Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Investment in Associate
- This topic has 4 replies, 2 voices, and was last updated 6 years ago by MikeLittle.
- AuthorPosts
- April 29, 2018 at 11:36 am #449280AnonymousInactive
- Topics: 1
- Replies: 1
- ☆
Hello,
Am stuck with below question and would really appreciate your help:– Company A has 50% interest in
Associate B. Investment value is $500m
– At acquisition Assoc B has patents with
a carrying value of $0 but a fair value of
$200m.
– Company A sells plant to Assoc B for
$400. Cost is $900m, acc depreciation
is $600, useful life is 9yrs. Assoc A
depreciates plant over 5yrs
– Company A sells goods to Assoc B for $100m, cost is $80m. 50% of goods have been sold. Assoc A has paid 60% of amount owing to company A.
– Company A gives interest free loan of $400m to Assoc B to help buy plant (point above).
– Assoc B pays dividend of $45
– Company A considers acquired good will has been impaired by 40%
How do I account for the above transactions? I need help urgently please.Thank you so much.
April 29, 2018 at 2:06 pm #449327This looks suspiciously like a homework assignment that you’re asking me to do … and that’s not we’re here for!
I’ll help you, sure
You tell me what you think and then I’ll correct you if it’s necessary
Besides, I assume that if it’s not homework then it must be from a text and there should be an answer available
Try to work through the answer (having tried your own attempt first) and then, if you still don’t understand the printed solution, come back to me
OK?
April 29, 2018 at 10:34 pm #449391AnonymousInactive- Topics: 1
- Replies: 1
- ☆
Hi Mike,
Thank you for taking time to read through my long question. Here is how I understand it.– Patents should be added at FV to the net assets of Assoc B when calculating the resulting Goodwill. True or not?
– The plant should be depreciated over 9yrs in Assoc B and the annual dep charge should reduce the PBT of Assoc B before Company A can take it’s share of profit after tax. i.e:
$900m/9 = $100m pa then deduct this from Gross profit of Assoc A and calculate tax.– Sale of goods to Assoc – Do I calculate the URP (which will increase the Cost of goods sold in company A or will it decrease the investment in Assoc?) based on the unpaid balance of 40% or based on the unsold goods of 50%? Do I just take the company’s share of 50% of this?
-Loan to Assoc to buy plant from Company A should be put as a NCA in Company A at $400m
-Dividends – deduct 50% of $45 when calculating investment in Associate?
– Goodwill impairment – is the impairment calculated on the entire investment in Assoc ($500m) or just on Goodwill? Because I understand this reduces the cost of investment in Assoc (only taking into account Company A’s share of the impairment?)
Appreciate your help and looking forward to your reply.
Thanks.
April 30, 2018 at 8:00 am #449420Patents – agreed
There’s a pup in the transfer of the plant – carrying value $300, transfer value $400
In addition, Associate B is now depreciating over 5 years at $80 per annum, but plant WAS being depreciated at $100 per annum ($900/9)
If the transfer had not happened, that plant would be shown as $900 cost and $700 accumulated depreciation ie a carrying value of $200
As it is, it’s now in the Associate B’s records at $320 ($400 – $80) so that needs adjustment
“Company A sells goods to Assoc B for $100m, cost is $80m. 50% of goods have been sold. Assoc A has paid 60% of amount owing to company A.”
3 issues here – the pup, the sale / purchase and the intra-entity balance
1) the pup. My way of dealing with pups where they arise from a transaction with an associate is to adjust them ALWAYS in the records of the associate. The effect is to eliminate the investor’s share of unrealised profits automatically (we reduce in full the profit after tax in the associate and then take the investor’s share of that reduced profit after tax)
The pup is $20 * 50% (the proportion still unsold by the associate) = $10
Reduce the associate profits by $10 and then take the investor’s share of that adjusted profit after tax
2) the sale / purchase. Because an associate is not a member of the group (we have only a significant influence and not control) no adjustment is made to cancel from revenue and from cost of sales the value of the inter-entity trade
3) the inter-entity balance. For the same reasons that we don’t eliminate the inter-entity sale and purchase, we also don’t cancel the inter-entity outstanding balance at the year end
Same again with the loan – no cancellation because the associate is not under our control
The dividend of $45 (I assume that’s the full dividend of which the investor will receive $22.5) should not be included in the final statement of profit or loss. The investor will record as a pre-tax income their share of the associate’s profit after tax and it is out of those associate’s profits after tax that the associate will be taking the dividend
Thus, by taking our 50% share of that profit after tax, we are automatically taking our share of the dividend paid by the associate
The goodwill impairment of 40% – we no longer call it goodwill in the case of an investment in an associate – it’s now a “premium on acquisition” and that premium is shown as part of the calculation of the figure in the statement of financial position “Investment in Associate”
That calculation is: Cost of investment + share of post-acquisition retained earnings – any impairment in the value of the investment
Your question shows: “Company A has 50% interest in Associate B. Investment value is $500m” so it’s not clear what is the value of the “goodwill”
Whatever that value, we can calculate 40% and put that amount in as the third element of the calculation necessary to arrive at “Investment in Associate”
OK?
Now … what a silly question! An investment of 50% suggests either that company A is in a 50 / 50 joint venture where the remaining 50% is owned by another single investor or alternatively, if the remaining 50% is spread over a number of other investors, then under IFRS 10 it would suggest that company A has effective control in which case we’re looking at a subsidiary and not an associate
In addition, if Associate B is the ONLY investment held by company A, then no consolidation exercise would be carried out … because there’s no group of companies
Your post does not tell me whether you are expected to prepare adjustments for a consolidation
OK?
May 4, 2018 at 3:26 pm #4500984 days and no response – I’m closing the thread
- AuthorPosts
- The topic ‘Investment in Associate’ is closed to new replies.