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128 On 1 February 20X1 Picardy acquired 35% of the equity shares of Avignon, its only associate, for $10 million in cash. The post-tax profit of Avignon for the year to 30 September 20X1 was $3 million. Profits accrued evenly throughout the year. Avignon made a dividend payment of $1 million on 1 September 20X1. At 30 September 20X1 Picardy decided that an impairment loss of $500,000 should be recognised on its investment in Avignon. What amount will be shown as ‘investment in associate’ in the statement of financial position of Picardy as at 30 September 20X1?
Answer given :-
128 $9,850,000 (EQUITY METHOD IS BEING USED) $’000 Cost of investment 10,000 Share of post-acquisition profit (3,000 × 8/12) – 1,000) × 35% 350 Impairment (500)
My concern:–
As per the IFRS- 3 , Equity method is to be used for valuing the associate only in the case of the parent has subsidiary at the time consolidation . In the question it is not evident that picardy has subsidiary and consolidation is essential . So how we can assume equity method is to be used ?
I have noted some inconsistency with respect to this from text to text (Even question to question )
Here’s an extract from IAS 28
“Separate financial statements of the investor
Equity accounting is required in the separate financial statements of the investor even if consolidated accounts are not required, for example, because the investor has no subsidiaries. But equity accounting is not required where the investor would be exempt from preparing consolidated financial statements under IAS 27. In that circumstance, instead of equity accounting, the parent would account for the investment either (a) at cost or (b) in accordance with IAS 39.”
Clear now?
Sorry it is not clear..
kindly clarify with following examples:-
P Ltd One subsidiary S and one associate A :- In separate statement ecost or IAS 39
Consolidated :- EQUITY METHODP Ltd only Associate A :- No consolidation required and Investment should b
either at cost or IAS 39
Is it correct ???In the question if it is not clear whether any subsidiary exist or not, Which method should be applicable ?
The above extract is perfectly clear. Here is the relevant part again …
…”Equity accounting is required in the separate financial statements of the investor even if consolidated accounts are not required, for example, because the investor has no subsidiaries”
What isn’t clear about that?
Good Morning Mike,
I am confused about this, too.
The quote you pasted here is from IAS 28 is from the 2003 version,however the 2011 says this:
Separate financial statements
An investment in an associate or a joint venture shall be accounted for in the entity’s separate financial statements in accordance with IAS 27 Separate Financial Statements (as amended in 2011).
The relevant IAS 27 section says that the entity has 3 options, equity accounting being one of them:
When an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for either: [IAS 27(2011).10]
at cost, or
in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9), or
using the equity method as decribed in IAS 28 Investments in Associates and Joint Ventures. [See the amendment information below.]If I follow this, my conclusion is that if an entity doesn’t have any subs but has an associate, they don’t have to account for the associate using equity method. However I must be wrong because whenever I see questions the answers indicate otherwise.
Thanks for this Edith
I don’t remember any F7 question where we had an associate and not a subsidiary
So I will be interested if you can point me in the direction of a question that has that precise situation
Let’s, just for a moment, be realistic about this … it is highly unlikely that your examiner is going to set a question where we have an associate, no subsidiary and the examiner tells you to value the associate at cost
It’s most improbable that that will happen!
OK?
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