1. AC506 lecture 4 Methods of group accounting –Associates –Joint ventures –Simple investments Group balance sheet considerations

2. Equity method for associates FRS 9 elaborates on profit and loss requirements: –For each line item in the group’s profit and loss account after group operating profit, show separately the group’s share of each element of associate’s profit and loss item –Below the level of profit before tax, the group’s share of its associates’ figures should be included in the group amounts, although the amounts relating to associates should be disclosed in the notes.

3. Methods of accounting for a group Gross equity accounting for joint ventures –the investor’s share of the aggregate gross assets and liabilities underlying the net amount included for the investment is shown on the fact of the balance sheet and –in the profit and loss account, the investor’s share of the JV turnover is noted (as a memorandum item). Otherwise the profit and loss account treatment is the same as for the equity method.

4. Balance sheet treatment of JV Example: –Parent has 50% interest in JV. Share capital was acquired on the first day of incorporation at par. Total share capital = €100 –Initial parent investment = €50 –Parent share of profit for the year = €15 –Double entry would be as per the equity method but on balance sheet, replace the investment balance with share of gross assets and gross liabilities

5. Methods of accounting for a group Simple investments –Treatment in individual accounts of the investor and the group is the same –Treatment depends on intention intention is to hold on an ongoing basis => classify as fixed asset and refer to FRS 15 guidance otherwise classify as current asset and usually valued at lower of cost and NRV

6. Balance sheet consolidation adjustments Inter-company balances cancellation Goods in transit completion and cancellation Inter-company dividends paid and proposed Unrealised profit cancellation Inter-company fixed asset sales and purchases

7. Inter-company balance The investment by a parent in a subsidiary may not be the only economic transaction these parties They may also buy and sell goods to each other They may provide loans to each other What are the implications for a consolidation process?

8. Goods in transit P Ltd and S Ltd trade goods with each other 30 December 2001: P Ltd sends goods to S Ltd and records the sale on credit of €2,000 S Ltd does not receive the goods until 5 January => Goods in transit on 31 December 2001 What implications for consolidation of P Ltd and S Ltd? Goods booked out of stock and into debtors for P Ltd but no corresponding entry in stock and creditors for S Ltd Reverse transaction entries in P Ltd OR book effective receipt of stock into S Ltd.

9. Dividends paid and proposed S Ltd pays a dividend during the financial period. No consolidation considerations necessary for group balance sheet as there are no outstanding balances! S Ltd proposes a dividend of €5,000 at financial year end => S Ltd shows a dividend payable in its financial statements and P Ltd shows a dividend receivable in its financial statements. They cancel out same as other inter- company balances.

10. Unrealised profits P Ltd buys goods for €1,500 and sells them to S Ltd for €2,000. At financial period end, S Ltd still has these goods in stock and values them at cost of €2,000. TWO matters for consolidation consideration: –P Ltd records a profit of €500 but, from a group perspective, no profit is made until S Ltd sells the goods to an outside party –The cost at which S Ltd has recorded the stock is not the cost to the group In a consolidated balance sheet, the only profits recognised should be those earned by the group in providing goods/services to parties outside the group. Similarly, stock should be booked at the cost to the group!

11. Inter-company fixed asset transactions Consolidated balance sheet should show assets at their cost to the group. Group depreciation should be based on group cost. Two adjustments may therefore be required for consolidation: –Remove any element of unrealised profit (same as stock) DRConsolidated reserves CRConsolidated fixed assets –Adjust consolidated depreciation charge so it is based on group cost DRConsolidated accumulated depreciation CRConsolidated reserves

12. Minority interest details Minority Interests –arise where the parent has not acquired ALL the shares of the subsidiary –the total assets and liabilities are nevertheless included in the consolidated balance sheet but a proportion of the net assets belong to investors from outside the group –in the consolidated balance sheet, it is necessary to distinguish this proportion from those attributable to the group