Company Accounting

a) There are different types of business relationship between different companies, like Joint Ventures, Associates, Parent and subsidiary, Partner Company, Group Company etc. An associate company is in which the other company has the significant influence, though they are not in the controlling position but it can affect and impact the decisions of the company.

As per case study given , Antara has acquired 25% of shares in Blanca Ltd , which is associates relationship in terms of investment and controlling, in other world it non-controlling parent association but still it gives Antara strong influencing voting powers in the company.

ASSB128/IAS28 are applicable accounting standards applicable in this case, where the disclosure in consolidated statement has to be on equity method.

In addition to the disclosures required by paragraph 7 and 12, an appropriate listing and description of associates including the proportion of ownership interest and, if different, the proportion of voting power held should be disclosed in the consolidated financial statements. 23. Investments in associates accounted for using the equity method should be classified as long-term investments and disclosed separately in the consolidated balance sheet. The investor’s share of the profits or losses of such investments should be disclosed separately in the consolidated statement of profit and loss. The investor’s share of any extraordinary or prior period items should also be separately disclosed. 24. The name(s) of the associate(s) of which reporting date(s) is/are different from that of the financial statements of an investor and the differences in reporting dates should be disclosed in the consolidated financial statements. 25. In case an associate uses accounting policies other than those adopted for the consolidated financial statements for like transactions and events in similar circumstances and it is not practicable to make appropriate adjustments to the associate’s financial statements, the fact should be disclosed along with a brief description of the differences in the accounting policies.

Advantages of using equity method:-

  • The investment in associate is recorded at cost at the time of acquisition, which helps in identifying the real value of goodwill and capital reserve as the case may be.
  • The consolidated statement of Profit and Loss account in this case only shows the investor’s part of income instead of showing the complete financial statement of associate as in the case consolidated method.
  • Dividend received from associate is not shown in income, so it reduces the income and not taxable in the hands of investor.
  • Using equity method enables the entities to present a true and fair view of financial statements without providing the complete financial record of the associate.
  • Due to the control exercised by the investor, it has economic access over the investee without consolidating them with itself.

Whereas the consolidation method has few demerit, and it only applicable where the level of investment is significant and of controlling nature to be presented to shareholders. Because the consolidation method is lengthy and too complex there by increasing the cost of maintaining the consolidated financial statements.

Internal reporting of financial statement is not required to be consolidated, if a company owns more than 50% shares or holding in another firm or company then there is a must for consolidation of account externally, to disclose the position and financial health of the company to its shareholders and other investors in real value. But internally it is up to the company to choose or adopt Cost method or Equity method of reporting.

Main difference – Consolidating the financial statement means combining the company’s income statement and Balance sheet statement of parent company and subsidiary company or joint ventures. But under the Equity method it accounts for the investment only as an asset and accounts for income from subsidiary.

Antara Ltd, has holding of 25% so for internal reporting they have the option to choose either of the method, Equity or cost. But to consolidation purpose externally, the investment has to be shown on equity method only as per the guidelines on non-controlling investments

The consolidated profit and loss or Balance sheet eliminates all intercompany transaction or investments

The consolidated statements eliminates all the intercompany investments. It also removes the minority interests and present the company as a single entity operating as a single business. It involves proper income taxation. It gives a simplified and complete overview of the system.

b) Treatment of Potential Dividend

Though in question above dividend is not declared or paid by Blanca Ltd., but as there is a potential to pay dividend because of the profit earned by Blanca Ltd., So , in that case the treatment of dividend in Blanca’s Account as per equity method is just like any dividend paid to shareholder , and entry will be

Dividend Account Dr XXXX

To bank account Cr. XXXX

Profit and loss account Dr XXXX

To Dividend Account Cr. XXXX

Investment accounts in an associate are adjusted for certain types of transactions which involve both the entities. No adjustment is required for the items considering the transactions which are only involving any of the entity.

In Accounts of Antara Ltd., treatment of dividend received from associate will be that it will reduce the investment by that amount, when shareholding is 20% of higher than 20% then Dividend effects the investment account and reduced investment account. But if shareholding is less than 20% then there is no effect of dividend on investment account. In this case as Antara is holding 25% of shares , so any dividend received will be treated under equity method in the consolidation account.

For example if Antara receives a dividend of $10000 from Blanca ltd, the carrying value of investment in the consolidated balance sheet will be $198000-$10000, and value of investment disclosed or shown will be $188000.

As per ASSB128, IAS 28 Accounting methods are defined by the value of investment or % of holding by the parents in subsidiary i.,e if investment is less than 20% the Fair Value method or Cost method is adopted , for investment and holding in the range 20% to 50% Equity method are adopted and if holding is beyond 50% the in the books of Parent’s company option is available to choose between Cost or Equity method. Generally if the relationship is of associate e.g in this case it is clearly advised to use the equity method of valuation of assets.

In Equity method the investment is initially recorded at cost and reduced or increased time to time accordingly whenever any dividend is received. Whereas in cost method investment remains same unless any additional investment is done and dividend is shown or disclosed separately as part of normal income.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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