HI5020 Corporate Accounting: Session 11b Accounting For Equity Investments

HI5020
Corporate Accounting
Session 11b
Accounting for Equity Investments
Session Learning Objectives
• Be aware of how to account for equity investments

• Be aware that investments in associates and joint
ventures must be accounted for using the equity method
of accounting, and know how to apply this method of
accounting
• Understand that , if the investor is a parent entity (that is,
it has at least one subsidiary), either the cost method of
accounting or fair value is to be used in its own individual
accounts, and the equity method in the consolidation
worksheet to account for the investments in associates
and joint ventures, and that, by contrast, if any investor is
not a parent entity (it has no subsidiaries), the equity
method of accounting is to be used in its own accounts to
account for investments in associates and joint ventures.
Application of the Equity Method of Accounting (cont.)
• If investor is required to prepare consolidated financial

statements they should:
• recognise investment in associate by applying equity
method in consolidated financial statements, &
• apply cost or fair value methods in own individual
financial statements
• If investor does not prepare consolidated financial
reports they should:
• apply the equity method to their own ‘separate’
financial report
• (the above is summarised on the following slide)
Is the Investor a Parent Entity?
• At acquisition, the difference between investor’s share of
adjusted values of investee’s net assets & cost of
investment is regarded as:
• goodwill, or
• discount on acquisition
• Goodwill is not separately disclosed; however, any
impairment of goodwill is taken into account in
calculating the investor’s share of the associate’s profit
or loss
• When recognising investor’s share of associate’s post-
acquisition profits:
• adjustments are to be made to profit share to take into
account depreciation based on fair values of
associate’s asset
• Rationale for adopting the equity method

• Stream of dividend receipts (revenue under the cost
method) might provide inaccurate guide to investee’s
performance & value
• Provides a better indication of investment’s
underlying worth
• Criticisms by opponents of equity method
• Breaches realisation principle tied to notion of
conservatism
• Investor reports its share of investee’s profits, even
without any dividends
• Account balance of investment is neither cost nor fair
value
Refer to Worked Example 32.1 —Comparison of cost

method & equity method of accounting
Cost method
To recognise initial acquisition of shares
Investment in X Ltd XX
Cash at bank XX
To recognise receipt of pre-acquisition dividend

Cash at bank XX
Cost method (cont.)
To recognise dividends provided by associate from
post-acquisition profits
Dividend receivable XX
Dividend revenue XX
To recognise receipt of previous dividend provided

Cash at bank XX
Dividend receivable XX
Equity method (where investor is a parent)

In consolidation worksheet (Year 1)
To record investor’s share of associate’s profit

Share of associate’s profit XX
To recognise investor’s share of dividends

Dividend revenue XX
In consolidation worksheet (Year 2)

Prior period share of profits
Retained earnings (opening) XX
To recognise share of associate’s losses

Share of associate’s profit/loss XX
To recognise investor’s share of dividends
Dividend revenue XX
Investor’s share of associate’s increase in

revaluation reserve
Revaluation surplus XX
Investor’s share of associate’s profit/loss to

be adjusted for (AASB 128):
any depreciation differences caused by
reassessing values of associate’s assets to fair
value at date of acquisition
Worked Example 32.1—Comparison of the cost and
equity methods of accounting
• On 1 July 2018, Cassie Ltd acquires a 30 per cent interest
in Joy Ltd for a cash consideration of $540 000.
• On the date of the acquisition, the assets of Joy Ltd are

reported at their fair value. The total share capital and
reserves of Joy Ltd as at the date of the acquisition are:
Share capital $1 320 000
Retained earnings $480 000
Total shareholders’ funds $1 800 000
Worked Example 32.1 (Continued)
Additional information
• For the year ending 30 June 2019, Joy Ltd records an after-tax profit
of $100 000. A dividend of $40 000 is declared and ratified by Joy Ltd
on 30 June 2019, with the dividend coming from profits earned in the
2018–19 financial year.
• In October 2019, Joy Ltd pays the $40 000 dividend provided for on
30 June 2019.
• For the year ending 30 June 2020, Joy Ltd records an after-tax loss
of $50 000. On 30 June 2020, Joy Ltd declares dividends of $20 000,
to be paid out of the profits earned in the 2019 financial year.
• On 30 June 2020, Joy Ltd revalues its land upwards by an amount of
$400 000.
• Cassie Ltd recognises dividends as revenue when the investee
declares the dividends (i.e. Cassie Ltd also recognises a dividend
receivable).
• The corporate tax rate is 30 per cent.
(a) Prepare journal entries for the years ending 30 June 2019 and 30 June 2020
to account for the investment in Joy Ltd using the cost method of
accounting
(b) Prepare journal entries for the years ending 30 June 2019 and 30 June 2020
to account for the investment in Joy Ltd using the equity method of
accounting and assuming that Cassie Ltd is a parent entity (and therefore
prepares consolidated financial statements)
(c) Prepare journal entries for the years ending 30 June 2019 and 30 June 2020
to account for the investment in Joy Ltd using the equity method of
accounting and assuming that Cassie Ltd is a not a parent entity (and
therefore does not prepare consolidated financial statements)
(a) Journal entries using the cost method in the accounts of Cassie Ltd
Year ending 30 June 2019
July 2018
Dr Investment in Joy Ltd 540 000
Cr Cash at bank 540 000
June 2019
Dr Dividend receivable 12 000
Cr Dividend revenue 12 000
Year ending 30 June 2020

October 2019
Dr Cash at bank 12 000
Cr Dividend receivable 12 000
June 2020
Dr Dividend receivable 6 000
Cr Dividend revenue 6 000


THE END

HI5020 Corporate Accounting: Session 11b Accounting For Equity Investments

Uploaded by

Copyright:

Available Formats

HI5020 Corporate Accounting: Session 11b Accounting For Equity Investments

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

HI5020 Corporate Accounting: Session 11b Accounting For Equity Investments

Uploaded by

Copyright:

Available Formats

HI5020

• Be aware of how to account for equity investments

• If investor is required to prepare consolidated financial

• Rationale for adopting the equity method

Refer to Worked Example 32.1 —Comparison of cost

To recognise receipt of pre-acquisition dividend

To recognise receipt of previous dividend provided

Equity method (where investor is a parent)

To record investor’s share of associate’s profit

To recognise investor’s share of dividends

In consolidation worksheet (Year 2)

To recognise share of associate’s losses

Investor’s share of associate’s increase in

Investor’s share of associate’s profit/loss to

• On the date of the acquisition, the assets of Joy Ltd are

Year ending 30 June 2020

• On the date of the acquisition, the assets of Joy Ltd are

• On the date of the acquisition, the assets of Joy Ltd are

You might also like