Lecture 9 - Lecture 9 Accounting for Associates Part 2 1...

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Lecture 9 Accounting for Associates Part 2 1
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Learning Objectives Identify the factors that indicate an investor/associate relationship Apply the cost and equity methods of accounting for investments Apply the equity method in consolidated financial statements Understand and apply the disclosure requirements of AASB 128 Investments in Associates 2
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Review • The story so far………………. . 3
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Investor/Investee Relationships A subsidiary is an entity over which another entity has the power to exert control. The power to exert control is the power to dominate decision-making in the subsidiary. An associate is an entity over which another entity has the power to exert significant influence . The power to exert significant influence is the power to participate in decision-making in the associate. 4
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Presumptive Test of Significant Influence Control of ≥ 20% of the voting power in an investee indicates that an investor may have the power to exert significant influence. This is only a presumptive test – the actual relationship is determined by particular circumstances. 5
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Cost Method Accounting for an Investment At acquisition, the investment is recorded at cost. Dividends received by the investor paid from pre-acquisition profits of investee are a return of investment. Dividends received by investor paid from post- acquisition profits of investee are a return on investment. The carrying amount of the investment cannot exceed its estimated recoverable amount. 6
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Investments and Market Values • If investments have a quoted market price in an active market, they are measured at the fair value at balance date as per AASB 139 (see Wesfarmers – Bunnings Warehouse Property trust) • If there is no quoted market values available for investments where the investor has the power to exercise significant influence - then the equity method is used. 7
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Equity Method Accounting for Investments Critical point of revenue recognition is the point at which profit is earned by the investee. At acquisition, the investment is recorded at cost The investor recognises its equity in the post- acquisition earnings and reserves of the investee. All dividends received are recognised as a recovery (return) of investment. The carrying amount of the investment cannot exceed its estimated recoverable amount. 8
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Cost of Investment > Equity Acquired At the purchase date, the investor compares the fv of the net investment to the purchase consideration Any amount over the fv represents the amount paid for goodwill. Any goodwill is not recognised as a separate asset but forms part of investment cost. The goodwill is not tested for impairment annually, the entire investment is tested for impairment when there are indicia of non- recoverability (as per AASB 139).
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This note was uploaded on 11/18/2010 for the course ACCOUNTING 22754 taught by Professor Helen during the Three '10 term at University of Technology, Sydney.

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Lecture 9 - Lecture 9 Accounting for Associates Part 2 1...

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