The General Framework

Consolidation procedures

 Investments in Associates to be recorded in CFS using equity method

 Investment to be initially recorded as cost, identifying goodwill / capital reserve arising at the time of acquisition.

 Carrying amount of investment is adjusted thereafter for the post acquisition change in investor’s share of net assets of the investee.

 Investor’s share of results of operations of investee to be included in Consolidated profit & loss account

 Goodwill/capital reserve arising on the acquisition of an associate included in the carrying amount of investment in the associate but should be disclosed separately.

 The investment in the associate is disclosed separately as a non-current asset.

 Unrealised profits and losses resulting from transactions between investor (or its consolidated subsidiaries) and the associate should be eliminated to the extent of the investor’s interest in the associate.

 Unrealised losses should not be eliminated if and to the extent the cost of the transferred asset cannot be recovered.

 Carrying amount of investment in an associate should be reduced to recognise a permanent decline in the value of investment. Such recognition should be determined and made for each and every individual investment.

Associate. An entity, including an unincorporated entity such as a partnership, over which an investor has significant influence and which is neither a subsidiary nor an interest in a joint venture.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Equity method. A method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor's share of net assets of the investee. The profit or loss of the investor includes the investor's share of the profit or loss of the investee.

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 Equity method is not applied when investment is acquired and held for subsequent disposal in near future; or there are severe long-term restrictions that significantly impair associate’s ability to transfer funds to its investors.

 Transactions between the Investor and the Associate-Since an associate is not consolidated, these inter-company transactions will not be cancelled out.

 Loan between associate and investor-The loan should be disclosed separately in the balance sheet as investment in the associate. Loans to and from the associated company should not be netted off.

 Receivables and payables arising between the associate and the- investor-The receivable and payables should not be netted off. Rather they should be included under respective current asset or liabilities. Such receivables and payables should be disclosed separately, if material.

Illustration 1

Johnson paid N1·2 million for a 30% investment in Treem’s equity shares on 1 August 2014.

Treem’s profit after tax for the year ended 31 March 2015 was N750,000. On 31 March 2015, Treem had N300,000 goods in its inventory which it had bought from Johnson in March 2015. These had been sold by Johnson at a mark-up on cost of 20%. Treem has not paid any dividends.

On the assumption that Treem is an associate of Johnson, what would be the carrying amount of the investment in Treem in the consolidated statement of financial position of Johnson as at 31 March 2015?

N’000

Investment at cost 1,200

Share of post-acq. profit 150 (750 x 8/12 x 30%)

URP in inventory (15) (300 x 20/120 x 30%)

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1,335 Illustration 2

On 31/12/2008, Abu Plc. acquired 40% of the 2,000,000 ordinary share capital of N1 each of BarllettPlc. for N1,700,000 when the reserves of the company stood at N1,200,000. On the same date, Abu Plc. acquired 60% of the ordinary share capital of Dan Plc. when the reserve of Dan Plc. was N 2,000,000.

The profit and loss accounts of the three companies for the year ended 31 December 2008 were as follows:

Abu Plc. Dan Plc. BarllettPlc.

N‘000 N‘000 N‘000

Profit before tax 10,400 5,400 4,000

Company income tax (4,200) (1,400) (1,400)

Profit after tax 6,200 4,000 2,600

Extra-ordinary loss after tax (1,600)

Proposed dividend (2,000) (800) (200)

Retained profit for the year 4,200 3,200 800

Retained profit b/f 3,000 2,400 2,000

Retained profit c/f 7,200 5,600 2,800

Required: prepare the profit and loss account of Abu Plc. and its subsidiary including the group share of associated company.

70 Suggested Solution

Abu group consolidated profit and loss account for the year ended 31/12/08

N‘000 N‘000

Turnover Xx

Group profit before tax (P+S) - 15,800

Group share of associate profit N4,000 x 40% 1,600

Profit before tax 17,400

Taxation: group (P+S) 5,600 -

Associate (N 1,400+40%) 560 (6,160)

Profit after tax - 11,240

Non-controlling interest N 4,000+40% - (1,600)

Net profit for the period - 9,640

Extra ordinary loss N 1,600x40% - (640)

Net profit for the period - 9,000

Dividend proposed - (2,000)

Retained profit for the year - 7,000

Retained profit b/f (w2) - 3,560

Retained profit c/d - 10,560

Movement on reserves

Retained profit b/f 3,560

Retained profit for the year 7,000

Retained profit c/f 10,560

Statement of reserves for the year ended 31 December 2008 (Disclosing associate reserve separately)

Parent Associate Group N‘000 N‘000 N‘000

Brought forward (w2) 3,240 320 3,560

Retained for the year (w3) 6,680 320 7,000

9,920 640 10,560 Workings

(a) Goodwill in associate N ‘000

Cost of shares acquired 1,700

Share of net assets 40% N(2,000+1,200) 1,280

Goodwill 420

(b) Retained profits brought forward

Group N3,000 + 60% (N2,400-2,000) 3,240

Associate 40% (N2,000-1,200) 320

3,560 (c) Profit for the year

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Retained profit N4,200+ 60% N3,200 6,120

Add dividend receivable

From Barllett 60% x N800 480

From Dan 40% x N200 80

6,680

Associate N800x 40% 320

Tutorial notes

(a) The associate profit before tax is not aggregated with the group profit. It is disclosed separately. The associate tax is also disclosed separately from the group tax.

(b) Extra ordinary items (losses in this case) are shown below profit after tax and minority interest. The share of associates gains or losses should be disclosed separately.

Though not compulsory, it helps to approach this question by preparing working schedule first.

Abu Plc. Dan Plc. Consolidated BarllettPlc.

N‘000 N‘000 N‘000 N‘000

Profit before tax 10,400 5,400 15,800 4,000

Associated profit 40% 1,600 1,600

Profit before tax 10,400 5,400 17,400

Taxation (4,200) (1,400) (5,600)

Associate tax - - (560) (560)

Profit after tax 6,200 4,000 11,240 1,040

Non contr. Interest - (1,600) (1,600)

Extra ordinary loss (640) (640)

Profit for the period 6,200 2,400 9,000 400

Inter-company dividend

Group 60% 480 (480) - -

Associate 40% 80 (80)

Proposed dividend (2,000) - (2,000) -____

Retained profit for the year 4,760 1,920 7,000 320

Retained profit b/f 3,000 240 3,560 320

Retained profit c/f 7,760 2,160 10,560 640

The profit b/fisN3,000,000