CIMA F2 Syllabus C. Group accounts - Associates - Notes ^{1 / 2}

An associate is an entity over which the group has significant influence, but not control.

Significant influence

Significant influence is normally said to occur when you own between 20-50% of the shares in a company but is usually evidenced in one or more of the following ways:

• representation on the board of directors

• participation in the policy-making process

• material transactions between the investor and the investee

• interchange of managerial personnel; or

• provision of essential technical information

Accounting treatment

An associate is not a group company and so is not consolidated. Instead it is accounted for using the equity method. Inter-company balances are not cancelled.

Statement of Financial Position

There is just one line only “investment in Associate” that goes into the consolidated SFP (under the Non-current Assets section).

It is calculated as follows:

Consolidated income statement

Again just one line in the consolidated income statement:

Include share of PAT less any impairment for that year in associate.

Do not include dividend received from A.

What’s important to notice is that you do NOT add across the associate’s Assets and Liabilities or Income and expenses into the group totals of the consolidated accounts. Just simply place one line in the SFP and one line in the Income Statement.

Unrealised profits for an associate

1. Only account for the parent’s share (eg 40%). 

   This is because we only ever place in the consolidated accounts P’s share of A’s profits so any adjustment also has to be only P’s share.

2. Adjust earnings of the seller

Adjustments required on Income Statement

• If A is the seller - reduce the line “share of A’s PAT”

• If P is the seller - increase P’s COS

Adjustments required on SFP

• If A is the seller - reduce A’s Retained earnings and P’s Inventory

• If P is the seller - reduce P’s Retained Earnings and the “Investment in Associate” line

Illustration

P sells goods to A (a 30% associate) for 1,000; making a 400 profit. 3/4 of the goods have been sold to 3rd parties by A.

What entries are required in the group accounts?

Profit = 400; Unrealised (still in stock) 1/4 - so unrealised profit = 400 x 1/4 = 100. As this is an associate we take the parents share of this (30%). So an adjustment of 100 x 30% = 30 is needed.

Adjustment required on the Income statement

P is the seller - so increase their COS by 30.

Adjustment required on the group SFP

P is the seller - so reduce their retained earnings and the line “Investment in Associate” by 30.

The retained earnings of S and A were £70,000 and £30,000 respectively when they were acquired 8 years ago.

There have been no issues of shares since then, and no FV adjustments required.

The group use the proportionate method for valuing NCI at acquisition.

Prepare the consolidated SFP

Solution

Step 1: Equity Table

Step 2: Goodwill

H owns 18,000 of S’s share capital of 30,000 so 60%.

Step 3: NCI

Step 4: Retained Earnings

Step 5: Investment in Associate

Final answer - Goodwill