This document provides an overview of accounting for investments in subsidiaries and associates. It defines the different types of investments based on percentage of ownership, and the associated reporting requirements. It discusses the preparation of consolidated financial statements for subsidiaries, and exclusions. It also covers acquisition accounting, treatment of goodwill, pre- and post-acquisition reserves, fair value adjustments, elimination of intra-group balances, and provisions for unrealized profits on intra-group transactions. Workings notes for consolidated financial statements are also outlined.

1. FINANCIAL
OPERATIONS PAPER: F1
LESSON 11:Accounting for Investments in Subsidiaries and Associates
LECTURER : ABIODUN MAMORA
LAGOS
1
Sunday, May 13, 2012 Mamora Abiodun +234802 415 7105

2. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Introduction
The extent of investment often determine the appropriate
accounting treatment. Degree of investment can be
classified as
• Basic- less than 20%
• Investment in associate- between 20% and 50%
• Investment in subsidiary- more than 50%
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3. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Reporting Requirement- IAS 27
SN Type of investment Reporting requirement
1 Basic investment Disclose dividend received
2 Investment in Report share of realized and
associate recognized gain
3 Investment in Prepare consolidated financial
subsidiary statement
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4. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Exclusion from preparing consolidated accounts
A parent need not present consolidated financial statements if and only if;
• the parent is itself an wholly owned subsidiary or partially owned
subsidiary of another entity
• the parent’s debt or equity instruments are not traded in a public market
• the parent did not file, nor is in the process of filling, its financial
statements with a security commission
• the ultimate or any intermediate parent of the parent produces
consolidated financial statements available for public use that comply with
IFRS
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5. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Acquisition Accounting
This requires the following rules to be followed
• add the parent’s and subsidiary’s assets, liabilities, income and expenses
•The cost of the investment in the parent books is eliminated against the
share of subsidiaries net assets at acquisition with any resulting goodwill
being treated in accordance with IFRS 3 (Revised)
•The share capital of the group is always only the share capital of the parent
•Adjustments are made to record the subsidiaries net assets at fair value
•Uniform accounting policies must be used
•Intra group balances and transactions must be eliminated in full
•Profit or losses on intra group transactions that are recognised in assets
should be eliminated in full
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6. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Standard Working Notes for Consolidated Statement of Financial Position
W1. Group structure
W2. Net assets of subsidiary
W3. Good will
W4. Retained earnings-group resrves
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7. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Goodwill
The difference between the cost of investment and the fair value
of the net assets acquired is known as goodwill on acquisition,
and the accounting standard IFRS 3 requires its recognition in
consolidated financial statement
Consolidated Statement of Financial Position
Illustration1
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8. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Pre and Post Acquisition Reserves
In the case where the parent made the purchase some months or years prior
to the reporting date, the subsidiary’s reserves must be split out into pre and
post-acquisition.
The parent has influenced any change in reserves since the acquisition date
only and can only share in the change in asset value after acquisition.
Illustration 3
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9. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Fair Value Adjustment
The group accounts must include the subsidiary’s net assets at their fair
value at the date of acquisition. This reflect the cost to the group at
acquisition and ensures an accurate measurement of goodwill
Depreciation Adjustment
Fair adjustment may involve adjusting non current assets value which will
consequently involve an adjustment to depreciation value. Depreciation must
be based upon the carrying value of the non current assets concerned.
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10. LESSON 11: Accounting for Investment in
Subsidiaries and Associate
Intra-group Balances
Intra-group balances must be eliminated in full. The group as a
single entity can not owe or be owed balances to itself.
Intra-group balances may arise in the following situations
•P and S trading with each other resulting in current account
balances i.e. receivables and payable
•Intra-group loans resulting in an investment and loan balance
Cash and Goods in Transit
The treatment will be DR bank or inventory and CR receivables or
payables in the consolidated statements.
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11. LESSON 11: Accounting for Investment in Subsidiaries
and Associate
Provisions for Unrealised Profits
P and S may sell goods to each other resulting in a profit being recorded in
the selling company FS. If these goods are still held at year end then there is
need to adjust for the unrealised profits in the groups account. Adjust for
• profit elements on the goods
•inventory
Non-current Assets Provision for Unrealised Profit
P and S may sell non-current assets to each other resulting in a profits being
recorded in the selling company FS. If these non-current assets are still held
at the year end the profits is unrealised from the groups perspective and
should be removed.
Test your understanding 9
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12. Abiodun Mamora
abiodunmamora@gmail.com
Thanks!
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