Investments in associates and joint ventures

associate. However, if the contribution lacks commercial substance and no other assets
have been received, no profit or loss is recognised (IAS 28.30).
When an investor receives, in exchange for its own non-monetary asset, a monetary or
dissimilar non-monetary asset over and above the equity interest in the associate, the
entity will recognise in full in profit or loss the portion of the gain or loss on the
non-monetary contribution relating to those assets (IAS 28.31).

Example 11.1a Application of the equity method

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17
P Ltd
A Ltd
Group
Profit 188 000 100 000
Dividends received from A Ltd 12 000 –
Profit before tax 200 000 100 000
Income tax expense (94 000) (50 000)
PROFIT FOR THE YEAR 106 000 50 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R106 000 R50 000

Total comprehensive income attributable to:

Owners of the parent 91 000 50 000
Non-controlling interests 15 000 –
R106 000 R50 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17
Retained earnings
P Ltd
A Ltd
Group
Balance at 1 January 20.17 79 000 70 000
Changes in equity for 20.17
Dividends (50 000) (30 000)
Total comprehensive income for the year:
Profit for the year 91 000 50 000
Balance at 31 December 20.17 R120 000 R90 000

67
Chapter 11

Additional information
1 On 1 January 20.12, P Ltd acquired a 40% equity interest in A Ltd for R84 000.
Since the acquisition date, P Ltd has exercised significant influence over the
financial and operating decisions of A Ltd. At the date of the acquisition of the 40%
equity interest in A Ltd, A Ltd had share capital of R195 000. At that stage, the
reserves of A Ltd consisted of retained earnings of R15 000.
2 In the above draft consolidated statement of profit or loss and other comprehensive
income and draft consolidated statements of changes in equity, the results of A Ltd
are accounted for according to the cost method.

Solution 11.1a

P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Profit 188 000
Share of profit of associate 20 000
Profit before tax 208 000
Income tax expense (P) (94 000)
PROFIT FOR THE YEAR 114 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R114 000
Total comprehensive income attributable to:
Owners of the parent 99 000
Non-controlling interests 15 000
R114 000

P LTD GROUP
EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Retained
earnings
Balance at 1 January 20.17 (79 000(P) + 22 000(A)) 101 000
Changes in equity for 20.17
Dividends (50 000)
Total comprehensive income for the year:
Profit for the year 99 000
Balance at 31 December 20.17 (Test: 120 000(P) + 30 000(A)) R150 000

68
 Investmen
nts in assoc
ciates and joint
j ventures

Commentt
The inves stment in thee associate w
will appear in
n the consolid
dated stateme
ent of financial
position att an amount of
o R114 000 ((84 000 + 30 000) at 31 December 20.1 17.

Calculatiions
C1 Analy ysis of owners’ equitty of A Ltd
P Ltd
d 40%
Total
At Since
i At acq
quisition (01/01/20.12)
Share capital 195 000 78 000
Retain
ned earningss 15 000 6 000
210 000 84 000
Investm
ment in A Lttd (84 000)
–
ii Since acquisition
n
• To begginning of cuurrent year (20.12
( – 20..16)
Retain
ned earningss (70 000 – 15 000) 55 000 22 000
• Currennt year (20.117)
Profit for
f the year 50 000 20 000
Dividends (30 000) (12 000)
R
R285 000 R30 000

C2 Pro forma
f cons
solidation journal
j enttries
Dr Cr
R R
J1 Inv
vestment in A Ltd (SFP) 42 000
Share
S of pro
ofit of assoc
ciate (P/L) 20 00
00
Retained eaarnings – Beeginning of yyear (SCE) 22 00
00
J2 Div
vidend income (P/L) 12 000
In
nvestment in A Ltd (SFP) 12 00
00

Example
e 11.1b Fair value
e adjustme
ent at acqu
uisition date

Assume thet same in nformation as

a in examp ple 11.1a. A
All the asse
ets and liabilities of A Ltd
L
were fairly valued on
n 1 Januaryy 20.12, exxcept for maachinery thaat was undervalued withw
R25 000 (after taking into acco
ount 28% ta ax). The ma achinery haad a remainning useful life
l
of eight years.

69
Chapter 11
1

Solution
n 11.1b

Calculatiions
C1 Analy ysis of owners’ equitty of A Ltd
P Ltd
d 40%
Total
At Since
i At acq
quisition (01/01/20.12)
Share capital 195 000 78 000
Retain
ned earningss 15 000 6 000
Revalu
uation surplu
us (machine
ery) 25 000 10 000
235 000 94 000
Investm
ment in A Lttd (84 000)
Gain frrom a barga
ain purchase
e 10 000
ii Since acquisitionn
• To begginning of cuurrent year (20.12–20.1
( 6) :

Retain
ned earningss
(70 000
0 – 15 000 – (25 000/8 × 5)(deprecia
ation)) 39 375 15 750
• Currennt year (20.117)
Profit for
f the year (50 000 – (25
5 000/8)) 46 875 18 750
Dividends (30 000) (12 000)
R
R291 250 R22 500

C2 Pro forma
f cons
solidation journal
j enttries
Dr Cr
R R
J1 Inv
vestment in A Ltd (SFP) 10 000
Retained eaarnings – Be
eginning of yyear (SCE) 10 00
00
J2 Inv
vestment in A Ltd (SFP) 34 500
Share
S of pro
ofit of assoc
ciate (P/L) 18 75
50
Retained eaarnings – Beeginning of yyear (SCE) 15 75
50
J3 Div
vidend income (P/L) 12 000
In
nvestment in A Ltd (SFP) 12 00
00

Comment
The gain from a bargaiin purchase wwas recognissed in profit or
o loss in 20.12 and would
therefor im
mpact on the opening
o balan
nce of retaine
ed earnings in
n 20.17.
The investtment in the e associate w
will appear in
n the consolid
dated statemeent of financia
al
position at an amount of
o R116 500 (884 000 + 10 0 000 + 22 500
0) at 31 Decemmber 20.17.

70
 Investments in associates and joint ventures

4 Treatment of the reserves of an associate

l Transfers to and from reserves via the statement of changes in equity
of the associate
If a subsidiary makes a transfer to a reserve in the statement of changes in equity
during the current year, it is customary to transfer the portion of the transfer attributable
to the shareholding of the investor to the specific reserve in the consolidated statement
of changes in equity. If an associate makes a transfer to a reserve, the transfer is
treated in a manner similar to transfers made by subsidiaries. This transfer reflects the
fact that the investor influences the policy and operating decisions of the associate.

l Revaluation of the assets of an associate since acquisition

If the assets of an associate are revalued after the acquisition of the investment, the
attributable portion of the revaluation surplus that is created must be recognised within
other comprehensive income in the consolidated statements of the investor, and the
carrying amount of the investment must be increased by the amount of the investor’s
share in the revaluation surplus of the associate. The portion of the revaluation that has
already been taken into account in the investor’s original cost of the investment is not
taken into consideration.
Any surplus that was paid on the acquisition date must, as far as possible, be allocated
to the assets of the associate on the date of acquisition. If a depreciable asset was
revalued in this manner, the accompanying adjustment to the depreciation expense
must be set off in the calculation of the share of profit of the associate. The above
treatment is in accordance with the basic viewpoint that the consolidation process and
the equity method are based on the same procedures and principles.

Example 11.2 Revaluation surplus of an associate

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17

P Ltd
A Ltd
Group
ASSETS
Property, plant and equipment 250 000 150 000
Investment in A Ltd (40 000 shares at cost) 50 000 –
Inventories 350 000 140 000
Total assets R650 000 R290 000
EQUITY AND LIABILITIES
Share capital (250 000/100 000 shares) 250 000 100 000
Retained earnings 300 000 120 000
Other components of equity (revaluation surplus) – 30 000
Non-controlling interests 50 000 –
Deferred tax liability – 20 000
Long-term loans 50 000 20 000
Total equity and liabilities R650 000 R290 000

71
Chapter 11

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17
P Ltd
A Ltd
Group
Profit 378 000 150 000
Dividends received 4 000 –
Profit before tax 382 000 150 000
Income tax expense (152 000) (60 000)
PROFIT FOR THE YEAR 230 000 90 000
Other comprehensive income
Items that will not be reclassified to profit or loss
Revaluation of land – 30 000
Other comprehensive income for the year, net of tax – 30 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R230 000 R120 000
Profit attributable to:
Owners of the parent 215 000 90 000
Non-controlling interests 15 000 –
R230 000 R90 000
Total comprehensive income attributable to:
Owners of the parent 215 000 120 000
Non-controlling interests 15 000 –
R230 000 R120 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17
Retained earnings
P Ltd
A Ltd
Group
Balance at 1 January 20.17 100 000 40 000
Changes in equity for 20.17
Dividends (15 000) (10 000)
Total comprehensive income for the year:
Profit for the year 215 000 90 000
Balance at 31 December 20.17 R300 000 R120 000

Additional information
1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A Ltd when
the retained earnings of A Ltd amounted to R10 000. Since that date, P Ltd
exercises significant influence over the financial and operating policy decisions of
A Ltd.
2 The revaluation surplus of A Ltd arose on 31 December 20.17 when the land was
revalued.

72
 Investments in associates and joint ventures

Solution 11.2

P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
Property, plant and equipment (P) 250 000
Investment in associate (50 000 + 56 000) 106 000
356 000
Current assets
Inventories (P) 350 000
Total assets R706 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 250 000
Retained earnings 344 000
Other components of equity (revaluation surplus) 12 000
606 000
Non-controlling interests 50 000
Total equity 656 000
Non-current liabilities
Long-term loans 50 000
Total equity and liabilities R706 000

P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.17
Profit (P) 378 000
Share of profit of associate 36 000
Profit before tax 414 000
Income tax expense (P) (152 000)
PROFIT FOR THE YEAR 262 000
Other comprehensive income
Items that will not be reclassified to profit or loss
Share of other comprehensive income of associate 12 000
Other comprehensive income for the year, net of tax 12 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R274 000
Profit attributable to:
Owners of the parent 247 000
Non-controlling interests 15 000
R262 000
Total comprehensive income attributable to:
Owners of the parent 259 000
Non-controlling interests 15 000
R274 000

73
Chapter 11

P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revalu- Non-
Share Retained Total
tion Total controlling
capital earnings equity
surplus interests
Balance at
1 Jan 20.17 250 000 * 112 000 – 362 000 35 000 397 000
Changes in
equity for
20.17
Dividends – (15 000) – (15 000) – (15 000)
Total
comprehensive
income for the
year
Profit for the year – 247 000 – 247 000 15 000 262 000
Other
comprehensive
income – – 12 000 12 000 – 12 000
Balance at
31 Dec 20.17 R250 000 @ R344 000 R12 000 R606 000 R50 000 R656 000

* 100 000(P) + 12 000 = 112 000

@ Test: 300 000(P) + 44 000(A) = 344 000

Calculations
C1 Analysis of owners’ equity of A Ltd
Total P Ltd 40%
At Since
i At acquisition
Share capital 100 000 40 000
Retained earnings 10 000 4 000
110 000 44 000
Investment in A Ltd (50 000)
Goodwill (6 000)
ii Since acquisition
• To beginning of current year :

Retained earnings (40 000 – 10 000) 30 000 12 000

• Current year :

Profit for the year 90 000 36 000

Dividends (10 000) (4 000)
Revaluation surplus 30 000 12 000
R250 000 R12 000 RS
R44 000 RE

74