chapter 28 associates and equity accounting i: basic elements
TRANSCRIPT
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Chapter 28Chapter 28
Associates and Equity Associates and Equity
Accounting I: Basic ElementsAccounting I: Basic Elements
Chapter 28Chapter 28
Associates and Equity Associates and Equity
Accounting I: Basic ElementsAccounting I: Basic Elements
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Lecture TopicsLecture Topics
• The investor and the associate• Decisions on accounting and reporting
methods• Illustration of the equity accounting
method • Disclosures
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Lecture ReferencesLecture References
• Text - Chapter 28• AASB - 1016
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Key ConceptsKey Concepts
• Associated entity• Investor/associate relationship• Significant influence• Equity accounting
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The Investor and the AssociateThe Investor and the Associate
• Investor/associate relationship– associate - an investee, not being:
• a subsidiary• a partnership• a short-term investment
– over which investor has significant influence
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The Investor and the AssociateThe Investor and the Associate
• Does not establish new entity• Nature of significant influence
– % of voting power– Board representation– Extent of material inter-company transactions
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The Investor and the AssociateThe Investor and the Associate
• Nature of significant influence– Management or technology transfer– Operating relationships or dependencies– Restrictions on distributions
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Decisions on Accounting and Decisions on Accounting and Reporting MethodsReporting Methods
• Alternative accounting methods– Cost method– Consolidation method– Equity method
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Equity method - exampleEquity method - example
• Associate 20% owned by investor• Associate:
– owner’s equity start X4 $600 000– profit for X4 $80 000– no dividends– owner’s equity end X4 $680 000
• Investor:– carrying value of inv. $124 000
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Equity method - exampleEquity method - example
Dr Investment in associate 16 000Cr Revenue from associates 16 00020% share of associates reported results for 19X4
Dr Investment in associate 16 000Cr Revenue from associates 16 00020% share of associates reported results for 19X4
• Investment has new carrying value of $140 000• Investor will report revenue of $16 000
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Decisions on Accounting and Decisions on Accounting and Reporting MethodsReporting Methods
• Application of the methods– Potential application– Accounting standard requirements
• AASB 1016
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Financial StatementsInvestor’s Consolidated
Parent InvestorInvestments in Subsidiaries Cost Consolidation Associates Cost Equity Method Other Cost CostInvestor not ParentInvestments in
Associates Equity Method - Other Cost -
Financial StatementsInvestor’s Consolidated
Parent InvestorInvestments in Subsidiaries Cost Consolidation Associates Cost Equity Method Other Cost CostInvestor not ParentInvestments in
Associates Equity Method - Other Cost -
Application of Investment Accounting MethodsApplication of Investment Accounting Methods
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Decisions on Accounting and Decisions on Accounting and Reporting MethodsReporting Methods
• Criteria for applying the equity method– Significant influence– Materiality– Must meet both
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The Equity MethodThe Equity Method
• Recording issues– Data requirements
• Based on most recent financial statements• Must only convey information available to
associate’s shareholders• Fair value of associates assets at investment date• Goodwill and amortisation
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The The Equity MethodEquity Method
– Data requirements• Discount, assets written off against and
accumulated depn.• Unrealised profit adjustments• Share of associates profits available and non-
distributable• Carrying amount of investment
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The The Equity MethodEquity Method
• Recording equity accounting– Disclosed in accounts
• Equity method– Recorded in formal records
• Cost method
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The The Equity MethodEquity Method
• Record in accounting records:– Purchase of investment– Receipt of dividends– Share of proposed dividends
• Disclose in accounts– All of above– Share of associates profits
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The The Equity MethodEquity Method
• Recording dividends– AASB 1016
• Investor must account for dividends as a deduction to the investment account
• Dividends a partial realisation of investment asset
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Cost Equity method method
Purchase dateDr Investment in associate xxx xxxCr Cash xxx xxxpurchase of investment
During the yearDr Cash xx xxCr Dividend revenue xx xxreceipt of dividend
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Cost Equitymethod
method End of year - associates a/csDr Investment in associate xxCr Revenue from associate xxshare of associates profits retained by associate
Dr Dividend receivable xx xxCr Dividend revenue xx xxshare of associates proposed dividend
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The Equity MethodThe Equity Method
• The recording of profit share and dividends– Investors share of profits = profit x % interest– AASB 1018 requirements for profit share– AASB 1016 requirements for dividends
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The Equity MethodThe Equity Method
• Disclosure - AASB 1016– Details about associates and investment– Investors share of:
• Profit before tax• Income tax expense• Extraordinary items
– Amount included in profits and reserves attributable to associates
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The Equity MethodThe Equity Method
• Disclosre - AASB 1016– Movements in carrying amount of investments
in associates– Financial effects of material events occurring
after associates balance date– Impact of different accounting policies
• ASX rules
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Where to get more informationWhere to get more information
• Other courses• List books, articles, electronic sources