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Cost model
Extract from FRS102: Section 14.5-14.6
14.5 An investor that is not a parent, that chooses to adopt the cost model, shall measure its investments in associates at cost less any accumulated impairment losses recognised in accordance with Section 27 Impairment of Assets.
14.6 The investor shall recognise dividends and other distributions received from the investment as income without regard to whether the distributions are from accumulated profits of the associate arising before or after the date of acquisition.
OmniPro comment
Section 14 does not detail what is defined as the cost however it is taken to mean the actual price paid plus expenses incidental to its acquisition. All income received from the investment should be credited to the profit and loss account regardless of whether this was paid out of pre or post acquisition profits.
In line with Section 27-Impairment of Assets, at the end of each reporting period, the entity must assess if there are indicators of impairment of the investment in the associate. Where these are identified an impairment review should be performed in line with Section 27 so as to determine the recoverable amount which will usually be performed by calculating the value in use.
Given that they are stated at cost there are no deferred tax implications, other than on an impairment. A deferred tax asset would only be recognised in this instance if it was probable there would be future CGT profits available to offset the loss.
See below illustration of the cost model.
Example 2: Cost model
Company A purchased a 25% interest in Company B for CU100,000 plus stamp duty of CU1,000 plus professional fees of CU1,000. The total cost of the investment to be shown on the balance sheet is CU102,000. This is kept at this cost over its life unless an impairment is identified.
Dividends received are recognised in the profit and loss account when received. It is irrelevant whether this is paid from pre or post acquisition reserves. However if it was paid from pre-acquisition reserves, then the entity should assess if this is an indication of impairment of the investment.
Example 2A: Dividend paid out of pre-acquisition reserves.
Company A acquired an 25% interest in an associate for CU10,000 when the profit and loss reserves of the associate were CU5,000. During the year the company received a dividend of CU10,000 from the associate. This CU10,000 is recognised in the financial statements as income (i.e. credit profit and loss and debit bank). It is irrelevant that some of it was paid out of pre-acquisition reserves.
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