings by the full 1,000, when I'm calculating W3 Consolidated Retained Earnings, I'm only going to take in our 30% of the Associate's adjusted post acquisition profits. And when I'm calculating W5A, Investment in Associate, I'll take Cost plus our share of Associate's post acquisition profits less any impairment in the value of the investment. Try it - you'll see how it works

Number 2 - my way is to make the adjustment in the Associate's records so exactly the same comments apply in Number 2 as they did for Number 1. The effect is the same, Consolidated Retained Earnings fall by 300 and the Investment in Associate also falls by 300. Again, try it and see for yourself

:)