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Chapter 2l1lllvestmellts ill Associates (l AS 28)
203
Cost of investment
Shareof postacquisition reserves 25%of ($21- 15)m
Required
What is the relationship between Z and Y?
Solution
Z
may be able to exercise significant influence over
Y,
and therefore it may have to be treated as an as–
sociate. Although Z owns only 19% of the voting rights, it is the sole supplier of raw materials to Y and
provides expertise in the form of maintenance of Y' s equipment.
4. Equity Method
Under the equity method, the inv e stment in the as sociat e is rec ogn ized initially at co st , and then the
carrying amount is adj us ted to rec ogn ize the inve stor' s sha re of profit or lo ss of the investee after
th at date. The in vestor' s sha re of the profit or loss of the associate is recognized in the income
statement. Adjustments to the carryi ng amount may be necessary for di stributions rec eived or
through change s in the inve stor' s interest in the investee or cha ng es aris ing from the re valuati on of
property, plant, and equipment, for example .
Case Study 2
Facts
A acquires 25% of the voting shares of
B
on January
I ,
20X5. The purchase consideration was $ 10 mil–
lion, and A has significant influence over
B.
The retained earnings of
B
were $ 15 million at the date of
acquisition, and the A group has several other subsidiaries. The retained earnings of
B
at December 3 1,
20X5, were $2 1 million.
Required
Calculate the carrying value of the investment in
B
in the group financial statements at December 3 1,
20X5 .
Solutio
11
$m
10.0
---L1
11.5
The share of the postacquisition reserves will be credited to the retained earn ings of the group. Goodwill
in an associate is not separately recog nized. The entire carry ing amount is tested for impairment.
In the consolidated income statement, income from associates for the year is reported after profit from
operations, ju st before profit before tax.
Case Study 3
Facts
Comp any A sells inventory to its 30% owned associate, B. The inventory had cost A $200,000 and was
sold for $300,000. B also has sold inventory to A. The cost of this inventory to B was $ 100,000, and it
was sold for $ 120,000.
Required
How would the intercompany profit on these transactions be dealt with in the financial statements if
none of the inventory had been sold at year-end?
Solution
Comp any A to Company B
$000
The intergroup profit is $(300 - 200)
100
Profitreported would be 100 x 70/100
=
...1Sl
The remaining profit would be deferred until the sale of the inventory.
Comp any B to Company A
The profit made by Bwould be $(120 - 100)
=
20
An amount of 20 x 301100 would be eliminated fromthe carrying value of the investment, that is, $6,000.
The alternative is to eliminate the whole of the profit from B' s profit for the period and then calculate the
profit attributable to the associate.
.