- 15 Marks
FR – May 2015 – L2 – SB – Q6 – Associates and Joint Ventures (IAS 28)
Explain the equity method, conditions for discontinuation, and evaluate types of audit evidence.
Question
(a) IAS 28 – Investments in Associates and Joint Ventures permits the application of the equity method when accounting for investments in associates and joint ventures.
Required:
Explain briefly the Equity Method and state the circumstances under which an entity can discontinue the use of the equity method under IAS 28. (5 Marks)
(b) Agbantara Plc. acquired equity shares from Odinma Plc. and Dangari Limited. The following are the Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2014 for the three companies:
| Company | Agbantara Plc. | Odinma Plc. | Dangari Ltd |
|---|---|---|---|
| Revenue | N4,500 | N1,350 | N630 |
| Cost of Sales | (N2,430) | (N720) | (N270) |
| Gross Profit | N2,070 | N630 | N360 |
| Admin Expenses | (N1,350) | (N180) | (N135) |
| Finance Income | N135 | N90 | – |
| Finance Costs | (N180) | – | (N90) |
| Profit Before Tax | N675 | N540 | N135 |
| Income Tax Expense | (N225) | (N135) | (N45) |
| Profit for the Year | N450 | N405 | N90 |
Other Comprehensive Income:
- Gains on Property Revaluation (Net of Tax):
- Agbantara Plc: N180
- Odinma Plc: N90
- Dangari Ltd: N45
Total Comprehensive Income for the Year:
- Agbantara Plc: N630
- Odinma Plc: N495
- Dangari Ltd: N135
Additional Information:
(i) Agbantara Plc. acquired 72 million ordinary shares in Odinma Plc. out of its 120 million ordinary shares at a nominal par value of N1 each for N160 million. The shares were acquired four years ago when Odinma Plc. had a N15 million credit balance in retained earnings. During the year, Odinma Plc. sold goods costing N38 million to Agbantara Plc. for N45 million, which remain unsold at year-end.
(ii) Agbantara Plc. acquired 35,000,000 ordinary shares in Dangari Limited out of 100,000,000 ordinary shares. The shares were acquired three years ago when the company had a credit balance on its retained
earnings of N10,000,000.
(iii) Agbantara Plc’s group policy is to measure non-controlling interests (NCI) at fair value. NCI at acquisition date in Odinma Plc. at fair value was N48,000,000. Impairment test carried out on the goodwill relating to Odinma Plc. and investment in Dangari Limited at year end resulted in N10,000,000 and N15,000,000 losses respectively.
Required:
Calculate Agbantara Plc.’s share of profits from Odinma Plc., considering the unrealized profit. (5 Marks)
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