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Fair value model for a jointly controlled entity
Extracts from FRS102-Section 15.14-15.15A
15.14 When an investment in a jointly controlled entity is recognised initially, a venturer that is not a parent, that chooses to adopt the fair value model, shall measure it at the transaction price.
15.15 At each reporting date, a venturer that is not a parent, that chooses to adopt the fair value model, shall measure its investments in jointly controlled entities at fair value using the fair value guidance in paragraphs 11.27 to 11.32. Changes in fair value shall be recognised in accordance with paragraphs 17.15E and 17.15F. A venturer using the fair value model shall use the cost model for any investment in a jointly controlled entity for which it is impracticable to measure fair value reliably without undue cost or effort.
15.15A The venturer shall recognise dividends and other distributions received from the investment as income without regard to whether the distributions are from accumulated profits of the jointly controlled entity arising before or after the date of acquisition.
OmniPro comment
Where the fair value model is chosen, the following rules apply:
- Fair value movements are recognised in other comprehensive income/revaluation reserve where the movement is positive unless previous devaluations have been recognisesd in the profit and loss in which case they are recognised in the profit and loss up to the amount previously recognised in the profit and loss and after that to other comprehensive income; and
- Fair value movements which are negative are first set against the revaluation reserve and where this is reduced to nil, they are then posted to the profit and loss.
All transaction costs are expensed as incurred. The revaluations should be performed on a regular basis so that the carrying amount is not materially different from its fair value. Where fair value can no longer be measured it is then stated at the carrying value at that time which is deemed to be its original cost.
The dividend received is posted to the profit and loss account.
Deferred tax
As there will be fair value adjustments, there will be a deferred tax impact for the differences between the tax base and the carrying amount. The deferred tax adjustment should follow the initial adjustment to reflect the new carrying amount i.e. on initial recognition the deferred tax impact will be posted to other comprehensive income. The deferred tax rate to be used will be the rate that it is expected that the investment will be settled for. Where the investment is to be held for dividend purposes then the trading tax rate should be used, however where it is expected the investment will be sold it should be measured at the capital gains tax/sales tax rate. The application of deferred tax is detailed in Section 29 and also in the transition adjustments below.
Fair value through the profit and loss
Section 11 provides the accounting treatment where fair value through the profit and loss is chosen. Please refer to section 11 of this guide for further details.
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