Hi all, I have a question on the subject.
Coy book profit from their share in their investment in associates and joint ventures but received no cash from them.
How should one treat this line in the P/L statement?
Thanks for any advise.
Associate earnings without cash returns is as good as nothing since these are just non-cash charges to the P&L but to have a clearer picture will depend on several factors:
- how long has the associate/JV been operating? If it's in the early stages, it means it will need a few more years before you can see cash returns.
- if it has been operating for a while (i.e. more than 5 years), then you should try to understand what is holding them back from getting the cash dividends. (i.e. associate needs cash to expand?). Logically, parent co should want to enjoy some form of cash returns else this is a bad investment.
- associate & JVs could also be a good way for management/majority shareholder to move money out of the company without sharing it with opmi. Do you see the parent co keep making substantial investment in the associate? Either way, a business is bad if it needs external capital all the time.
- on the parent co, how much of associate earnings does it attribute to consolidated bottom line? If it's significant and there is nil cash returns, then it will be conservative to adjust it out.
I can't agree with the above statement. A property without much cash flow does not make the property less valuable. If that's the case, no one is going to buy residential properties for investment in Singapore.
The same can be said for subsidiaries, especially for foreign subsidiaries. Though the group can consolidate the financial information of the subsidiaries, it does not mean that the parent company can extract cash from its subsidiaries.
(01-07-2014, 06:03 PM)dzwm87 Wrote: [ -> ]Associate earnings without cash returns is as good as nothing since these are just non-cash charges to the P&L but to have a clearer picture will depend on several factors:
- how long has the associate/JV been operating? If it's in the early stages, it means it will need a few more years before you can see cash returns.
- if it has been operating for a while (i.e. more than 5 years), then you should try to understand what is holding them back from getting the cash dividends. (i.e. associate needs cash to expand?). Logically, parent co should want to enjoy some form of cash returns else this is a bad investment.
- associate & JVs could also be a good way for management/majority shareholder to move money out of the company without sharing it with opmi. Do you see the parent co keep making substantial investment in the associate? Either way, a business is bad if it needs external capital all the time.
- on the parent co, how much of associate earnings does it attribute to consolidated bottom line? If it's significant and there is nil cash returns, then it will be conservative to adjust it out.
That's pretty much what I think. I thought they should only book a profit from their invested assoc and JV when they received the cash dividend. Booking share of assoc and JV's profit seems to be windows dressing their bottomline.
(01-07-2014, 06:32 PM)GPD Wrote: [ -> ]That's pretty much what I think. I thought they should only book a profit from their invested assoc and JV when they received the cash dividend. Booking share of assoc and JV's profit seems to be windows dressing their bottomline.
You book your equity share of accounting profit (which is based on accrual accounting) for the associate or JV. Just as how earnings from your income statement does no reconcile with net operating cash flow on your cash flow statement, this goes the same for associate recognition.
(01-07-2014, 06:25 PM)freedom Wrote: [ -> ]I can't agree with the above statement. A property without much cash flow does not make the property less valuable. If that's the case, no one is going to buy residential properties for investment in Singapore.
The same can be said for subsidiaries, especially for foreign subsidiaries. Though the group can consolidate the financial information of the subsidiaries, it does not mean that the parent company can extract cash from its subsidiaries.
Sure. My list is not exhaustive. But in the end, you need some form of cash returns. Forming a JV for property development still needs cash returns being paid as dividends to the stakeholders. (i.e. parent co)
I have seen cases where parent co keeps investing in the associate which increases its book value on the parent's balance sheet but eventually sold it to a related party as a discount.
(01-07-2014, 06:32 PM)GPD Wrote: [ -> ] (01-07-2014, 06:03 PM)dzwm87 Wrote: [ -> ]Associate earnings without cash returns is as good as nothing since these are just non-cash charges to the P&L but to have a clearer picture will depend on several factors:
- how long has the associate/JV been operating? If it's in the early stages, it means it will need a few more years before you can see cash returns.
- if it has been operating for a while (i.e. more than 5 years), then you should try to understand what is holding them back from getting the cash dividends. (i.e. associate needs cash to expand?). Logically, parent co should want to enjoy some form of cash returns else this is a bad investment.
- associate & JVs could also be a good way for management/majority shareholder to move money out of the company without sharing it with opmi. Do you see the parent co keep making substantial investment in the associate? Either way, a business is bad if it needs external capital all the time.
- on the parent co, how much of associate earnings does it attribute to consolidated bottom line? If it's significant and there is nil cash returns, then it will be conservative to adjust it out.
That's pretty much what I think. I thought they should only book a profit from their invested assoc and JV when they received the cash dividend. Booking share of assoc and JV's profit seems to be windows dressing their bottomline.
Should the parent only book the profit when it receives cash dividend from its subsidiaries?
What kind of accounting is that? This goes back to whether accounting should be cash based or not. Should there be receivable on the balance sheet since only cash should be recorded as revenue?
The accounts of associates cannot be consolidated but yes for subsidiaries . for associates , can only book dividend income( If any ) under revenue.
(01-07-2014, 06:40 PM)freedom Wrote: [ -> ] (01-07-2014, 06:32 PM)GPD Wrote: [ -> ] (01-07-2014, 06:03 PM)dzwm87 Wrote: [ -> ]Associate earnings without cash returns is as good as nothing since these are just non-cash charges to the P&L but to have a clearer picture will depend on several factors:
- how long has the associate/JV been operating? If it's in the early stages, it means it will need a few more years before you can see cash returns.
- if it has been operating for a while (i.e. more than 5 years), then you should try to understand what is holding them back from getting the cash dividends. (i.e. associate needs cash to expand?). Logically, parent co should want to enjoy some form of cash returns else this is a bad investment.
- associate & JVs could also be a good way for management/majority shareholder to move money out of the company without sharing it with opmi. Do you see the parent co keep making substantial investment in the associate? Either way, a business is bad if it needs external capital all the time.
- on the parent co, how much of associate earnings does it attribute to consolidated bottom line? If it's significant and there is nil cash returns, then it will be conservative to adjust it out.
That's pretty much what I think. I thought they should only book a profit from their invested assoc and JV when they received the cash dividend. Booking share of assoc and JV's profit seems to be windows dressing their bottomline.
Should the parent only book the profit when it receives cash dividend from its subsidiaries?
What kind of accounting is that? This goes back to whether accounting should be cash based or not. Should there be receivable on the balance sheet since only cash should be recorded as revenue?
Company A has 50% interest in Company B and has control and consolidate Company B as subsidiary
Company C has 50% interest in Company B and has no control but significant influence and consolidate Company D as associate using equity accounting.
Put the question on control aside.
Has the value of Company B change just because our current accounting standard say so? If so, accountant will be our greatest investor