ACT504 Chap.11 Investments in Associates and Joint Ventures
Investments in Associates and Joint Ventures
Influence without control changes everything
Two published learning outcomes belong here: accounting for investments in associates, and accounting for investments in joint ventures. The indicative content sets out the equity method, goodwill and inter-entity transactions for associates, and jointly controlled operations, jointly controlled entities and jointly controlled assets for joint arrangements.
Everything follows from the fact established in the first chapter: significant influence and joint control are not control, so there is no consolidation.
The investee's revenues do not enter the investor's revenue, its inventory does not enter the investor's inventory, and its borrowings do not enter the investor's liabilities.
One asset and one line of income
What the investor reports is a single asset, the investment, and a single line of income, its share of what the investee earned. That compression is the whole of the equity method.
The investment begins at cost, rises by the investor's share of the investee's post-acquisition profit, falls by its share of any loss, and falls by dividends received, because a dividend is the investee handing back part of the very net assets the investment represents.
Recording a dividend as revenue counts the same earnings twice, once through the share of profit and once as a distribution of it, and leaves the investment carrying net assets the associate no longer holds.
The share of profit is never simply a percentage
The percentage is applied only after the investee's profit has been adjusted, and the adjustments come from the same two places as in a consolidation.
Depreciation on any fair value uplift recognised at acquisition is deducted after tax, because the investee depreciates its own lower carrying amount while the investor effectively paid the higher one. Unrealised after-tax profit on transactions between investor and investee is deducted where the item is still held, and profit that was unrealised in an earlier period and has since been realised is added back.
Only then is the ownership percentage applied.
Both directions are adjusted here
This looks like a contradiction of the previous chapter and is not. There, only upstream transactions moved the non-controlling share, because that share is a percentage of one entity's result.
Here the adjustment is to the investor's own share of a jointly produced figure, and an unrealised profit distorts it whichever way the goods travelled.
The course's worked answers carry items in both directions for exactly this reason.
Goodwill stays inside the investment
The difference between the cost of the investment and the investor's share of the net fair value of the investee's identifiable assets and liabilities is goodwill, and computing it is often worth a mark on its own.
It is not recognised as a separate asset, it is not amortised, and it never appears under its own name on the investor's balance sheet. It is part of the carrying amount of the investment, which is tested for impairment as a whole.
Joint arrangements, and the form that decides the answer
Three forms are named: jointly controlled operations, jointly controlled entities and jointly controlled assets.
The distinction is about what the parties hold jointly rather than about how much. In a jointly controlled operation each party uses its own assets and incurs its own expenses for a shared activity and recognises what it controls together with its share of the revenue. In a jointly controlled asset the parties own an asset together and each recognises its share of that asset and of the costs of running it.
A jointly controlled entity is a separate vehicle, and an interest in it is equity accounted in the same way as an associate. Associates and joint ventures are also related parties of the investor, so a question about an inter-entity sale usually carries a disclosure requirement as well as a measurement one.
What this chapter covers
- 01
Why influence without control produces one line rather than a column
- 02
The three movements in the carrying amount, and there are only three
- 03
Why a dividend from an associate can never be revenue
- 04
Adjusting the investee's profit before applying the percentage
- 05
Depreciation on a fair value uplift, and why the investor bears it
- 06
Why both directions of inter-entity trade are adjusted here
- 07
Goodwill that is computed, never recognised and never amortised
- 08
Three forms of joint arrangement, and the question that sorts them
- 09
Where the equity method meets the related party disclosures
Take goodwill, the share of profit and the closing carrying amount
- 3Compute net fair value and extract the goodwill inside the investment.
- 4Adjust the investee's profit for both items, after tax.
- 3Apply the percentage and roll the carrying amount forward.
Key terms
- Equity Method
- A method carrying an investment at cost adjusted for the investor's share of the investee's post-acquisition profit or loss and reduced by dividends received, reporting one asset and one line of income.
- Associate
- An entity over which the investor has significant influence, being the ability to participate in financial and operating policy decisions without controlling them.
- Joint Control
- The contractually agreed sharing of control, so that decisions require the consent of the sharing parties. It produces equity accounting rather than consolidation.
- Jointly Controlled Operation
- A joint arrangement without a separate vehicle, in which each party uses its own assets and incurs its own expenses and recognises its share of the revenue from the shared activity.
- Jointly Controlled Asset
- A joint arrangement in which the parties own an asset together, each recognising its share of that asset and of the costs of operating it directly.
- Investor's Share of Profit
- The ownership percentage applied to the investee's profit after adjusting for depreciation on fair value uplifts and for unrealised inter-entity profit in either direction.
Investments in Associates and Joint Ventures FAQ
Why is a dividend from an associate not income?
Because the earnings behind it have already been recognised. Under the equity method the investor has taken its share of the associate's profit into its own income statement and increased the investment by that amount. The dividend is the associate paying out of that same profit, so treating the cash as revenue counts it twice and leaves the investment carrying net assets the associate no longer holds.
Reducing the investment fixes both problems in one entry.
Why are both directions adjusted here when only upstream mattered for a subsidiary?
Because the two calculations answer different questions. A non-controlling share is a percentage of one entity's own result, so only a transaction that distorted that entity's result can move it, and that means upstream. The share of an associate's profit is the investor's own slice of a jointly produced figure, and an unrealised profit distorts it whichever way the goods travelled.
The course's worked answers carry items in both directions for exactly this reason.
Do we show the goodwill on an associate separately?
No. The excess of the cost of the investment over the investor's share of the net fair value of the investee's identifiable assets and liabilities is goodwill, and computing it is often worth a mark, but it is not recognised as a separate asset, never appears under its own name and is not amortised. It remains part of the carrying amount of the investment, which is tested for impairment as a single asset.
Exam move
Draw the investment account as a four-line ledger, opening cost, share of profit, dividends and closing balance, and fill it for three invented associates, each with a fair value uplift and one inter-entity sale, alternating the direction of the sale. Then write one line for each saying what the closing balance represents.
The ledger is small enough to reproduce under pressure, and the discipline of adjusting before multiplying is the only habit this chapter needs.
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