Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

ACF2100 Financial Accounting

Week 11 Equity Accounting

Investments

Entities often hold equity investments in other entities

–   Parent-subsidiary-------consolidation

–   Associates and joint ventures------equity method

It is the capacity to participate that is required (not actual participation)

Holding 20% or more of the voting power leads to the presumption of significant influence

Associate

An associate is an entity over which the investor has significant influence

Significant influence is that the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies

Joint ventures

joint arrangement whereby the parties that have joint control of the arrangement have rights

to the net assets of the arrangement

Equity method of accounting

The asset Investment in Associates and JVs is initially recognized at cost

The asset is subsequently adjusted for the post-acquisition change in the investor’s share of the investee’s net assets

If the investor is not a parent

The equity method is applied in the investors books

If the investor is a parent

–   Cost method is used in the investors books

–   Equity method is applied on consolidation

–   Consolidation worksheet contains:

–   Consolidation journals relating to subsidiaries

–   Equity journals relating to associates

Example

Goodwill and FV adjustments

The equity method requires adjustments to the investor’s share of post-acquisition equity for:

–   Goodwill this is included in the carrying amount of the investment and cannot be amortised

–   Excess (similar to gain on bargain purchase where FVINA > consideration) – must be recognised as income

–   Fair value adjustments on acquisition

Appropriate adjustments must be made to investors share of the profit or loss after acquisition

Not all recorded profits represent post-acquisition equity

Inter-entity transactions

Transactions between investor and associate

The investor’s share of any unrealized profits must be adjusted against the share of

associate profits for the year

–   Applies to both upstream and downstream transactions

–   Is performed on an after-tax basis

–   Adjustments are made to the Share of P/L of Associates and JVs” and to the “Investment in Associates and JVs”

Relates to unrealised profit…

–   in closing inventory

–   in opening inventory

–   on the transfer of non current assets

A) Where an entity does not prepare consolidated financial statements,

E.g. Assuming Investor acquires 30% shares of Investee

Acquisition Analysis

FVINA=Recorded equity + (1-30%)*BCVR entries-recorded goodwill

FV acquired= FVINA * Investor’s proportional ownership interest

Cost of investment= $XX-cum. Dividend receivable

Goodwill/Gain on bargain= FV acquired Cost of investment

Journal entries in the accounts of Investor

Acquisition Date

Investment in Associates/JVs

Cash/Payable

(Acquisition of shares in Investee)

Current year

a) Dividend paid/declared

Cash

Investment in Associates/JVs

(Dividend paid: 30% * $XX)

Dividend Receivable

Investment in Associates/JVs

(Dividend declared: 30% * $XX)

b) OCI-Asset Revaluation Surplus

Investment in Associates/JVs

Share of OCI of associates/JVs

Share of OCI of associates/JV

Asset Revaluation Surplus

(Increase in Asset Revaluation surplus: 30% * $XX)

c) Reported Profit in Investee

Investment in Associates/JVs

Share of P/L of associates/JVs

(Share of profit: 30% * $XX)

Adjustment for Profit:

Profit for 201x-201x period

$XX

Pre-acquisition adjustments:

Depreciation for Revalued NCA

($XX)

Post-acquisition profit

*Adjustmentsfor inter-entity transactions:

Less Unrealised PAT in closing inventory

Less Unrealised PAT on sale of NCA in current year

Add Realized profit on opening inventory

Add Realised PAT on sale of NCA through depn in current

year

Investors shares-30%

$XX

* Adjusted regardless of whether the transaction is an upstream or downstream one, the others

are same as NCI calculation- step 5

B)  Where an entity prepares consolidated financial statements.

Journal entries in consolidated financial statement

Acquisition date:

No entry (avoid double-accounting)

Current year:

a) Dividend paid/declared (the only difference)

Dividend revenue

Investment in Investee

b) OCI-Asset Revaluation Surplus (same)

Investment in Investee

Asset Revaluation Surplus

c) Reported Profit (same)

Investment in Investee

Shares of P/L of associates/ JVs

Previous years: (Period from acquisition to the start of the current year