FINAL PAPER 1 Financial Reporting Chapter 5 Unit 3. CA. Ajay Lunawat

Transcription

1 FINAL PAPER 1 Financial Reporting Chapter 5 Unit 3 CA. Ajay Lunawat

2 Learning Objectives Meaning of Associates Accounting Method for Associates Non- Application of Equity Method Treatment of change in equity of associate not arising out of profit and loss account

3 Meaning of Associates An associate is an enterprise in which an investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.

4 Significant Influence 'Significant influence means the power to participate in the financial, and operating policy decisions of the investee but the investor does not have control over those policies.

5 Indicators of significant influence Gained by virtue of Ownership Statute Agreement

6 Indicators of Significant influence Representation on the board of directors or corresponding governing body of the investee; Participation in policy making processes; Material transactions between the investor and the investee; Interchange of managerial personnel; or Provision of essential technical information.

7 Significant Influence Holding 20% or more of voting power Holds 20 % or more voting power Yes No Significant influence presumed to exist Significant influence not presumed to exist

8 Significant Influence Holding 20% or more of voting power Significant influence presumed to exist If it can be clearly demonstrated that the investor does not have significant influence, The investment will not be accounted for as an associate.

9 Significant Influence Holding less than 20% of voting power Significant influence presumed not to exist If it can be clearly demonstrated that the investor have significant influence, The investment will be accounted for as an associate.

10 Accounting for Associates Equity Method General Rule is that investments in associate is accounted using Equity Method Non applicability of Equity Method when an investment is acquired for the purpose of disposal in the near future there is severe long term restriction on fund transfer by the associate to the investor.

11 Equity Method of Accounting Investment is initially recorded at cost Carrying amount is increased/decreased on the basis of share in the profit/loss Distributions received from the investee reduce the carrying amount of the investment

12 Initial recording of Investment Value of Investment Proportionate value of net assets of the investee Purchase Price > Value of Investments Purchase Price < Value of Investments Goodwill Capital Reserve

13 Treatment of Goodwill / Capital Reserve Goodwill / Capital Reserve Included in the carrying amount of the investments with a separate disclosure

14 Steps of Equity Method Step 1 : Date of Investment Step 2 : Extent of Investment Step 3 : Analyse Profits Step 4 : Share of Pre and Post acquisition profits Step 5 : Ascertain Cost of Control Step 6 : Inter Company Transactions Step 7 : Reserves for consolidated balance sheet Step 8 : Ascertain Carrying amount of investment

15 Steps of Equity Method Step 1 : Date of Investment Ascertain date of investment of investing entity in associate Investments may be made on more than one date. Step 2 : Extent of investment Ascertain extent of investing entity s interest in associate

16 Steps of Equity Method Step 3 : Analyse profits Analyse profits of associate as pre acquisition and post acquisition with reference to date of investment (Step 1) Step 4 : Share of pre and post acquisition profits Ascertain investing entity s share of pre acquisition and post acquisition profits

17 Steps of Equity Method Step 5 : Ascertain Cost of Control A) Cost of Investment (i) Amount invested XXX (ii) Less : Pre-acquisition Dividend (XXX) XXX B) Share of net assets on the date of investment represented by investing entity s share of (i) Share Capital XXX (ii) Pre acquisition Profits XXX XXX C) Goodwill / Capital Reserve (A-B) XXX

18 Steps of Equity Method Step 6 : Inter Company Transactions Ascertain unrealised profits to the extent of investing entity s interest Inter company owings No adjustment is required

19 Steps of Equity Method Step 7 : Reserves for consolidated balance sheet A. Aggregate reserves of parent and subsidiaries as per AS 21 XXX B. Add : Investing entity s share of post acquisition profit of associate (Step 4) XXX C. Less : Unrealised profit investing entity s share (Step 6A) (XXX) D. Net for Consolidated Balance Sheet XXX

20 Steps of Equity Method Step 8 : Carrying amount of investment A. Investing entity s share of net assets of associate as at date of investment (5B) XXX B. Adjust for Goodwill / Capital Reserve (5C) XXX XXX C. Add / Less : Investing entity s share of post acquisition profit of associate (Step 4) XXX D. Less : Dividends received from associate (XXX) E. Less : Investors share of unrealised profit (6A) (XXX) F. Net for Consolidated Balance Sheet XXX

21 Important Points Unrealised profit or loss resulting from transactions between the investor (and its consolidated subsidiary) and the associate should be eliminated to the extent of interest of the investor in the associate. In case an associate has made a provision for proposed dividend in its financial statements, the investor s share of the results of operations of the associate should be computed without taking into consideration the proposed dividend [ASI-16].

22 Non- Application of Equity Method If any of the two conditions under-mentioned are fulfilled, the investment is not accounted for using the equity method a) when an investment is acquired for the purpose of disposal in the near future, i.e., as short term investments; and b) there is severe long term restriction on fund transfer by the associate to the investor. Accounted for in accordance with AS 13 Accounting for Investments with disclosure of the reasons for not applying the equity method in accounting for investments;

23 Treatment of change in equity of associate not arising out of profit and loss account For example, the associate may revalue its fixed assets and create revaluation reserve. increase/decrease in the value of investments should be directly added to/subtracted from the carrying amount of investments with corresponding credit/debit to the balance of the consolidated profit and loss account in the balance sheet

24 THANK YOU & ALL THE BEST