ACF2100 Financial Accounting Week 11 Equity Accounting
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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 investor’s books
If the investor is a parent
– Cost method is used in the investor’s 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 investor’s 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 |
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Cash/Payable |
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(Acquisition of shares in Investee) |
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Current year |
a) Dividend paid/declared |
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Cash |
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Investment in Associates/JVs |
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(Dividend paid: 30% * $XX) |
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Dividend Receivable |
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Investment in Associates/JVs |
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(Dividend declared: 30% * $XX) |
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b) OCI-Asset Revaluation Surplus |
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Investment in Associates/JVs |
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Share of OCI of associates/JVs |
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Share of OCI of associates/JV |
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Asset Revaluation Surplus |
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(Increase in Asset Revaluation surplus: 30% * $XX) |
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c) Reported Profit in Investee |
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Investment in Associates/JVs |
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Share of P/L of associates/JVs |
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(Share of profit: 30% * $XX) |
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Adjustment for Profit:
Profit for 201x-201x period |
$XX |
Pre-acquisition adjustments: |
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Depreciation for Revalued NCA |
($XX) |
Post-acquisition profit |
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*Adjustmentsfor inter-entity transactions: |
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Less Unrealised PAT in closing inventory |
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Less Unrealised PAT on sale of NCA in current year |
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Add Realized profit on opening inventory |
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Add Realised PAT on sale of NCA through dep’n in current year |
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Investor’s 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) |
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Current year: |
a) Dividend paid/declared (the only difference) |
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Dividend revenue |
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Investment in Investee |
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b) OCI-Asset Revaluation Surplus (same) |
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Investment in Investee |
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Asset Revaluation Surplus |
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c) Reported Profit (same) |
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Investment in Investee |
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Shares of P/L of associates/ JVs |
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Previous years: (Period from acquisition to the start of the current year |
2023-02-01