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LECTURE WEEK NINE

LECTURE WEEK NINE. Accounting for Investments in Associates and Joint Venture. Definition:. FRS 128 (2006) : Investment on Associates

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LECTURE WEEK NINE

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  1. LECTURE WEEK NINE Accounting for Investments in Associates and Joint Venture

  2. Definition: • FRS 128 (2006) : Investment on Associates “An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.”

  3. Test of significant influence: • The power to participate in the financial and operating policy decisions of the investee but not control or joint control over those the policies • The investment must be long term and substantial • Substantial - held 20% or more equity share of the investee but no upper limit (50% by practice)

  4. Example: • 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. • Conversely, 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. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.

  5. Existance of significant influence : • Evidenced by one or more of following: • Representation of BOD • Participation in the investee’s policy making • Material transactions between the investor and investee • Interchange of managerial personnel • Provision of essential technical information

  6. Accounting Method: • Cost Method • Record the investment in the associate at cost • Recognised only to an extent of dividend receives from the accumulated net profits of the associate arising subsequent to the date of acquisition • Distribution receive recorded as a reduction of the cost of investment

  7. Equity Method: • 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 net assets of the investee. The profit or loss of the investor includes the investor's share of the profit or loss of the investee. • In CFS the carrying amount of the investment in associate is not eliminated but shown as a separate item as investment in associates • FRS only authorised the equity method

  8. FRS 131(2006): Interest on Joint Venture • Definitions: “A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control”

  9. What is joint control? • Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers).

  10. Forms of JV: • Jointly controlled operations • Two or > combine their operation to produce product such as aircraft • Jointly controlled assets and • Two or > oil and gas ventures jointly own, control and operate an oil pipeline • Jointly controlled entities • Establishment of corporation or partnerships in which each of the venturers has an ownerships interest

  11. Characteristics of JV: • Two or more venturers bound by contractual arrangement • The contractual arrangement establishes joint control

  12. Accounting Method • Under FRS 131: • Equity Method in CFS, or • Proportionate consolidation

  13. Proportionate Consolidation Method: • a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is combined: • line by line with similar items in the venturer’s financial statements, or • reported as separate line items in the venturer’s financial statements. • No MI in respect of JV because each venturers is an equal partner to JV

  14. Overview of CFS preparation Financial Statement ?? Separate FS FRS 127 Investor Assoc Venturer JCE P A S JCE P S P Inv Ven S As JCE Cost of Investment: Cost or FRS 139 Using Equity or Proportionate CFS: Using full consol. FRS 127 Using Equity Method

  15. FRS applies: • FRS 127: Consolidated and Separate Financial Statement • this std applies to accounting for investment in subsidiaries, jointly controlled entities and associated • FRS 139:Financial Instruments: Recognition and Measurements

  16. Direct Interest of Associates: • Means: • Example 4.1 TLT Parent Bhd Have 30% interest Associates Bhd

  17. Indirect Interest in Associates • Associates arise when the investment in the associates is held by one or more subsidiaries of the parent • INDIRECT to the parents but DIRECTS to the groups point of views (regardless the interest is held by the parents or subsidiaries) • See TLT pp 260

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