Topic 1
Topic 1
Topic 1
Learning Outcomes:
Understand the principles of investments in
associates
Understand and apply the equity method of
accounting for investments in associates
Understand the accounting principles in
eliminating intragroup transactions with the
associates
1
Cont.
MFRS 128 Investment in Associates
Significant Influence
2
Cont.
Significant influence is the power to participate in the
financial and operating policy decisions of the investee
but not control of those policy
3
Cont.
Potential voting shares
Example:
AB holds 150,000 OS of 1,150,000 issued shares in ACE Bhd.
AB also has share options that it can exercise to acquire another
150,000 shares in ACE.
Explanation:
Although AB does not yet hold 20% or more of the voting shares
of ACE Bhd (150,000/1,150,000 = 13%), it has to treat ACE as its
associate as if were to exercise its rights to acquire another
150,000 shares (300,000/1,150,000 = 26%).
4
Cont.
If the investor holds less than 20% of the voting power
of the investee, it is presumed that the investee does
not have a significant influence, unless such can be
clearly demonstrated.
5
Accounting Treatments
MFRS 128 requires the investor to account for the
associate which is not held for sale, at cost or in
accordance with MFRS 9
6
Cont.
(b) The parent is exempted from presenting CFS, or
7
Cont.
(ii) The parent’s debt or equity instruments are not
traded in a public market (not a listed entity)
8
Equity Method: Basic Principles
Equity Method
9
Cont.
Under the equity method, the investment is initially recorded
at cost but is subsequently adjusted for the investor’s
proportionate share of the increase or decrease in the net
assets of the associate (e.g. post acquisition profits/losses,
revaluations).
10
Cont.
In the CSFP, the investor’s proportionate share of the
associate’s net assets is presented as a single line item:
“Investment in associate”
11
Cont.
The investor must include in the CSCI its share of the
associate’s post-acquisition profits or losses, irrespective of
whether dividends are distributed. By doing so, the effect of
the associate’s performance (either good or bad) is reflected
in performance of the group since the investor has influence
over the financial and operating policies of the associate
12
Accounting Technique
Journal entries:
13
Cont.
Journal entries: Subsequent to acquisition date
14
Cont.
(iii) To record dividend income received from the associate
15
Cont.
(iv) To adjust the carrying amount for changes in the investor’s
proportionate interest in the investee arising from changes
in the investee’s equity that have not been recognised in the
investee’s profit or loss (e.g. revaluation of property, plant and
equipment and foreign exchange translation differences).
16
Cont.
Under the equity method, the net assets of the investee entity is
not consolidated with that of the investor, thus the investment in
associate is not eliminated on consolidation but is disclosed as
a separate item in the statement of financial position to reflect
the investor’s share of the net assets as at the reporting date
which comprise the following:
17
Goodwill
Goodwill is computed as for subsidiaries
18
Cont.
Impairment Losses on Investment in Associate
19
Example
20
Group Statement of Financial
Position
(1) The investment account is shown as a separate item at its
carrying value. It is increased by the investor’s share of the
post-acquisition increase in the net assets of the investee.
However, if the investor’s share of losses exceeds the carrying
amount of the investment account, then the investment is
shown as nil (para 30 of MFRS 128);
21
Cont.
Depreciation of the depreciable assets based on their fair
values;
Impairment of associate;
Cumulative preference dividends, whether or not declared;
Unrealised profits or losses arising on transactions between
the investor and associate must be eliminated
22
Example 1
See Example 1, JL & TLL, C&G, 6th Edition, p. 519
23
Solution
Explanation:
Calculation of goodwill:
RM
Cost of investment 200,000
Net assets of A – 1.1.x7 (RM520,000 x 25%) 130,000
Goodwill 70,000
24
Cont.
Consolidated Statement of Financial Position
As at 31.12.X7
RM
1,652
Liabilities 120
1,652
25
Cont.
Note A: Investment in A
26
Cont.
This can be verified as follows:
27
Group Statement of Profit or Loss
and Other Comprehensive Income
(1) Group turnover/sales will comprise of the parent and
subsidiaries but not that of the associates;
(2) Group profit before tax will be that of the parent and
subsidiaries that are consolidated;
(3) The group’s share of the associate’s current year profit before
tax is shown separately.
28
Cont.
(4) Taxation will consist of the group (holding and subsidiaries that
are consolidated).
(5) The prior year’s retained profit will comprise the group and the
group’s share of the post acquisition retained profits of the
associate brought forward.
29
Cont.
Share of post-acquisition of OCI
(Refer to Example 5.8 from TLT, CFS, 7th edition, p305, CSPLOCI)
30
Example 2
See Example 2, JL&TLL, C&G, 6th Edition, p521
31
Solution
Consolidated SPLOCI
For the year ended 31.12.X4
Group
Sales 1,200,000
Expenses (150,000)
667.500
Taxation (150,000)
32
Cont.
Note 1: Share of profit of A
33
Comprehensive Example
34
Transactions with an Associate
In equity accounting, the profit or loss on an investor-associate
transaction is realised in proportion to the third parties’
ownership interests in the associate.
35
Cont.
Intragroup sales of inventories:
36
Cont.
Transfer or sale of PPE:
37
Cont.
Other intragroup account balances:
These include:
Loan to or from the associate
Amounts due to or due from the associate
Dividends receivable from the associate
38
Cont.
Loan – the interest income or expense from loan to or from
associate – no adjustment necessary because it has been realised
(earned or incurred).
39
Self Study
Investment in Associates (Chapter 5)
40
Investment in Joint Arrangement (JA)
Learning Outcomes:
Understand the principles of investments in
Joint Arrangements (JA)
Understand and apply the equity method &
percentage share method of accounting in
JA
Understand the accounting principles in
eliminating intragroup transactions with the
JV
41
Cont.
MFRS 11 Investment in JA
Joint Control
42
Cont.
Two common characteristics:
two or more venturers are bound by a contractual
arrangement; and
the contractual arrangement establishes joint
control.
43
Overview
Earlier – MFRS 31 Interests in Joint ventures
44
Cont.
Three forms of JV (MFRS 131)
45
Cont.
(b) Jointly controlled assets
No establishment of a separate business enterprise
The venturers have joint control of one or more assets
contributed for the JV such as holiday villa & gas
pipeline.
Each venturer may take a share of the output from the
assets and each bears an agreed share of the expenses
incurred.
46
Cont.
(c) Jointly controlled entities
Establishment of a separate business enterprise which
could be a company, partnership or other form of entity
The JV will have its own set of accounts and prepare its
own set of financial statements
For the venturer its contribution to the JV will be
disclosed as an investment and for the JV the
contributions made by the venturers are capital
distribution
47
Differences MFRS 131 and MFRS 11
MFRS 131 MFRS 11
Jointly controlled assets, jointly Joint operations and joint
controlled operations and joint venture
venture
48
Cont.
MFRS 131 MFRS 11
JV – can use either equity or JV – use equity method
proportionate method
49
MFRS 11
Salient features:
50
JV or JO
JOINT ARRANGEMENT
JOINT OPERATION
JOINT VENTURE
Joint operators have rights to
Venturers have rights to net assets and obligations for
assets liabilities
Establishment of a corporation/ (e.g. when 2 or more joint
partnership operators combine their
operations, resources and
Not necessarily an equal equity expertise in order to produce,
stake market and distribute jointly a
particular product)
51
Cont.
52
Cont.
53
Cont.
54
Cont.
55
Cont.
56
Accounting Treatment of JA
Joint Operation
See Example 5.5 & Example 5.6 from TLT, CFS, 7th edition,
p290 & p293
57
Cont.
Joint Venture
58
Self Study
Investment in Joint Venture (Chapter 5)
59