ACCT6010 · Financial Reporting For Business Groups
Associates and Joint Ventures
Below control sit two relationships that don't get full consolidation. An associate is an entity over which the investor has significant influence (the power to participate in, but not control, policy decisions — presumed at 20%–50%, but judged on substance), accounted for by the equity method, often called 'one-line consolidation': the carrying amount is cost + share of post-acquisition profit − dividends received, adjusted for fair-value-adjustment depreciation, with the investor's share of profit shown as a single line. A joint arrangement (AASB 11) arises where two or more parties share control by unanimous consent; the classification then turns on the parties' rights: a joint operation gives rights to the individual assets and obligations for the liabilities (recognise your share of each asset, liability, income and expense), while a joint venture gives rights only to the net assets (one equity-method line, like an associate). The chapter also distinguishes where the entries live — separate vs consolidated statements.
What this chapter covers
- 01Significant influence and the indicators (AASB 128.6)
- 02The equity method — carrying amount = cost + share − dividends
- 03Initial recognition and subsequent measurement
- 04The equity-method journal stack and a worked roll-forward
- 05Separate vs consolidated financial statements
- 06AASB 11 — joint operation vs joint venture
Worked example: the equity method carrying amount
- +1Start at cost: the investment is initially recognised at cost of $400k.
- +1Add the share of profit: 30% × 120 = 36; Dr Investment in associate 36, Cr Share of profit of associate 36.
- +1Subtract dividends received: 30% × 50 = 15; Dr Cash 15, Cr Investment in associate 15 (dividends reduce the carrying amount, they are not income).
- +1Compute the carrying amount: 400 + 36 − 15 = $421k.
- +1State the principle: this is one-line consolidation — the associate's assets and liabilities are not added line-by-line; only the share of its net result and the carrying amount appear.
Key terms
- Significant influence
- The power to participate in the financial and operating policy decisions of an investee without controlling them — presumed at 20% to 50% of votes, but judged on substance (board representation, policy participation, material transactions).
- Equity method
- The accounting for associates and joint ventures: the investment is carried at cost plus the investor's share of post-acquisition profit (and OCI), minus dividends received and fair-value-adjustment effects; the share of profit is one line in the income statement. Also called one-line consolidation.
- Joint arrangement (AASB 11)
- An arrangement over which two or more parties have joint control — the contractually agreed sharing of control, where decisions about the relevant activities require the unanimous consent of the sharing parties.
- Joint operation
- A joint arrangement giving the parties rights to the individual assets and obligations for the liabilities; each party recognises its share of each asset, liability, income and expense (line-by-line, not equity method).
- Joint venture
- A joint arrangement giving the parties rights only to the net assets of the arrangement; accounted for by the equity method, like an associate — one line, not line-by-line.
Associates and Joint Ventures FAQ
What is the difference between an associate and a subsidiary?
Degree of influence. A subsidiary is controlled and is fully consolidated line-by-line; an associate is only significantly influenced — the investor participates in policy decisions but does not control — and is equity-accounted as one line. Significant influence is presumed at 20%–50% but, like control, is decided on substance, not the percentage alone.
How does the equity method work?
The investment is recorded at cost, then each period it is increased by the investor's share of the associate's profit (and other comprehensive income) and decreased by dividends received and by fair-value-adjustment depreciation. The carrying amount = cost + share of post-acquisition profit − dividends − FVA depreciation, and the share of profit appears as a single line — hence 'one-line consolidation'.
Why is a dividend from an associate not income under the equity method?
Because the investor already recognises its full share of the associate's profit as income when the associate earns it. A subsequent dividend is just that profit being distributed, so recognising it again would double-count — instead the dividend reduces the carrying amount of the investment, treated as a partial return of the investment.
How do I tell a joint operation from a joint venture?
Both involve joint control, but the rights differ. A joint operation gives the parties rights to the individual assets and obligations for the liabilities, so each recognises its share of every asset, liability, income and expense line-by-line. A joint venture gives rights only to the net assets, so it is equity-accounted as one line. Same economic stake, very different statements.
Exam move
Lock down the equity-method formula — cost + share of post-acquisition profit − dividends − fair-value-adjustment depreciation — and rehearse the journal stack and a two-year roll-forward so the carrying amount flows correctly. Drill the dividend trap (a dividend reduces the carrying amount, it is not income) because it is heavily tested. For joint arrangements, decide classification by rights: operation (rights to assets, obligations for liabilities → line-by-line) versus venture (rights to net assets → equity method). Finally, be clear on where entries live: in separate statements the associate sits at cost (or fair value), and the equity method is applied only in the consolidated statements.
