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Contents
14.2.1 Extract from FRS102: Section 14.2-14.3.
14.2.2.1 What forms of entities can be considered an associate.
14.2.2.2 Significant influence (the ability to assert the influence even if it is not asserted)
14.2.2.2.1 Requirements to consider potential voting rights where reviewing significant influence.
14.2.2.2.2 How is significant influence demonstrated.
14.2.2.2.3 When can the 20% or more holdings be rebutted – significant influence.
14.2.2.2.4 Consideration when slightly less than 20% held.
14.3 Measurement—accounting policy election.
14.3.1 Extract from FRS102: Section 14.4-14.4B.
14.4.1 Extract from FRS102: Section 14.5-14.6.
14.4.2.3 Deferred tax under the cost model
14.4.2.4 Illustration of the cost model
14.4.2.5 Recognition of Income.
14.5.1 Extract from FRS102: Section 14.8(a)-18.8(h)
14.5.2.2 Application of equity accounting.
14.5.2.2.2 Worked example illustrating equity accounting requirements.
14.5.2.4 Transactions with associates.
14.5.2.5 Date of associates financial statements.
14.5.2.6 Uniform Accounting policies
14.5.2.7 Losses in excess of investment
14.5.2.8 Deferred tax on unremitted earning in the consolidated financial statements.
14.5.2.8.2 Timing difference to reverse through sale.
14.5.2.8.3 Timing difference to reverse through receipt of dividends.
14.5.2.8.4 Example of deferred tax on unremitted earnings.
14.6 Discontinuing the equity method.
14.6.1 Extract from FRS102: Section 14.8(i)
14.6.2.2.1 Full derecognition of associate due to sale.
14.6.2.2.3 Transfer of associate as a result of loss of significant influence due to sale.
14.6.2.2.4 Loss of significant influence not due to sale.
14.7 Initial carrying amount of an associate following loss of control of an entity.
14.8 Step increase in an existing associate.
14.9 Step increase from investment/financial asset to associate.
14.10.1 Extract from FRS102: Section 14.9-14.10A.
14.10.2.1 Fair value through other comprehensive income (OCI)
14.10.2.1.1 Measurement and recognition.
14.10.2.1.2 Treatment of transaction costs.
14.10.2.1.3 Frequency of valuations.
14.10.2.1.4 What happens when fair value cannot be measured reliably.
14.10.2.1.6 Example of application of Fair Value through Other Comprehensive Income model
14.10.2.1.7 Recognition of income.
14.10.2.2 Fair value through the profit and loss.
14.10.2.2.1 Measurement and recognition.
14.10.2.2.2 Frequency of valuations.
14.10.2.2.3 What happens when fair value cannot be measured reliably?.
14.10.2.2.4 Example of application of Fair Value through profit and loss model
14.11 Disclosure requirements.
14.11.1 Extract from FRS102: Section 14.11-14.15A.
14.11.2.2.2 Consolidated financial statements.
14.11.2.2.2.1 Accounting policies – consolidated financial statements.
14.11.2.2.2.2 Notes to the financial statements.
14.11.2.2.2.2.1 Financial assets.
14.11.2.2.2.3 Consolidated profit and loss amount showing share of associates.
14.11.2.2.3 Parent entity financial statements.
14.11.2.2.3.1 Accounting policies.
14.11.2.2.3.2 Notes for the financial statements.
14.11.2.2.3.2.1 Financial assets.
14.11.2.2.3.3 Profit and loss accounts for entity that is not a parent
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14.2 Definition of Associate
14.2.1 Extract from FRS102: Section 14.2-14.3
14.2 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.
14.3 Significant influence is the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies.
(a) If an investor holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more of the voting power of the associate, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case.
(b) Conversely, if the investor holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of the voting power of the associate, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.
(c) A substantial or majority ownership by another investor does not preclude an investor from having significant influence.
14.2.2 OmniPro comment
14.2.2.1 What forms of entities can be considered an associate
As per Section 14.2 of FRS 102. 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.
In short an investment will more than likely be an associate where the entity has acquired between 20% and 49.99% of the voting rights.
14.2.2.2 Significant influence (the ability to assert the influence even if it is not asserted)
When assessing whether an acquisition is to be accounted for as an associate, the main consideration is whether the entity has a significant influence over the other entity as a result of the acquisition. It is irrelevant whether the entity uses this influence, it is the ability to significantly influence the entity if it had to. A holding of 20% or more of the voting rights is presumed to provide an entity with a significant influence as stated in Section 14.3(b) of FRS 102 see
In assessing the percentage ownership consideration needs to be given for both ordinary and other categories of shares in determining its voting rights. Voting rights are rights that shareholders have to vote at the general meeting of the company on all, or substantially all matters. Section 14.3 of FRS 102 defines significant influence as the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies.
(a) If an investor holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more of the voting power of the associate, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case.
(b) Conversely, if the investor holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of the voting power of the associate, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.
(c) A substantial or majority ownership by another investor does not preclude an investor from having significant influence.
14.2.2.2.1 Requirements to consider potential voting rights where reviewing significant influence
When reviewing the voting rights an entity needs to include potential voting rights (e.g. call options, convertible preference shares) that are exercisable or convertible at the time of the acquisition for both themselves and the other shareholders. With regard to this assessment the intention of management and the financial ability to exercise or convert those potential voting rights are ignored.
Example 1: Potential voting rights
Company A acquired 25% of the voting shares of company B. At that date Company B had also issued convertible preference shares to other shareholders who have the right to convert to ordinary shares at that time. In assessing the percentage ownership Company A would have to take these shares into account as the holders of the preference shares can now convert. This may result in Company A having only an 18% interest once these are converted, therefore this would not be accounted for as an associate.
If in this example, the preference share right to convert has not passed at the date of acquisition they would then be ignored in the assessment.
Example 2: Potential voting rights
Company A purchased a 15% interest in Company B and at the same time acquired an option to purchase an additional 10% for a set price. In assessing whether a significant influence exists, 25% ownership would be looked at, as they can exercise that option at the point of acquisition if they wanted to.
14.2.2.2.2 How is significant influence demonstrated
Section 14 gives very little guidance on how significant influence is demonstrated. Therefore regard should be given to IAS 28 of IFRS which states that significant influence can be evidenced in one or more of the following ways:
- Representation on the board of directors or equivalent governing body of the investee;
- Participation in policy-making processes, including participation in decisions about dividends and other distributions;
- Material transactions between the entity and the investee;
- Interchange of managerial personnel; or
- Provision of essential technical information.
14.2.2.2.3 When can the 20% or more holdings be rebutted – significant influence
The presumption of a significant influence as a result of acquiring 20% or more of the voting rights can be rebutted if:
- The investor has failed to obtain representation on the investee’s board of directors;
- The other shareholders are opposing the investors attempts to exercise significant influence;
- The investor is unable to obtain timely information or cannot obtain more information to allow it to apply equity method accounting thereby inferring the entity may not have a significant influence;
- A group of shareholders who hold the majority of the investees’ shares are taking action without regard to the views of the investor.
Note it would be very rare for a 20% voting share not to equate to a significant influence.
14.2.2.2.4 Consideration when slightly less than 20% held
Where an investment is only slightly under 20%, an entity should carefully consider whether they can significantly influence the acquired company. Consideration of the points detailed in IAS 28 as replicated above at 14.2.2.2.2. should be given.
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Examples
Example 1: Potential voting rights.
Example 2: Potential voting rights.
Example 4: Dividend paid out of pre-acquisition reserves.
Example 5: Equity method accounting.
Example 6: Elimination of profit where investor sells goods to investee.
Example 7: loss in excess of investment
Example 8: Deferred tax on enremitted earnings
Example 9: Full derecognition of associate due to sale.
Example 10: Partial derecognition of associate due to sale but significant influence still retained.
Example 11: Transfer of associate as a result of loss of significant influence due to sale.
Example 12: Loss of significant influence not due to sale.
Example 14: Step increase in an existing associate.
Example 15: Step increase from investment /financial asset to associate.
Example 16: Adoption of fair value through other comprehensive income.
Example 17: Adoption of fair value through profit and loss.
Example 18: Extract from the accounting policy notes to the consolidated financial statements.
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