NYC can services it debt independently. 11 d.
Question 10.9 (Economic and Accounting Measures of Exchange Gains)
A foreign currency translation gain will generally arise where
the foreign currency appreciates and
the opening net assets
of the foreign operation
are positive. The opening net assets at the closing exchange rate is a greater amount (expressed as
units of the functional currency of the group) than the opening net assets translated using the rate as at the beginning of the period. This gain will be adjusted for the effect of changes in
net assets (including total comprehensive income for the period and dividends paid).
If indicators are mixed, give propriety to indicators per para.9 in exercising professional
judgement (AASB121.12)
Equity accounting:
Apply equity accounting in CFS, AASB 128(17), Measure at
cost or fv in separate FS of investor AASB127(10), If no consolidation ,use equity accounting in SFS.
Objective:
to provide useful information about performance of an investment 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.
Advantage and disadvantage of equity
accounting:
Equity accounting adjusts cost for the investor’s share of changes in net assets recognised by the associate. However, under current accounting 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 under AASB 139. Fair value is a more
comprehensive measure of the value of the investment because it is not restricted 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 classified as an AFS financial asset and measured at fair value. The higher carrying amount, in
turn, may improve gearing.
On the other hand, one
advantage
, 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 investment in an associate and
applying equity accounting. Additional disclosure requirements apply under AAB 128 Investments in Associates. From the perspective of the preparer, this may be a
disadvantage
because additional disclosures are potentially costly. However, an
advantage
of the equity accounting 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 accounted 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.
JOINT VENTURE Why joint ventures?
