1 / 82

Gary Leung garyleung.hk

ACCA Paper P2 (HKG) Corporate Reporting- HKAS 28(Investments in Associates and Joint Ventures) ,HKFRS 11 (Joint Arrangements) and HKFRS 12 (Disclosure of Interests in Other Entities) 14 Sept. 2012. Gary Leung www.garyleung.hk. HKAS 28 Investments in Associates and Joint Ventures.

tashya-prince
Download Presentation

Gary Leung garyleung.hk

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ACCA Paper P2 (HKG) Corporate Reporting- HKAS 28(Investments in Associates and Joint Ventures) ,HKFRS 11 (Joint Arrangements) and HKFRS 12 (Disclosure of Interests in Other Entities) 14 Sept. 2012 Gary Leung www.garyleung.hk ACCA P2 -Dec 2012

  2. HKAS 28 Investments in Associates and Joint Ventures • Introduction • Definition • Separate financial statement • Equity method • Transactions between parent and associate • Share of losses of the associates • Impairments losses • Dissimilar accounting policies • Different reporting dates • Main defects of equity accounting ACCA P2 -Dec 2012

  3. Introduction • In June 2011, HKICPA issued HKAS 28 (2011) Investments in Associates and Joint Ventures supersedes HKAS 28 (2003) Investments in Associates. • Where one company has a controlling investment in another company, a parent subsidiary relationship is formed and accounted for as a group. Companies may also have substantial investments in other entities without actually having control. Thus, a parent-subsidiary relationship does not exist between the two. • If the investing company can exert significant influence over the financial and operating policies of the investee company, it will have an active interest in its net assets and results. • Including the investment at cost in the company's accounts would not fairly present the investing interest. • So that the investing entity (which may be a single company or a group) fairly reflects the nature of the interest in its accounts, the entity’s interest in the net assets and results of the company, the associate, needs to be reflected in the entity’s accounts. This is achieved through the use of equity accounting ACCA P2 -Dec 2012

  4. Introduction • A third relationship exists where an entity shares control with one or more other entities. This shared or joint control, does not give any dominant or significant influence and all parties that share control must agree on how the shared entity is to be run. • Prior to 2011 joint ventures an entity could choose to use either equity accounting or proportional consolidation. • The use of proportional consolidation never had the support of the accounting profession and in 2011 the HKICPA withdrew HKAS 31, which allowed its use, and replaced it with HKFRS 11 Joint Arrangements. This standard only allows joint ventures to be accounted for using equity accounting. ACCA P2 -Dec 2012

  5. Definitions of Key Terms • Associate • An entity over which the investor has significant influence • Significant influence • The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies • Joint arrangement • An arrangement of which two or more parties have joint control • Joint control • The contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control ACCA P2 -Dec 2012

  6. Definitions of Key Terms • Joint venture • A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement • Joint venturer • A party to a joint venture that has joint control of that joint venture • Equity method • A method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets. The investor's profit or loss includes its share of the investee's profit or loss and the investor's other comprehensive income includes its share of the investee's other comprehensive income ACCA P2 -Dec 2012

  7. Significant Influence • If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. • If the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. ACCA P2 -Dec 2012

  8. Significant Influence • The existence of significant influence by an investor is usually evidenced in one or more of the following ways: • (a) representation on the board of directors or equivalent governing body of the investee; • (b) participation in policy-making processes, including participation in decisions about dividends or other distributions; • (c) material transactions between the investor and the investee; • (d) interchange of managerial personnel; or • (e) provision of essential technical information. • When significant influence is lost any remaining investment will be measured at fair value. Any difference between the carrying amount of the investment in associate and the remeasured amount will be included within profit or loss. From that point on the investment will be accounted for in accordance with HKFRS 9. ACCA P2 -Dec 2012

  9. Potential voting rights • The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether an entity has significant influence. • Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event. ACCA P2 -Dec 2012

  10. Illustration 1 • X Owns 60% of the voting rights of Y,Z owns 19% of the voting rights of Y, and the remainder are dispersed among the public. Z also is the sole supplier of raw materials to Y and has a contract to supply certain expertise regarding the maintenance of Y’s equipment. • Required: • What is the relationship between Z and Y ? ACCA P2 -Dec 2012

  11. Illustration 1 • Z may be able significant influence over Y, and therefore it may have to be treated as an associate. Although Z owns only 19% of the voting rights, it is the sole supplier of raw materials to Y and provides expertise in the form of maintenance of Y’s equipment. ACCA P2 -Dec 2012

  12. Separate financial statements of the investor • In the separate financial statements an investment in an associate or a joint venture are to be accounted for in accordance with HKAS 27 Separate Financial Statements. • In the separate financial statements, the investment is accounted for: • Under HKFRS 5 if classified as held for sale; • At cost or in accordance with HKFRS 9. • The emphasis in the separate financial statements will be on the performance of the assets as investments. ACCA P2 -Dec 2012

  13. Consolidated accounts • The objective of IAS 28 is to prescribe the accounting for associates and to describe the use of the equity method for both associates and joint ventures. ACCA P2 -Dec 2012

  14. Equity accounting • The investment in an associate or a joint venture is initially recognised at cost and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. • Distributions received from the investee reduce the carrying amount of the investment. • Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investee arising from changes in the investee's other comprehensive income (e.g. to account for changes arising from revaluations of property, plant and equipment and foreign currency translations.) ACCA P2 -Dec 2012

  15. Equity accounting • Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. • The investor’s share of the current year’s profit or loss of the associate is recognised in the investor’s profit or loss. • The associate is not consolidated line-by-line. Instead, the group share of the associate’s net assets is included in the consolidated statement of financial position in one line, and share of profits (after tax) in the consolidated profit or loss and other comprehensive income in one line. ACCA P2 -Dec 2012

  16. Treatment in a consolidated statement of financial position • In group investments, replace the investment as shown in the individual company statement of financial position with: • Either: share of equity at the balance sheet date (plus fair value adjustments at acquisition) , PLUS any unimpaired goodwill remaining at the balance sheet date, • Or: cost PLUS share of post-acquisition reserves at the balance sheet date LESS goodwill impaired and written off since acquisition. ACCA P2 -Dec 2012

  17. Treatment in a consolidated statement of financial position • In group reserves, include the parent’s share of the associate’s (or JV) post-acquisition reserves (the same as for subsidiary). • Cancel the investment in associate in the individual company’s books against the share of the associate’s (or JV) net assets acquired at fair value. The difference is goodwill. • The fair values of the associate’s (or JV) assets and liabilities must be used in calculating goodwill. Any change in reserves, depreciation charges etc due to fair value revaluations must be taken into account (as they are when dealing with subsidiaries). • Where the share of the associate’s net assets acquired at fair value are in excess of the cost of investment, the difference is included as income in determining the investor’s share of the associate’s (JV) profits or losses. ACCA P2 -Dec 2012

  18. Illustration 2 • P owns 80% of S and 40% of A. A statement of financial position of the three companies at 31December 2011 are: • P S A • $ $ $ • Investment: shares in S 800 – – • Investment: shares in A 600 – – • Other non-current assets 1,600 800 1,400 • Current assets 2,200 3,300 3,250 • ——— ——— ——— • 5,200 4,100 4,650 • ——— ——— ——— • Issued capital – $1 O.S. 1,000 400 800 • Retained earnings 4,000 3,400 3,600 • Liabilities 200 300 250 • ——— ——— ——— • 5,200 4,100 4,650 • ——— ——— ——— ACCA P2 -Dec 2012

  19. Illustration 2 • P acquired its shares in S seven years ago when S’s retained earnings were $520 and P acquired its shares in A on the 1 January 2011 when A’s retained earnings were $400. •  The goodwill in S was fully written off after five years. • There were no indications during the year that the investments in A wase impaired. • Non-controlling interest is valued at the proportionate share of the subsidiary’s identifiable net assets, it is not credited with its share of goodwill (i.e. partial goodwill method). • Required: •  Prepare the consolidated statement of financial position at 31 December 2011. ACCA P2 -Dec 2012

  20. Illustration 2 • P Consolidated statement of financial position as at 31 December 2011 •   $ • Investment in associate 1,880 • Non-current assets (1,600 + 800) 2,400 • Current assets (2,200 + 3,300) 5,500 • ——— • 9,780 • ——— • Issued capital 1,000 • Retained earnings (W5) 7,520 • ——— • 8,520 • NCI (W4) 760 • Liabilities 500 • ——— • 9,780 • ——— ACCA P2 -Dec 2012

  21. Illustration 2 • WORKINGS • (1) Group structure • P • 80% 40% • S A ACCA P2 -Dec 2012

  22. Illustration 2 • (2) Net assets working • Balance Acquisition sheet date • $ $ • Issued capital 400 400 • Retained earnings 3,400 520 •   ——— —— •   3,800 920 •   ——— —— • A Balance Acquisition • sheet date • Issued capital 800 800 • Retained earnings 3,600 400 • ——— ——— • 4,400 1,200 • ——— ——— • (3) Goodwill • S $ Cost of investment 800 • Net assets acquired (80% X 920 (W2)) (736) • —— • 64 • —— • A $ • Cost of investment 600 • Net assets acquired (40% × 1,200 (W2))(480) • —— • 120 • —— ACCA P2 -Dec 2012

  23. Illustration 2 • (4) NCI • $ • S only – (20% X 3,800) 760 • —— • (5) Retained earnings • $ • P – from question 4,000 • Share of S [80% X (3,400 – 520) (W2)] 2,304 • Share of A [40%X (3,600 – 400) (W2)] 1,280 • Less Goodwill impaired (W3) (64) • ——— • 7,520 • ——— ACCA P2 -Dec 2012

  24. Illustration 2 • (6) Investment in associate • $ Share of net assets (40% × 4,400) 1,760 • Goodwill 120 • ——— • 1,880 • ——— •  OR • Cost 600 • Share of post acquisition profits 1,280 • ——— • 1,880 • ——— ACCA P2 -Dec 2012

  25. Illustration 3 Dividend paid by an Associate • On 1 Jan 2010 entity A acquire 35% interest in entity B. Entity A paid $475,000 for its interest in B. At that date the book value of B’s net assets was $900,000, and their fair value $1,100,000, the difference of $200,000 relates entirely to an item of PPE with a remaining useful life of 10 years. During the year B made a profit of $80,000 and paid a dividend of $120,000 on 31 Dec 2010. • Required: How A accounts for its investment in B under the entity method. ACCA P2 -Dec 2012

  26. Illustration 3- Dividend paid by an Associate • EITHER • 1) • Cost 475,000 • Post acq. Profits35% X $80,0000 28,000 • Adjustment of Fair value (35% X $200,000) /10 (7,000) • Dividend paid (35% X 120,000) (42,000) • Closing balance of A’s investment in B 454,000 • OR • 2) • Share of FV NAV at 31 Dec 2010 • ($1,100,000 + 80,000 – 120,000) X 35% – 7,000 364,000 • Unimpaired Goodwill (475,000 – 315,000-70,000) 90,000 • 454,000 ACCA P2 -Dec 2012

  27. Treatment in a consolidated profit or loss and other comprehensive income • Treatment is consistent with consolidated statement of financial position : • Include group share of the associate’s (or JV) profits after tax in the consolidated statement of comprehensive income. This replaces dividend income shown in the investing company’s own statement of comprehensive income. • Parent’s % the associate ’s (or JV) profit for the year X • Less: any impairment loss in the current year (X) • Less: the parent’s % of additional depreciation on fair value adjust. (X) • X • Do not add in the associate’s (or JV) revenue and expenses line-by-line as this is not a consolidation and the associate is not a subsidiary. • Time-apportion the associate’s results if acquired mid-year. • Note that the associate statement of financial position is NOT time apportioned as the statement of financial position reflects the net assets at the period end to be equity accounted. ACCA P2 -Dec 2012

  28. Illustration 3 • P has owned 80% of S and 40% of A for several years. consolidated profit or loss and other comprehensive income for the year ended 31 December 2011 are: • P S A • $ $ $ • Revenue 14,000 12,000 10,000 • Cost of sales (9,000) (4,000) (3,000) •   ——— ——— ——— • Gross profit 5,000 8,000 7,000 • Administrative expenses (2,000) (6,000) (3,000) • ——— ——— ——— • 3,000 2,000 4,000 •  Dividend from associate 400 – – •   ——— ——— ——— • Profit from ordinary activities before taxation 3,400 2,000 4,000 • Income taxes (1,000) (1,200) (2,000) • ——— ——— ——— • Profit from ordinary activities after taxation 2,400 800 2,000 • ——— ——— ——— •  Dividends (paid) (1,000)–(1,000) •  Retained earnings for the period 1,4008001,000 •  Goodwill was fully written off three years ago. • Required: •  Prepare the consolidated profit or loss and other comprehensive income for the year ended 31 December 2011. ACCA P2 -Dec 2012

  29. Illustration 3 • P Consolidated profit and loss account for the year ending 31 December 2011 • $ • Turnover 26,000 • Cost of sales (13,000) • ——— • Gross profit 13,000 • Administrative expenses (8,000) • ——— • Operating profit 5,000 • Income from associate 800 • ——— • Profit before taxation 5,800 • Income taxes (2,200) • ——— • Profit after taxation 3,600 • ——— • Profit attributable to:- • Owner of the parent 3,440 • NCI (W3) 160 • 3,600 • Dividends (paid) (1,000) ACCA P2 -Dec 2012

  30. Illustration 3 • 1) Consolidation schedule • P S 40% A Consolidation • Revenue 14,000 12,000 26,000 • Cost of sales (9,000) (4,000) (13,000) • Administration expenses (2,000) (6,000) (8,000) • Income from associate 40% × 2,000 800 800 • Tax – group (1,000) (1,200) (2,200) • (2) NCI • S only 20% × 800 $160 ACCA P2 -Dec 2012

  31. Impairments losses • After application of the equity method, including recognising the associate’s losses, the investor applies the requirements of HKAS 36 to determine whether it is necessary to recognise any additional impairment loss. • Because goodwill included in the carrying amount of an investment in an associate is not separately recognised, it is not tested for impairment separately. • Instead, the entire carrying amount of the investment is tested for impairment, by comparing its recoverable amount with its carrying amount. Accordingly, any reversal of that impairment loss is recognised in accordance with HKAS 36 to the extent that the recoverable amount of the investment subsequently increases ACCA P2 -Dec 2012

  32. Impairments losses • In determining the value in use of the investment, an entity estimates: • its share of the present value of the estimated future cash flows expected to be generated by the associate, including the cash flows from the operations of the associate and the proceeds on the ultimate disposal of the investment; or • the present value of the estimated future cash flows expected to arise from dividends to be received from the investment and from its ultimate disposal. ACCA P2 -Dec 2012

  33. Illustration 4 • A acquired 30% of the issued capital of B for $1 million on 31 Dec 2010. The accumulated profit and the share capital at that date were $2 million and $ 1 million (share capital @ $1) respectively. • Financial information of B Ltd at 31 Dec 2008 is • Share capital $1 million • Retained profit $3 million • Recoverable amount is $ 6 million • Required: • What amount should be shown in A’s consolidated balance sheet at 31 Dec 2011, for the investment in B ? ACCA P2 -Dec 2012

  34. Illustration 4 • Goodwill = 1 million – (30% X 3 million)=0.1 million. • Interest in associate at 31 Dec 2008 • Cost 1 • Add: profit acq. Profits. ( 3-2)X 30% 0.3 • 1.3 • RA ( 6 X 30%) 1.8 • An impairment test would prove that the carrying amount of the investment is not impaired. ACCA P2 -Dec 2012

  35. Illustration 5 • The following are the summarised accounts of India, New and Delhi for the year ended 30 June 2011. • Statements of financial position • India New Delhi • Tangible assets 90,000 80,000 60,000 • Investment in New 92,000 • Investment in Delhi 30,000 • Current assets 88,00050,00010,000 • 300,000130,00070,000 • Share capital ($1 share) 175,000 75,000 40,000 • Accumulated profits 114,00051,00029,000 • Equity 289,000 126,000 69,000 • Liabilities 11,0004,0001,000 • 300,000130,00070,000 ACCA P2 -Dec 2012

  36. Illustration 5 • Profit or loss and other comprehensive income • India New Delhi • Revenue 500,000 200,000 100,000 • Operating costs (400,000)(140,000)(60,000) • Profit before tax 100,000 60,000 40,000 • Tax (25,000)(20,000)(14,000) • Profit for the year 75,00040,00026,000 • Additional information i) New • 1. India acquired 60,000 shares in New three years ago when the accumulated profits were $15,000. • 2. At the date of acquisition the fair value of New’s non current assets, which at that time had a remaining useful life of ten years, exceeded their book value by $5,000. • 3. The group policy is to calculate the goodwill arising on the consolidation of a subsidiary gross with the NCI at fair value. At acquisition the fair value of the NCI of New was $24,000. • 4. Impairment reviews reveals that no impairment losses have arisen. • ii) Delhi • 5. India acquired 12,000 shares in Delhi three years ago when the accumulated profits were $5,000. • 6. At the date of acquisition the fair value of Delhi’s non-current assets, which at that time had a remaining useful life of four years, exceeded the book value by $20,000. • 7. The impairment review reveals the recoverable amount of Delhi at their year-end to be $103,333. • Required: • Prepare the consolidated profit or loss and other comprehensive income and the consolidated statement of financial position for the India Group 2011. ACCA P2 -Dec 2012

  37. Illustration 5 • W1) Group • India • 80% 30% • New Delhi ACCA P2 -Dec 2012

  38. Illustration 5 • W2 Net Assets • New Delhi • DOA 2009 DOA 2009 • Share Cap. 75,000 75,000 40,000 40,000 • Acc. Profits 15,000 51,000 5,000 29,000 • Fair value • adjustment 5,000 5,000 20,000 20,000 • Less: add. • dep. (1,500) # (15,000) *95,000129,50065,00074,000 • % of Post acq. profits of New 80% (129,500 – 95,000) = $27,600 • % of Post acq. Profits of Delhi 30% ( 74,000 – 65,000) = $2,700 • # $5,000 X 1/10 X 3 years = $1,500 • * $20,000 X ¼ X 3 years = $15,000 ACCA P2 -Dec 2012

  39. Illustration 5 • W3) Investment in associate • Cost of investment 30,000 • Plus Post acq. Profits (30% X 9,000) 2,700 • Less: impairment loss (1,700) • 31,000 • W4) Impairment review • Carrying value before impairment 32,700 • Recoverable amount (30% X 103,333) (31,000) • Impairment loss 1,700 ACCA P2 -Dec 2012

  40. Illustration 5 • W 5) Goodwill • Cost of the New investment 92,000 • Fair value of the NCI 24,000 • Net assets (95,000) • Gross goodwill at acquisition 21,000 • W6) NCI • Fair value of the NCI at DOA 24,000 • Plus NCI % of the post acq. Profits • ( 20% X 34,500) 6,900 • 30,900 • OR • NCI % of the net assets at 2009 25,900 • ( 20% X 129,500) • Plus goodwill ( 24,000 – (20% X 95,000)) 5,000 • 30,900 ACCA P2 -Dec 2012

  41. Illustration 5 • W7) Accumulated profits • Parent 114,000 • New - Post acq. Profits (80% X 34,500) 27,600 • Delhi-Post acq. Profits ( 30% X 9,000) 2,700 • Impairment loss on the associate –Delhi (1,700) • 142,600 • W8) Income from associate • Parent’s % of the associate’s profit for the year (30% X 26,000) 7,800 • Less: additional deprecation ( 30% X 5,000) (1,500) • Less: the impairment loss arising in the year (1,700) • 4,600 • W9) NCI in the subsidiary’s profits for the year • NCI % of the subsidiary’s profits ( 20% X 40,000) 8,000 • Less: the NCI % of the deprecation of FVA ( 20% X 500) (100) • 7,900 ACCA P2 -Dec 2012

  42. Illustration 5 • India group • Revenue ( 500,000 + 200,000) 700,000 • Operating costs (540,500) • (400,000 + 140,000 + 500 dep. (5,000 X 1/10)) • Operating profit 159,500 • Income from associate (W8) 4,600 • Tax ( 25,000 + 20,000) (45,000) • Profit for the year 119,100 • Attributable: • Owner 111,200 • NCI (W9) 7,900 • 119,100 ACCA P2 -Dec 2012

  43. Illustration 5 • India consolidated profit or loss and other comprehensive income • $ • Goodwill 21,000 • Tangible ( 90,000 + 80,000 + 5,000- 1,500) 173,500 • Investment in associate (w3) 31,000 • Current assets 138,000 • 363,500 • Ordinary shares ($1) 175,000 • Accumulated profits (w7) 142,600 • NCI (w6) 30,900 • Equity 348,000 • Liabilities 15,000 • 363,500 ACCA P2 -Dec 2012

  44. Inter- company items with associate and Joint Venture • Inter-company trading • Dividends • Unrealised profit ACCA P2 -Dec 2012

  45. Inter-company trading • Members of the group can sell to or make purchases from the associate. This trading will result in the recognition of receivables and payables in the individual company accounts. • Do not cancel inter-company balances on the statement of financial position and do not adjust sales and cost of sales for trading with associate. • In consolidated statement of financial position, show balances with associate separately from other receivables and payables. • The associate is not part of the group. It is therefore appropriate to show amounts owed to the group by the associate as assets and amounts owed to the associate by the group as liabilities. ACCA P2 -Dec 2012

  46. Dividends • Consolidated statement of financial position: • Ensure dividends payable/receivable are fully accounted for in individual companies’ books. • Include receivable in the consolidated statement of financial position for dividends due to group from associates. • Do not cancel inter-company balance for dividends. • Consolidated profit or loss and other comprehensive income: • Do not include dividends from the associate in the consolidated statement of P&L and OCI. Parent’s share of the associate’s profit after tax (hence before dividends) is included under equity accounting in the income from associate. ACCA P2 -Dec 2012

  47. Unrealised profit • If parent sells goods to associate and associate still has these goods in stock at the year end, their carrying value will include the profit made by parent and recorded in its books. Hence, profit is included in inventory value in associate’s net assets (profit is unrealised); and parent’s revenue. • If associate sells to parent, a similar situation arises, with the profit being included in associate’s revenue and parent’s inventory. • To avoid double counting when equity accounting for associate, this unrealised profit needs to be eliminated. • Unrealised profits should be eliminated to the extent of the investor’s interest in the associate. • To eliminate unrealised profit, deduct the profit from associate’s profit before tax and retained earnings in the net assets working before equity accounting for associate, irrespective of whether sale is from associate to parent or vice versa. • Unrealised losses should not be eliminated if the transaction provides evidence of an impairment in value of the asset that has been transferred. ACCA P2 -Dec 2012

  48. Unrealised profit • Unrealised inter-company profits and losses resulting from ‘upstream’ and ‘downstream’ transactions are to be eliminated, but on partial rather than full elimination basis, i.e. only the investor’s proportionate interest in the inter-company profit and losses is adjusted for. • ‘Upstream’ transactions are, for example, sales of goods from an associate to the investor. • Dr. Retained earning • Cr. Inventory • ‘Downstream’ transactions are, for example, sales of goods from the investor to an associate. • Dr. Retained earning • Cr. Investment in associate ACCA P2 -Dec 2012

  49. Illustration 6 • Company A sells inventory to its 30% owned associate, B. The inventory had cost A $200,000 and was sold for $300,000 to B. • B also has sold inventory to A. The Cost of this inventory to B was $100,000, and it was sold for $120,000. • Required: • How would the inter company profit on these transactions be dealt with in the financial statements if none of the inventory had been sold at year-end ? ACCA P2 -Dec 2012

  50. Illustration 6 • Solution • Company A to Company B $000 • The inter group profit is $(300 -200) 100 • Unrealised Profits would be 100X 30/100 30 • The unrealised profit would be deferred until the sale of the inventory • Consolidated Journal : • Dr. Retained profits 30 • Cr. Interest in Associate 30 ACCA P2 -Dec 2012

More Related