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The remaining profit would be deferred until the sale of the inventory.
Company B to Company A
The intergroup profit is $(300 – 200) 100
Profit reported would be 100 × 70/100 = 70
The profit made by B would be $(120 – 100) = 20
An amount of 20 × 30/100 would be eliminated from the carrying value of the investment, that is, $6,000.
The alternative is to eliminate the whole of the profit from B’s profit for the period and then calculate the profit attributable to the associate.
EXCEPTIONS TO THE EQUITY METHOD
An investment in an associate should be accounted for using the equity method except in these three exceptional circumstances:
1. Where the investment is classified as held-for-sale in accordance with IFRS 5
2. Where a parent does not have to present consolidated financial statements because of the exemption in IAS 27
3. The investor need not use the equity method if all of these criteria apply:
a. The investor is a wholly owned subsidiary or is a partially owned subsidiary of another entity and its owners have been informed about and do not
object to the investor not applying the equity method. The owners in this case are all of those entitled to vote.
b. The investor’s debt or equity instruments are not traded in a public market.
c. The investor did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory body for the purpose
of issuing any class of financial instrument in a public market.
d. The ultimate or any intermediate parent of the investor produces consolidated financial statements that are available for public use and that comply
with IFRS.
INVESTOR CEASES TO HAVE SIGNIFICANT INFLUENCE
If the investor ceases to have significant influence over an associate, then the equity method should not be used and the investment should be accounted for using
IAS 39, provided that the associate does not become a subsidiary or a joint venture.
On the loss of significant influence, the investor measures at fair value any investment the investor retains in the former associate. The investor recognizes in profit
or loss any difference between the following two:
1. The fair value of any retained investment and any proceeds from the disposing of the part interest in the associate.
2. The carrying amount of the investment at the date when significant influence is lost.
When an investment ceases to be an associate and is accounted for in accordance with IAS 39, the fair value of the investment at the date when it ceases to be an
associate is regarded as its fair value on initial recognition as a financial asset in accordance with IAS 39.
If an investor loses significant influence over an associate, the investor accounts for all amounts recognized in other comprehensive income in relation to that entity
on the same basis as if the associate had directly disposed of the related assets or liabilities. Hence, if a gain or loss previously recognized in other comprehensive
income would be reclassified to profit or loss on the disposal of the related assets or liabilities, the investor reclassifies the gain or loss from equity to profit or loss (as a
reclassification adjustment). If an investor’s ownership interest in an associate is reduced, but the investment continues to be an associate, the investor reclassifies to
profit or loss only a proportionate amount of the gain or loss previously recognized in other comprehensive income.
Facts
CASE STUDY 4
Company X owns 22% of Company Y and is entitled to appoint two directors to the board, which consists of eight members. The remaining 78% of the
voting rights are held by two other companies, each of which is entitled to appoint three directors. The board makes decisions on the basis of a simple
majority. Because board meetings are often held at very short notice, Company X does not always have representation on the board. Often the suggestions
of the representative of Company X are ignored, and the decisions of the board seem to take little notice of any representations made by the directors from
Company X.
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