Cost method Dr investment in JV Cr cash Equity method Dr investment in JV Cr

Cost method dr investment in jv cr cash equity method

This preview shows page 2 - 3 out of 3 pages.

tioned consolidation; joint venture (more risk): one line method, equity method. Cost method : Dr. investment in JV Cr. cash. Equity method : Dr. investment in JV Cr. cash. Dr. loss in joint venture (%) Cr. investment in JV (OR) Dr. investment in JV Cr. profit in joint venture (%). Line by line method : Dr. investment in JO Cr. cash. Dr. asset (%) Dr. expense (%) Cr. liability (%) Cr, investment in joint operation (%). Cost method (39.66, 118.30): reliable but inappropriate -Revenue recognition; Asset valuation. not good to indicate performance if there is significant influence, so limited. Equity method- one-line method (128.11,12): relevant, significant influence. it adjust journal entries and relevant disclo- sure. only affect equity , there is no elimination and consolidation (127); only adjust the CA for the share of movements in the equity of asso- ciate; better value for investment and measurement for performance. objective : To provide useful information about performance of an invest- ment in another entity; A clever accounting technique for providing a more relevant measure than cost in the absence of control or a clear market value. Equity accounting adjusts cost for the investor s share of changes in net assets recognised by the associate. However, under current ac- counting standards, the alternative treatment is fair value/cost because the investment would otherwise be classified as an available-for-sale (AFS)/Held-to-maturity financial asset (139). Fair value is a more comprehensive measure of the value of the investment because it is not re- stricted to amounts recognised by the associate in accordance with accounting standards. Fair value can capture internally generated intangibles and goodwill that would not be recognised in the books of the associate. If the investment is accounted for as an AFS financial asset the change in fair value is recognised directly in equity and dividends received are recognised as income in profit or loss. If the investment performs well, a disadvantage of the equity accounting method is that it may yield a lower carrying amount for the investment than would arise if it were classi- fied as an AFS financial asset and measured at fair value. The higher carrying amount, in turn, may improve gearing. On the other hand, one ad - vantage, from the perspective of the preparer, of classifying the investment as AFS is the greater potential to manage earnings, to the extent that it is able to influence the associate s dividend policy. This advantage of classification as AFS reflects a disadvantage of classifying it as an invest- ment in an associate and applying equity accounting. Additional disclosure requirements apply 128 Investments in Associates. From the perspec- tive of the preparer, this may be a disadvantage because additional disclosures are potentially costly. However, an advantage of the equity ac - counting method is that to the extent that the increase in net assets of the associate reflects profit of the associate, the investor s share is ac- counted for through profit. By contrast, the change in fair value of an available-for-sale financial asset would be recognised directly in equity, until such times as the investment is sold or otherwise derecognised.
Image of page 2
Image of page 3

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture