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Chapter 20 - Accounting for investments in associates

REVIEW QUESTIONS

2. Why are associates distinguished from other investments held by the investor? The suite of accounting standards provides different levels of disclosure dependent on the relationship between the investor and the investee: Subsidiaries: a control relationship Joint ventures: a joint control relationship Associates: a significant influence relationship Other investments: no relationship Where there is a relationship, it relates to the ability of the investor to influence the direction of the investee, in comparison to a simple holding of shares as an investment. Where such a relationship exists, it is argued that the investor is affected, from an accountability perspective as well as a potential receipt of benefits perspective [why get involved if there are no benefits to doing so?]. These effects result in the need for additional disclosure about the relationship. Outline the accounting adjustments required in relation to transactions between the investor and an associate. Explain the rationale for these adjustments. Note paragraph 22: - adjust for profits and losses on upstream/downstream transactions - adjust to the extent of investor’s interest ie proportionate adjustment - adjust investor’s share in associate’s profits and losses Rationale AASB 128 provides no rationale. A key question is whether the equity method is used as a measurement technique to approximate fair value, or as a consolidation technique. If it is a measurement technique, then why adjust for inter-entity transactions? If it is a consolidation technique, then adjustments can be justified – however, does the method of adjustment proposed in paragraph 22 conform with consolidation techniques? Debate: - why should investor’s share of associate’s profits be adjusted if investor sells to associate as associate’s profits are unaffected by this transaction? - Should individual accounts such as “sales”, “cost of sales” and...