Associates

NotesVideoQuizObjective Test

Associates

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:

Cost 400
Share of A’s post acquisition reserves 200
Less impairment (100)
  500

Consolidated income statement

Again just one line in the consolidated income statement:

Share of Associates PAT (-impairment) 100

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.

Full Example
  H S A
PPE 300,000 100,000 160,000
18,000 shares in S 75,000    
24,000 shares in A 30,000    
Receivables 345,000 160,000 80,000
Share capital £1 250,000 30,000 60,000
Retained earnings 400,000 180,000 100,000
Trade payables 100,000 50,000 80,000

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

  Now At Acquisition Post-Acquisition
Share Capital 30,000 30,000 0
Retained Earnings 180,000 70,000 110,000
Total 210,000 100,000 110,000

Step 2: Goodwill

Consideration 75,000
NCI 40,000 (40% x 100,000)
FV of Net Assets Acquired (100,000) from equity table
Goodwill 15,000

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

Step 3: NCI

NCI @ Acquisition 40,000 (from goodwill working)
40 % of S’s post acquisition profits 44,000 (40% x 110,000) (From equity table)
Impairment (0)  
NCI on the SFP 84,000  

Step 4: Retained Earnings

P 400,000  
S 66,000 (60% x 110,000 (From Equity table)
A 28,000 (40% x 70,000 (100-30)
Impairment (0) (100% because proportionate method x 0)
  494,000  

Step 5: Investment in Associate

Cost 30,000
Share of A’s post acquisition reserves 28,000 (from RE working)
Less impairment (0)
  58,000

Final answer - Goodwill

  H S A Group
PPE 300,000 100,000 160,000 400,000
18,000 shares in S 75,000     15,000
18,000 shares in A 30,000   Investment in Associate 58,000
Receivables 345,000 160,000 80,000 505,000
Share capital £1 250,000 30,000 60,000 250,000
Retained earnings 400,000 180,000 100,000 494,000
NCI       84,000
Trade payables 100,000 50,000 80,000 150,000
NotesVideoQuizObjective Test