AC303 lecture 3

1. AC303 lecture 3 • Associates, joint ventures and simple investments • Methods of preparing group accounts

2. Associate definition - FRS 9 • An associate is an undertaking in which another undertaking has a ‘participating interest’ and • over which that other undertaking has significant influence and • is not controlled by that other undertaking either solely or jointly • No minimum shareholding necessarily indicative of significant influence but 20% is the rebuttable presumption • Active involvement and influence in the strategic issues of an entity would indicate significant influence

3. Joint venture/Simple investment • JV: An entity in which the investor holds a long term interest and shares control under a contractual arrangement. • Example: 50% of the voting equity rights and power to appoint three directors to a board of six people. • Simple investment: An interest in an entity which does not qualify as a subsidiary, associate or joint venture. • Example: 0.001% of shares in a plc

4. Methods of accounting for a group • Acquisition method • Parent/subsidiary relationship exists • Parents therefore controls the risks and rewards of the acquisition • Replace the financial investment in subsidiary with all the underlying net assets in the subsidiary • Even if the parent doesn’t buy all the shares, provided it controls the subsidiary, it is regarded as controlling ALL the subsidiary’s net assets

5. Minority interest • Defined in FRS 2 • The aggregate share of net assets or liabilities of subsidiary undertakings included in the consolidation that are attributable to the minority interests. • Minority control might be a better description - why?

6. Methods of accounting for a group • Equity method • Include the group’s share of the undertaking’s post-acquisition results in the group profit and loss account • the same amount as a one-line inclusion in the group balance sheet (Investment in associate undertaking) • without showing the interest in the line by line assets and liabilities in the balance sheet. • The investment is reduced by any distribution by the associate undertaking

7. Equity method for associates • FRS 9 elaborates on profit and loss requirements: • For each line item in the group’s profit and loss account after group operating profit, show separately the group’s share of each element of associate’s profit and loss item • Below the level of profit before tax, the group’s share of its associates’ figures should be included in the group amounts, although the amounts relating to associates should be disclosed in the notes.

8. Methods of accounting for a group • Gross equity accounting for joint ventures • the investor’s share of the aggregate gross assets and liabilities underlying the net amount included for the investment is shown on the fact of the balance sheet and • in the profit and loss account, the investor’s share of the JV turnover is noted (as a memorandum item). Otherwise the profit and loss account treatment is the same as for the equity method.