01-11-2014, 10:41 AM
(30-10-2014, 02:41 PM)specuvestor Wrote: [ -> ]^^ why is there a gain when they bought more and convert into associate? I thought usually the principle is the lower of cost or market? Once it is associate it is no longer MTM right?
Trying to understand the accounting intricacies here because I don't remember any company booking gains when buying under GAAP... only when selling... or is this an IFRS thing?
Not a new accounting standard.
Financial Memo
Equity Method of Accounting – Investments in Associates
http://financialmemos.com/equity-method-...e-example/
Investment in Associate and Accounting Treatment
IAS 28 sets a clear framework for the way that an investment in an associate should be recorded. An example can be found below but briefly, the following points apply:
1. The investment is initially recognized at fair value which is the same as the price paid to acquire the holding in the associate company.
2. Goodwill is not separately calculated since it is already included in the fair value.
3. The statement of financial position include the initial fair value (price paid), plus the share of the post acquisition profits generated by the associate company, less the share of any impairment in the investment, less any dividends distributed by the associate company.
4. The income statement of the investing company should include the post acquisition share of profits that the associate company generated as a single line (“profits from associate”).
5. If the acquisition is made in the middle the year, then the profits should be pro-rated to only reflect the post acquisition part of the profits generated.
Equity method requires the record of investment in associate at the cost of purchase, and to track the share of post acquisition profit (+)and dividend (-), followed by any impairment made (-).
Investment in associate materialised when
a. Upright acquisition of 20% or more shareholding in one transaction
b. Piece meal acquisition resulting in the booking/recording as available for sales investment (less than 20%), and later transformed to investment in associates upon accumulation to 20% and beyond.
In this case, it is (b). However, before hitting 20%, it stay in the books as available for sales investment, and MTM apply. At the point when the investment become an associate, the fair value reserve accorded to the investment will be released to the Income Statement. (That is the latest book value will be taken to equate the fair value. Thereafter, the need to track the share of post acquisition profit, etc.
IMO - to take all the buy cost of the various share acquisition transactions at different points in time prior to attaining 20% interests, amounts to recognize the associate investment at historical cost, instead of the fair value (stipulated by the standard).
Please correct me if I am wrong.