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Hi, i need to outline potential criticisms of the above named method… I managed:
there have been numerous criticisms of the equity method, one being that companies are owning between 20 and 49% of an associate so as they account for the investment under the equity method of accounting but in fact they have more than significant influence they have control; but under IAS 28 they only hold enough voting stock to be considered associates and no consolidation is required. This can be done by way of agreements between the parent and the associate for things such as purchase agreements or even debt arrangements. As a result, control is exerted through a variety of contractual arrangements.
Further criticisms of the method include the equity method not requiring consolidation of an associates accounts with the parents due to the holding being less than 50%. This meaning that the reported assets and liabilities of the parent will be lower and as a result will make the financial ratios of the business seem higher; ratios such as RONA or debt to equity. This type of off balance sheet financing is a way of avoiding having to disclose debts. This may create a misleading picture to investors regarding the financial position of the investing company
i have looked in BPP & Kaplan study texts and they don’t list much about this, can you give any other pointers?
You’ve actually only made one point haven’t you? The de facto control is not, under IAS 28, grounds for consolidation. And then you go on to explain the consequences.
However, your point that because it’s less than 50% means that control is absent and therefore no consolidation is now incorrect. IFRS 10 takes care of that by bringing into the equation “effective control” based on the distribution of the remaining votes
Surely the question is asking you for the shortcomings / criticisms of the mechanics of equity accounting rather than the grounds upon which equity accounting is required
Am I wrong?
So my original post was correct when I said “Surely the question is asking you for the shortcomings / criticisms of the mechanics of equity accounting rather than the grounds upon which equity accounting is required”
At least your response seems to confirm that view
“The question is to “outline potential criticisms of equity accounting””
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