Hello Sir,
I would like you to help me to clarify the part of examiner answer for Specimen Exam Sep 2018 Q1 part (a) Associate section
The last sentence of " risk of inappropriate classification, recognition and measurement of the investment in Stewart Co"
I confuse about the classification and recognition
For classification,is it refers to the possibility of classifying the associate as an investment?
For recognition,is it refers to not disclosure issue which the post-acquisition share of associate profit not separately disclosed in the CSOPL?
Thank you so much :)
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Specimen Exam Sep 2018
6y ago#1Classification means the sorting of elements (assets/liability/equity/income/expense) for presentation and disclosure purposes. In this case - is it an investment in an associate - or just an investment?
Recognition is the process of capturing for inclusion in the statement of
financial position or the statement(s) of financial performance an item that
meets the definition of one of the elements of financial statements.
If the investment is de facto an associate it should be accounted for using the equity method. This means that % share of post-acquisition retained earnings should be RECOGNISED in profit or loss and added to the cost of the investment. (This is NOT a matter of disclosure.)
In summary:
- classification refers to presentation/disclosure,
- recognition, in this case, is about recognising share of profit,
- measurement, relates to the carrying amount.
Thank you Sir for your reply, I much understand now.
Apart from the classification, recognition and measurement issue(risk), is it also have a presentation risk as the company does not show the share of associate profit as a separate line of item(if the company have recognised the income but only does not show separate line)?
Thanks.
6y ago#3That would be covered by classification - see my meaning of classification (which is taken from the Conceptual Framework for Financial Reporting).
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