Académique Documents
Professionnel Documents
Culture Documents
Seminar 5
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Content
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Concept of “Significant Influence”
• The power to participate in, but not control or jointly control, the
financial and operating decisions of the investee
• Default assumption:
– Percentage ownership of ≥ 20% and ≤ 50% of investee’s voting rights
deemed as giving rise to “significant influence”
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Accounting Policy for Investments In Associates
2. Consolidated financial
statements (has both subsis and Equity method
associates): economic entity
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Equity Method
• Equity accounting:
– Investment is initially recognized at cost and adjusted thereafter for
investor’s share of post-acquisition change in equity (which will include
retained earnings)
– Dividends are not treated as income but as repayment of equity-
accounted profit
– Investment account is not eliminated
Does this formula
Investment remind you of
in associate something from
Seminar 3?
Share of BV of Share of
net assets at unamortized Implicit
goodwill
reporting date FV adjustments
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Equity Method
As at reporting date…
Share of post-
acq REs Implicit
goodwill
Implicit Implicit
goodwill Share of
goodwill unamortised
FV adjustments
CV
Cost = FV of Share of Share of
Consideration FV adjustments FV adjustments
transferred Share of BV of
net assets as at
Share of BV of Share of BV of reporting date
net assets at acq net assets at acq
date date
Subsequent to date
At date of acquisition
of acquisition
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Cost Method Versus Equity Method
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Content
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Rationale for Differences in Presentation
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Consolidation Vs Equity Method
Dimensions Consolidation Equity Method
Income • Income statement items • Share of profit and share of tax are
recognition reported as single line items in
of subsidiary are added
with the parent’s the income statement
Non- • NCI is shown • Only investor’s share of profit (net
controlling
interests (NCI) separately as a of tax) in associates is separately
deduction from profit added to the group’s profit before tax
after tax
• NCI allocation is not applicable
Asset • Investment • Investment is carried at cost +
measurement account is share of post-acquisition change
eliminated, and in equity
• Investment account includes:
• Substituted with line
items of each identifiable – Share of book value of net
assets + liabilities, and assets of associate
goodwill of subsidiaries – Share of fair value adjustments
at FV, net of amortisation – Goodwill
and impairment
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Consolidation Vs Equity Method
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Consolidation Vs Equity Method
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Content
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Methodology of Equity Accounting
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Methodology of Equity Accounting
6. Post-acquisition change in the investor’s share of net assets
is added to the investment account
• Will include share of profit and tax in each reporting period from acquisition
date to disposal date
7. Share of current profit and tax of the associate will be adjusted for
unrealised effects of asset transfers between investor and
assoc:
• Unrealized profit arising from current year transfer
• Realized profit in current year arising from previous year transfer
8. Dividends
• Deemed as a "repayment" of profits
• Since share of profit is already recognized in the P/L by the investor,
dividends should not be recognized as profit
• It will be credited to the investment account as a realization of past
capitalised profit
9. Other changes in equity (e.g. increase in revaluation
reserves) are proportionately recognized in accordance with
the investor’s interest
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Content
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Analytical Check
Investment
in associate
(at each reporting date)
Share of
Share of BV of Implicit
unamortized goodwill
net assets
FV adjustments
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Content
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Conversion from the Cost Method to the Equity
Method
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Reclassification of Dividends
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Consolidation Procedures NOT Applicable to Equity
Method
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Specific Illustrations
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Illustration 1: Amortization of FV
Adjustments of Identifiable Net Assets
Prepare the equity accounting entries for the year ended 31 Dec 20X5.
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Illustration 1: Amortization of FV
Adjustments of Identifiable Net Assets
Current year
One year from date of acquisition
Entries in this
period are to
Retained Earnings
EA 1, EA 2 The question
asked for
accounting entries
as at 31 Dec 2015
Illustration 1: Amortization of FV
Adjustments of Identifiable Net Assets
Note: This entry capitalizes the share of past profits in the investmentaccount
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Illustration 1: Amortization of FV
Adjustments of Identifiable Net Assets
20% X (5,000,000 /
Dr Opening RE 80,000 10) X 80%
Cr Investment in associate 80,000
Note:
1) This EA is to account for the Investor’s share in the amortisation of FV
differential (excess of FV over BV). As at 1 Jan 20X5, there was only one
year of amortisation of FV differential from acquisition date
2) Any adjustments relating to associate’s assets or liabilities are made
against the investment account (a proxy for net assets)
3) This entry can be combined with the previous entry (EA 1)
4) Adjustment includes the tax effects
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Illustration 1: Amortization of FV
Adjustments of Identifiable Net Assets
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Impairment Test
• Impairment losses:
– Will reduce the investment account
– May be attributed to book value of net assets, fair value adjustments or
goodwill
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Illustration 2: Accounting for impairment loss of
investment in associate
• P owned 20% of A
• Past impairment of investment in A: $250,000
• Current impairment of investment in A: $100,000
• A’s current year net profit before tax: $10,000,000
• Tax expense: $2,100,000
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Illustration 2: Accounting for impairment loss of
investment in associate
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Transfer of Assets between Investor and Associate
Investor Investor
Sales Sales
were were
made from X% made from
X% associate investor to
to investor associate
Associate Associate
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Illustration 3: Effect of transfer of assets on
investment in associate
Prepare the equity accounting entries for I as at the end of the current
year.
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Illustration 3: Effect of transfer of assets on
investment in associate
Workings to compute all the unrealised profits:
1 Calculate realised and Total profit = 60,000
unrealised profit from Realised = 40,000 (2/3)
inventory sale Unrealised = 20,000 (1/3)
NPBT of A 1,000,000
Less: unrealized profit on sale of inventory (20,000) 1/3 X $60,000
Less: unrealized profit on sale of plant (30,000)
Adjusted net profit before tax 950,000
I’s share of profit (20%) 190,000
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Illustration 3: Effect of transfer of assets on
investment in associate
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Moving along
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Accounting Exposure
Accounting Exposure
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Foreign Currency Transactions of a Stand-
alone Entity
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Foreign Currency Transactions of a Stand-
alone Entity
– Non-monetary items:
• No adjustment made at balance sheet date
• Items are measured at historical rate (i.e. date of transaction)
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Transaction Exposure
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Treatment of Transaction Gains and Losses
• Monetary items:
– Exchange gains or losses are recognized in profit or loss of the entity
– Exceptions: exchange gains or losses on an intercompany loan that is
an extension of the parent’s net investment are taken to equity in the
consolidated financial statements
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Illustration 1:
Foreign currency transaction – Accounts Payable
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Illustration 1:
Foreign currency transaction
1 November 20x1
Dr Inventory 375,000
Cr Accounts payable 375,000
Record purchase of goods at spot rate USD$250,000 x 1.5
31 December 20x1
Dr Accounts payable 12,500
Cr Exchange gain (USD250k* 12,500
1.50-1.45 )
Record exchange gain on outstanding accounts payable
31 January 20x1
Dr Accounts payable 362,500
Dr Exchange loss (1.48-1.45)*250k 7,500
Cr Cash/Bank 370,000
To record exchange loss on settlement of accounts payable
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Content
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Concept of Functional Currency
3. The currency that mainly influences the labour, material and other
cost of goods and services (currency in which costs are
denominated and settled)
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Factors to Indicate an Entity’s Functional Currency
Factors to Determine the Functional Currency of a
Foreign Operation SU5-31
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Determination of Functional Currency
If translation to parent’s
presentation currency is Remeasurement /Temporal Method
required, Closing rate will be used to translate the books kept
method shall be used in foreign currency to the functional
currency
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Determination of Functional Currency
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Presentation Vs Functional Currency
• A company may choose any currency as its presentation
currency
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Foreign Currency to Functional Currency
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Functional Currency to Presentation Currency
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Functional to Presentation Currency
PC = Presentation Currency
Incorporated in Australia FC = Functional Currency
PC = AUD
FC = USD
Prepares conso FS
Integrated with HO
Autonomous entity
A branch
Incorporated in registered in
Singapore Msia
PC = SGD PC = RM
FC = SGD FC = USD
Books in USD Books in RM
Exchange Rates Used for Translating Balance Sheet
Items
Historical rate
Non-monetary assets and (For a subsi acquired by a
liabilities at historical rate (eg. Closing rate
parent, the forex rate at
PPE, investments, prepayment, acquisition date serves as
inventory) the new historical rate for
items of the subsi existing
prior to the acquisition
date)
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Exchange Rates Used for Translating Balance Sheet
Items
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Exchange Rates Used for Translating Income
Statement Items
Remeasurement /
Income Statements Items Closing Rate Method
Temporal method
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Translation Exposure
• Under closing rate method, ALL assets and liabilities are translated
at closing rate. So exposed items are the NET ASSETS (assets –
liabilities)
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Sources of Translation Differences Under Closing
Rate Method ( FCTR )
• Under the closing rate method, the exposed item is the entire net
assets.
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Illustration 2:
Translation example
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Illustration 2:
Translation example
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Illustration 2:
Translation example
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Illustration 2:
Translation example
Additional information:
1. Assets are depreciated using the straight line method at the rate of 10%.
During 20x4, equipment costing FC50,000 was purchased. A full
year’s depreciation is recorded in the year of purchase.
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Illustration 2:
Translation example
Required:
1. Translate the financial statements of Beta Company into S dollars
assuming that Beta’s functional currency is the FC (foreign
currency)
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Illustration 2:
Translation example – closing rate method
Beta Company
Balance sheet at 31.12.20x4
Assets & liabilities FC Rate S$
FX AS AT Plant and equipment 225,000 1.35 303,750
31/12/03 Inventories 120,000 1.35 162,000
1.50 Accounts receivable 200,000 1.35 270,000
Cash 5,000 1.35 6,750
Accounts payable (120,000) 1.35 (162,000)
31/12/04 Net assets 430,000 1.35 580,500
1.35
A
Share capital 200,000 1.5 300,000
Retained earnings 230,000 From I/S 340,700
Translation reserves Bal. figure (60,200)
(proof is next slide) 430,000 580,500
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Illustration 2:
Translation example- closing rate method
Alternative 1
Movement in net exposed Items FC Rate S$
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Illustration 2:
Translation example- closing rate method
Alternative 2 A B (B – A) X FC
Movement in net exposed FC Opening/Ave S$
Items /Tranx Rate Closing rate
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Illustration 2:
Translation example –Temporal method
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Illustration 2:
Translation example –Temporal method
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Illustration 2:
Translation example – Temporal method
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Illustration 2:
Translation example –Temporal method
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Illustration 2:
Translation example –Temporal method
See next slide
Beta Company
Balance sheet at 31.12.20x4
Assets & liabilities FC Rate S$
Plant/Equipment 225,000 Note (d) 335,250
Inventories 120,000 1.38 165,600
Accounts receivables 200,000 1.35 270,000
Cash 5,000 1.35 6,750
Accounts payables (120,000) 1.35 (162,000)
Net assets 430,000 1.35 615,600
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Illustration 2:
Translation example –Temporal method
New equipment
Cost 50,000
Accumulated depreciation (5,000)
Net carrying value 45,000 1.45 65,250
Total 225,000 335,250
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Conclusion
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Conclusion
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Additional Exercises
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