Standard on Accounting for
Investments Using Equity Method
Standard on Accounting for Investments
using Equity Method
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# |
Subject |
Page |
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1. |
Scope |
87 |
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2. |
Objective |
87 |
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3. |
Statement of the Standard |
88 |
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4. |
Presentation |
90 |
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5. |
Disclosures |
91 |
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6. |
Definitions |
92 |
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7. |
Analytical comparative Study. |
95 |
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8. |
Practical cases and examples for
application of the standard. |
115 |
Standard on Accounting for
Investments using Equity Method
1.
Scope :
1.1 This standard identifies the requirements
for measurement, recognition, presentation and disclosure of investments, that
give the investing business enterprise the ability to exercise significant
influence over the financial and operating policies of the investee,
irrespective of the size or legal form of the investor.
(Paragraph 101)
1.2 This standard does not apply to investments
accounted for under the standard on Consolidated Financial Statements nor
standard on Accounting for Investments in Securities. Also it does not apply to
enterprises whose investments is treated according to specialized accounting
standards approved by GCCAAO including enterprises whose sole purpose is investment
in securities.
(Paragraph
102)
1.3 The paragraphs of this standard shall be
read in the context of the conceptual framework of financial accounting and the
General Presentation and Disclosure Standard approved by GCCAAO.
(Paragraph
103)
1.4 This
standard applies only to material investment items.
(Paragraph 104)
2.
Objective :
The objective of this standard is to
identify the basis and procedures to be followed for the use of the equity
method and the underlying requirements for presentation and disclosure for the
financial statements to fairly present the financial position of the investor
and the results of its operations.
(Paragraph 105)
3.
Statement of the Standard :
3.1 Measurement
and Recognition :
3.1.1
Measurement and Recognition of Investments at the date of Acquisition
The investment
should be measured and recognized at cost at the date of acquisition. Cost
includes the purchase price as well as all associated acquisition costs
incurred.
(Paragraph 106)
3.2
Measurement and Recognition of Investment after Acquisition :
3.2.1 The investment should be measured and
recorded in the periods which follow its acquisition date, at its historical cost
adjusted by the investor’s share of the investee’s net income (loss) and
dividends.
(Paragraph
107)
3.2.2 The difference between the cost of the
investment and the investor’s share in the book value of the net assets of the
investee as at the investment date, should be amortized over the remaining
useful life of the assets of the investee which caused such a difference.
Goodwill, if any, should be amortized over the lesser of the estimated period
of benefit, or 20 years from the date of its establishment.
(Paragraph
108)
3.2.3 The investing enterprise’s share in the
investee’s net income (loss) should be recognized on a timely basis after the
elimination of preferred shares and its dividends, (if any).
(Paragraph 109)
3.2.4 Unrealized gains or losses on intercompany
transactions between the investing enterprise and the investee should be
eliminated based on the percentage of equity and the investment balance should
be adjusted accordingly.
(Paragraph 110)
3.2.5 Gains or losses on sale of the investment
shares to a third party should be recognized when sold. Gains or losses should equal the difference
between the selling price and the carrying amount of the shares sold at the
selling date.
(Paragraph
111)
3.2.6 Other than temporary decline in investment
value should be recognized when occurred. Losses resulting from such a decline
should be recognized in the income of the period in which the other
than-temporary decline has occurred, and the investment value should be
adjusted accordingly.
(Paragraph
112)
3.2.7 If the financial period of an investee and
investor is different, the latest prepared financial statements of the investee
should be used to determine the investing enterprise’s share in the income or
losses of the investee. Mostly the investee prepares its financial statements
concurrent to those of the investor for the purpose of being use by investor. If this became
impracticable, the difference between the financial periods of the two entities
must be regular between each period and another. Necessary adjustments should
made for the effects resulting from significant events and transactions occurring
between the investor and investee during the period falling the dates of
preparation of financial statements of the two entities, if such dates are
different.
(Paragraph
113)
3.2.8 If an investee adopts accounting policies
inconsistent with those applied by an investing enterprise on similar
transactions and events, the investing enterprise should make the necessary
adjustments to the investee’s financial statements upon the use of the equity
method.
(Paragraph 114)
3.2.9 The investing enterprise should discontinue
applying the equity method in the following cases :
A.
When the investing enterprise is unable to exercise significant influence over
the investee’s financial and operating policies.
(Paragraph
115)
B. If the investment value is reduced to zero as
a result of the continuous losses of the investee (unless the investing
enterprise has guaranteed the obligations of the investee or has otherwise
committed to provide further financial support for the investee). Application of the equity method will resumed
if the envestee attained net profits equal to the net loss, during cessation
period.
(Paragraph
116)
3.2.10 If
the equity method ceases to be applied due to loss of the ability to
significantly influence and upon the application of another method (i.e. fair
value), the carrying value of the investment at the cessation date should be
considered as a basis for the application of the new method and the investment
value shall not be adjusted retroactively.
(Paragraph
117)
3.2.11 When applying the equity method for the
first time on an investment that was previously accounted for on a basis other
than the equity method, a retroactive adjustment to the investor’s investment
balances, retained earnings and results of operations should be made (for the
current and all presented previous years).
(Paragraph
118)
4.
Presentation :
4.1 The investor’s investment accounted for
under the equity method should be disclosed as a single line item on the
balance sheet under non-current assets.
(Paragraph 119)
4.2 The investor’s share of investee’s net
income (loss) should be disclosed as a single line item on the income statement
of the investee (after the elimination of profits or losses on inter-company
transactions) following profit from transactions. The investor’s share in
extraordinary profits and/or losses should be shown under extraordinary items.
Prior year adjustments should be presented in the statement of retained
earnings.
(Paragraph
120)
4.3 Losses arising from other than temporary
decline in investment value should be shown within losses in the statement of
income for the period during which the decline has occurred.
(Paragraph 121)
5.
Disclosures :
The following should be disclosed:
5.1
The accounting policies for investment according to the equity method.
(Paragraph
122)
5.2 Reasons for not applying of the equity method
where the investor holds 20% - 50% of the net assets of the investee.
(Paragraph 123)
5.3 Name of the investee in which the investor
exercises significant influence, percentage of ownership in the voting capital
of that investee, and the fair value of each investment at the date of
preparation of the financial statements.
(Paragraph
124)
5.4 Any
transfer of other transferable securities to ordinary shares if such transfer
has significant influence on the investor’s shares in earnings and losses of
the investees.
(Paragraph 125)
6.
Definitions :
6.1 Investment :
An investment is
an asset held by an enterprise for the accretion of wealth through distribution
(such as dividends, rentals, or other returns) or capital appreciation or for
other benefits to the investor such as those obtained through trading
relationships.
(Paragraph
126)
6.2 Investor :
Is an enterprise
that holds an investment in another enterprise.
(Paragraph
127)
6.3 Investee :
An enterprise in
which the investor has an investment.
(Paragraph
128)
6.4 Share :
For the purpose
of this standard, share means the investing enterprises rights and obligations.
(Paragraph
129)
6.5 Significant influence :
Is the influence that does not give
the investor the ability to exercise control in using or directing the use of
the investee’s assets to gain economic benefits. Significant influence may be
indicated by the following indicators unless there is evidence of the absence
of such influence :
a) Holding
by an investor (directly or indirectly) an interest between 20% to 50% in the
voting capital of the investee.
b) Holding of minority interests less than 20%
in the net assets of the investee, provided that the following conditions are
met :
i) Existence
of representation for the investor on the investee’s board of directors.
ii) Participation by the
investor in plans and policy-making processes of the investee.
iii) Interchange of managerial personnel between
the investee and the investor.
iv) The investee’s reliance on the investor in
technical aspects (use of technology).
v) Existence of material intercompany
transactions.
(Paragraph
130)
6.6 Other than-temporary decline :
The decline is
considered other than temporary if certain indicators exist which evidence its
continuity, or from which it could be judged whether the decline is temporary
or other than temporary. These indicators include the inability to recover the
carrying amount of the investment or the inability of the investee to maintain
a level of earnings that would be
appropriate for the book value of the investment.
(Paragraph
131)
6.7 Fair value :
Is the amount for
which an asset could be exchanged between knowledgeable, willing parties in an
arm’s length transaction. It is indicated by the market value.
(Paragraph
132)
6.8 Preferred shares :
Is a class of
shares that has preference over common shares. Preferred shares may vest their
holders with priority in receiving a certain dividend and/or in recovering
their paid-up capital upon liquidation, or with any other benefits.
(Paragraph 133)
Analytical Comparative Study
Main topic : The Scope of standard
The title of standard : Standard on
accounting for investments
using equity method Sub- topic :
|
Standards
approved in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
- This standard identifies the requirements
for measurement, recognition, presentation and disclosure of investments,
that give the investing business enterprise the ability to exercise
significant influence over the financial and operating policies of the
investee, irrespective of the size or legal form of the investor. |
This standard should be applied in accounting by an
investor for investments in associates. An associate is an enterprise in
which the investor has significant influence and which is neither a
subsidiary nor joint venture of the investor. |
The two standards agree in that, the scope is limited to the investments
that give the investing company the ability to exercise significant influence
over the financial and operating policies of the investee. However the scope of Saudi standard is more specific
and more clear, because it identifies more clearly the matters that are not
covered by the scope of the standard. |
Limited
difference |
- This standard identifies the requirements
for measurement, recognition, presentation and disclosure of investments,
that give the investing business enterprise the ability to exercise
significant influence over the financial and operating policies of the
investee, irrespective of the size or legal form of the investor. |
The Saudi standard is more specific, with respect to its scope therefore
it is suggested to be used as basis for formulation of proposed text. |
|
- This standard does not apply to
investments accounted for under the standard on Consolidated Financial
Statements nor standard on Accounting for Investments in Securities. Also it
does not apply to enterprises whose investments is treated according to
specialized accounting standards approved by SOCPA including enterprises
whose sole purpose is investment in securities. |
|
|
- This standard does not apply to
investments accounted for under the standard on Consolidated Financial
Statements nor standard on Accounting for Investments in Securities. Also it
does not apply to enterprises whose investments is treated according to
specialized accounting standards approved by GCCAAO including enterprises whose sole purpose is investment in
securities. |
|
|
|
- The paragraphs of this standard shall be
read in the context of the explanations in the study accompanying the
standard , and within the framework of the objectives and concepts of
financial accounting approved by SOCPA and the General presentation and
Disclosure standard. |
|
|
- The paragraphs of this standard shall be
read in the context of the conceptual framework of financial accounting and
the General Presentation and Disclosure Standard approved by GCCAAO. |
|
|
|
- This standard applies only to material
investment items. |
|
|
- This standard applies only to material
investment items. |
|
Analytical Comparative Study
Main
topic : The Objective
The title of standard : Standard on
accounting for investments
Sub- topic :
Using
equity method
|
Standards approved
in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
- The objective of this standard is to
identify the basis and procedures to be followed for the use of the equity method
and the underlying requirements for presentation and disclosure for the
financial statements to fairly present the financial position of the investor
and the results of its operations. |
- The objective of this standard is to identify
the basis and procedures to be followed in apply in the equity method in
accounting for the investment in associate companies, and indicating how
investments will be accounted for in the consolidated and separate financial
statements of the investor enterprise that uses equity method. |
The two standard agree that, the objective of the
standard is to identify the basis and procedures to be followed for the use
of the equity method on accounting for investment in associates and to
identify also the requirements for presentation and disclosure related to
this type of investments. |
Agreed |
- The objective of this standard is to
identify the basis and procedures to be followed for the use of the equity
method and the underlying requirements for presentation and disclosure for
the financial statements to fairly present the financial position of the
investor and the results of its operations. |
It is suggested to use the text provided in Saudi standard as basis of
the proposed text, because it is more clear, specific and inclusive and consistent
with other standards approved by GCCAAO. |
Analytical Comparative Study
Main topic : Measurement and recognition
The title of standard : Standard on
accounting for
investments using equity method Sub- topic :
|
Standards
approved in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
- The investment should be
measured and recognized at cost at the date of acquisition. Cost includes the
purchase price as well as all associated acquisition costs incurred. |
- Under the equity method, the investment is
initially recorded at cost and the carrying amount is increased or decreased
to recognize the investor's share of the profits or losses of the investee
after the date of acquisition. Distributions received from an investee reduce
the carrying amount of the investment. Adjustment to the carrying amount may
also be necessary for alterations in the investor's proportionate interest in
the investee arising from changes in the investee's equity that have not been
included in the income statement. Such changes include those arising from the
revaluation of property, plant, equipment and investments, from foreign
exchange translation differences and from the adjustment of differences
arising on business combinations. - If an associate has outstanding cumulative
preferred shares, held by outside interests, the investor computes its share
of profits or losses after adjusting for the preferred dividends, whether or
not the dividend have been declared. - If, under the equity method, an investor's
share of losses of an associate equals or exceeds the carrying amount of an
investment, the investor ordinarily discontinues including its share of
further losses. The investment is reported at nil value. Additional losses
are provided for to the extent that the investor has incurred obligations or
made payments on behalf of the associate to satisfy obligations of the
associate that the investor has guaranteed or otherwise committed. If the
associate subsequently reports profits, the investor resumes including its
share of those profits only after its share of the profits equals the share
of net losses not recognized. |
There is an
agreement with respect to the general procedures in the two standards,
although there is some difference in formulation. The Saudi standard is more clear and inclusive for
the following : 1. The Saudi
standard text indicates measurement basis on acquisition date and on
any subsequent date. 2. It indicates the difference
between the cost of investment and the envestor's share in net assets of the
investee. 3. It indicates clearly and
specify how profits, gains and losses on intercompany transactions between
the investor and the investee, be treated. |
Limited
difference |
- The investment should be
measured and recognized at cost at the date of acquisition. Cost includes the
purchase price as well as all associated acquisition costs incurred. |
As Saudi standard text is more
clear and inclusive than that of the international standard, it is suggest
that text as basis for the formulation of proposed text. |
|
- The investment should be measured and
recorded in the periods which follow its acquisition date, at its historical
cost adjusted by the investor’s share of the investee’s net income (loss) and
dividends. - The difference between the cost of the investment
and the investor’s share in the book value of the net assets of the investee
as at the investment date, should be amortized over the remaining useful life
of the assets of the investee which caused such a difference. Goodwill, if
any, should be amortized over the lesser of the estimated period of benefit,
or 20 years from the date of its establishment. |
|
- The investment should be measured and
recorded in the periods which follow its acquisition date, at its historical
cost adjusted by the investor’s share of the investee’s net income (loss) and
dividends. - The difference between the cost of the investment and the
investor’s share in the book value of the net assets of the investee as at
the investment date, should be amortized over the remaining useful life of
the assets of the investee which caused such a difference. Goodwill, if any,
should be amortized over the lesser of the estimated period of benefit, or 20
years from the date of its establishment. |
|||
|
The investing
enterprise’s share in the investee’s net income (loss) should be recognized
on a timely basis after the elimination of preferred shares and its
dividends, (if any). |
|
|
The investing
enterprise’s share in the investee’s net income (loss) should be recognized
on a timely basis after the elimination of preferred shares and its
dividends, (if any). |
|
|
|
Unrealized
gains or losses on intercompany transact-ions between the investing
enterprise and the investee should be eliminated based on the percentage of
equity and the investment balance should be adjusted accordingly. |
|
|
Unrealized
gains or losses on inter company transact-ions between the investing
enterprise and the investee should be eliminated based on the percentage of
equity and the investment balance should be adjusted accordingly. |
|
|
|
Gains or
losses on sale of the investment shares to a third party should be recognized
when sold. Gains or losses should
equal the difference between the selling price and the carrying amount of the
shares sold at the selling date. |
|
Gains or
losses on sale of the investment shares to a third party should be recognized
when sold. Gains or losses should
equal the difference between the selling price and the carrying amount of the
shares sold at the selling date. |
|
||
|
Other
than temporary decline in investment value should be recognized when
occurred. Losses resulting from such a decline should be recognized in the
income of the period in which the other than-temporary decline has occurred,
and the investment value should be adjusted accordingly. |
|
|
|
Other
than temporary decline in investment value should be recognized when
occurred. Losses resulting from such a decline should be recognized in the
income of the period in which the other than-temporary decline has occurred,
and the investment value should be adjusted accordingly. |
|
Analytical Comparative Study
Main topic : Measurement and recognition
The title of standard : Standard on
accounting for
investments using equity method
Sub- topic : Other than temporary decline in investment.
|
Standards
approved in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
Other
than temporary decline in investment value should be recognized when
occurred. Losses resulting from such a decline should be recognized in the
income of the period in which the other than-temporary decline has occurred,
and the investment value should be adjusted accordingly. |
Investment
value shall be reduced to include other than temporary decline in the value.
This reeducation shall be performed for each investment individually. |
The two standards agree with
respect to the treatment of other than temporary decline in investment value,
by adjusting the investment value by the amount of that decline. The Saudi
standard indicates clearly, that such decline should be treated as a loss in
the result of the period in which it occurred. |
Limited
difference |
Other
than temporary decline in investment value should be recognized when
occurred. Losses resulting from such a decline should be recognized in the
income of the period in which the other than-temporary decline has occurred,
and the investment value should be adjusted accordingly. |
Saudi standard text is more clear and inclusive. |
Analytical Comparative Study
Main topic : Measurement and recognition
The title of standard : Standard on accounting
for
investments using equity method
Sub- topic : Different financial periods.
|
Standards
approved in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
If the financial period of an investee and
investor is different, the latest prepared financial statements of the
investee should be used to determine the investing enterprise’s share in the
income or losses of the investee. |
- The most recent available financial
statements of the associate are used by the investor in applying the equity
method, they are usually drawn up to the same date as the financial
statements of the investor. When the reporting dates of the investor and the
associate are different, the associate often prepares, for the use of the
investor, statements as at the same date as the financial statements of the
investor. When it is impracticable to do this, financial statements drawn up
to a different reporting date may be used. The consistency principle dictates
that the length of the reporting periods, and any difference in the reporting
dates, are consistent from period to period. -
When financial statements with a different reporting date are used,
adjustments are made for the effects of any significant events or
transactions between the investor and the associate that occur between the
date of the associate's financial statements and the date of the investor's
financial statements. |
The two standards agree that, if the financial
periods are different, the latest prepared financial statements of the
investee should be used to determine the investing enterprise's share in the
income and losses of the investee. However the international standard adds
that necessary adjustments should be made for the effects of any significant
events or transactions between the investor and investee during the period
falling between the dates of preparation of financial statements of the two
entities. The Saudi standard did not consider this matter, although it may be
implicitly understood. |
Limited
difference |
If the financial period of an investee and
investor is different, the latest prepared financial statements of the
investee should be used to determine the investing enterprise’s share in the
income or losses of the investee. Mostly the investee prepares its financial
statements concurrent to those of the investor for the purpose of being use by investor. If this became
impracticable, the difference between the financial periods of the two
entities must be regular between each period and another. Necessary adjustments should made for the
effects resulting from significant events and transactions occurring between
the investor and investee during the period falling between the dates of
preparation of financial statements of the two entities, if such dates are
different. |
The proposed text includes both texts, in order to be clear and
inclusive. |
|
|
Analytical Comparative Study
Main
topic : Measurement and recognition
The title of standard : Standard on
accounting for
investments using equity method
Sub- topic : Discontinue applying the equity method
|
Standards
approved in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
If the equity method ceases to be applied
due to loss of the ability to significantly influence and upon the
application of another method (i.e. fair value), the carrying value of the
investment at the cessation date should be considered as a basis for the
application of the new method and the investment value shall not be adjusted
retroactively. |
An
investor should discontinue the use of the equity method from the date that : a. It ceases to have significant influence
in an associate but retains, either in whole or in part, its investment; or b. The use of the equity method is no
longer appropriate because the associate operates under severe long-term
restrictions that significantly impair its ability to transfer funds to the
investor. The carrying amount of the investment at that
date should be regarded as cost thereafter. |
The international standard identify the dates on
which the investor should discontinue the use of the equity method. This
matter was not addressed by the Saudi standard. The two standards agree that,
the carrying value of the investment at the cessation date be considered as a
basis for the application of new method. |
Limited
difference |
The investing enterprise should discontinue
applying the method in the following cases : A.
When the investing enterprise is unable to exercise significant influence
over the investee’s financial and operating policies. B. If
the investment value is reduced to zero as a result of the continuous losses
of the investee (unless the investing enterprise has guaranteed the
obligations of the investee or has otherwise committed to provide further
financial support for the investee).
Application of the equity method will be resumed if the envestee
attained net profits equal to the net loss, during cessation period. If the equity
method ceases to be applied due to loss of the ability to significantly
influence and upon the application of another method (i.e. fair value), the
carrying value of the investment at the cessation date should be considered
as a basis for the application of the new method and the investment value
shall not be adjusted retroactively. |
Proposed text includes both texts, in order to include the cases in which
the investor ceases to use the equity method, and measurement basis that
should be followed in such cases. |
Analytical Comparative Study
Main
topic : Measurement and recognition
The title of standard : Standard on
accounting for
investments using equity method
Sub- topic : Applying the equity method for the first time
|
Standards
approved in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
When applying
the equity method for the first time on an investment that was previously
accounted for on a basis other than the equity method, a retroactive
adjustment to the investor’s investment balances, retained earnings and
results of operations should be made (for the current and all presented previous
years). |
The international accounting standard did not
address how the equity method will appied for the first time. |
The international standard did not include any text
addressing this case. |
Significant
difference |
When applying the equity method for the first
time on an investment that was previously accounted for on a basis other than
the equity method, a retroactive adjustment to the investor’s investment
balances, retained earnings and results of operations should be made (for the
current and all presented previous years). |
No text in the international standard. The Saudi standard text is clear
and inclusive. |
Analytical Comparative Study
Main topic : Presentation
The title of standard : Standard on
accounting for
investments using equity method
Sub- topic :
|
Standards
approved in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
- The investor’s investment accounted for
under the equity method should be disclosed as a single line item on the
balance sheet under non-current
assets. - The investor’s share of investee’s net income
(loss) should be disclosed as a single line item on the income statement of
the investee (after the elimination of profits or losses on inter-company
transactions) following profit from transactions. The investor’s share in
extraordinary profits and/or losses should be shown under extraordinary
items. Prior year adjustments should be presented in the statement of
retained earnings. - Losses arising from other than
temporary decline in investment value should be shown within losses in the
statement of income for the period during which the decline has occurred. |
- Any investment in an associate should be
accounted for in consolidated financial statements under the equity method
except when the investment is acquired and held exclusively with a view to its
subsequent disposal in the near future, in which case should be accounted for
using cost method. - Any investment in an associate that is
included in the separate financial statements of an investor that issues
consolidated financial statements should be accounted for in the separate
financial statement of the investor enterprise according to one of the
following options : a. The method used in accounting for the investment
in consolidated financial statements whether the cost or the equity method. b. By cost
or by value adjusted after re-evaluation according to IAS25. However, the
preparation of consolidated financial statement in itself does not prevent
preparation of separate financial statements for the investee enterprise. Investments in associates accounted for using the
equity method should be classified as long-term assets and disclosed as a
separate item in the balance sheet. The investor's share of the profits or
losses of such investments should be disclosed as a separate item in the
income statement. The investor's share's share of any extraordinary or prior
period items should also be separately disclosed. |
The international standard includes two alternative
options for the presentation of the data of investment in associate, in the
financial statements of the investing enterprise. Existence of presentation
alternatives upsets comparability of the financial statements of the various
entities. The Saudi standard successfully avoided this matter. |
Significant
difference |
- The investor’s investment accounted for
under the equity method should be disclosed as a single line item on the
balance sheet under non-current
assets. - The investor’s share of investee’s net
income (loss) should be disclosed as a single line item on the income
statement of the investee (after the elimination of profits or losses on
inter-company transactions) following profit from transactions. The
investor’s share in extraordinary profits and/or losses should be shown under
extraordinary items. Prior year adjustments should be presented in the
statement of retained earnings. - Losses arising from other than temporary
decline in investment value should be shown within losses in the statement of
income for the period during which the decline has occurred. |
Saudi standard text provide for the purpose of comparability between the
financial statements of the various entities. The text is also clear and
inclusive. Therefore it is suggested to be used as basis for formulation of
proposed text. |
Analytical Comparative Study
Main topic
: Disclosure
The title of standard : Standard on
accounting for
investments using equity method
Sub- topic :
|
Standards
approved in |
Standards
approved in some of GCC Countries (International standards) |
Comparison |
Conclusion |
Proposed
statements |
Reasons |
|
The following should be disclosed: - The accounting policies for investment
according to the equity method. - Reasons for not applying of the equity method
where the investor holds 20% - 50% of the net assets of the investee. - Name of the investee in which the investor
exercises significant influence, percentage of ownership in the voting
capital of that investee, and the fair value of each investment at the date
of preparation of the financial statements. - Any transfer of other transferable securities to
ordinary shares if such transfer has significant influence on the investor’s
shares in earnings and losses of the investees. |
In additional
to the above mentioned presentation methods the following disclosures should
be made : a. an appropriate listing and description of
significant associates including the proportion of ownership interest and, if
different, the proportion of voting power held, and b. the methods used to account for such
investments. |
Saudi standard text included the requirements of
disclosure for investments that is accounted for using the equity method, in
a way that is more clear and inclusive than that adopted in other GCC
Countries. |
Significant
difference |
The following should be disclosed: - The
accounting policies for investment according to the equity method. - Reasons for not applying of the equity method
where the investor holds 20% - 50% of the net assets of the investee. - Name of the investee in which the investor
exercises significant influence, percentage of ownership in the voting
capital of that investee, and the fair value of each investment at the date
of preparation of the financial statements. - Any
transfer of other transferable securities to ordinary shares if such transfer
has significant influence on the investor’s shares in earnings and losses of
the investees. |
The Saudi standard text is more clear and inclusive and consistent with
the standard of presentation and general disclosure approved by GCCAAO. |
Cases and Practical Examples for the
Application of
The Standard on Accounting for Investments
Using the Equity Method
First Case :
Assume
that , the company (m) purchased, on
|
|
Carrying value monetary
unit |
Fair value monetary
unit |
|
Cash |
30,000 |
30,000 |
|
Receivables (net) |
120,000 |
120,000 |
|
Inventory |
240,000 |
250,000 |
|
Lands |
150,000 |
200,000 |
|
Machinery and equipments
(net) |
400,000 |
500,000 |
|
Total assets |
940,000 |
1100,000 |
|
Liabilities |
(240,000) |
(240,000) |
|
Net
assets (equity) |
700,000 |
860,000 |
The
following information's became available to you :
1.
Profits (losses) of company (p) for the years 2002, 2003 and 2004 and dividends
made by company (p) for the same period was as follow :
|
|
2002 |
2003 |
2004 |
|
Net profit (loss) |
90,000 |
50,000 |
(10,000) |
|
Dividends |
20,000 |
30,000 |
10,000 |
2. The
inventory existing on the date of purchase is completely sold, during the year
2002, to a third party.
3. From the date of investment 10 year were
remaining from useful life of the machinery and equipments and will be
depreciated by the straight – line method.
4. According to the standard on accounting for
investment using the equity method, goodwill shall not be amortized.
5. During the year 2003, company (p) sold a
inventory to company (m) against a price exceeding its cost by 6,000 monetary
units and up to the end of the year 2003, this inventory was not sold to a
third party.
The
question :
Indicate the accounting
treatment for the investment of company (m) in company (p) for the years
2002,2003,2004, assuming that, the 30% has given the company (m) significant
influence on the financial and operational policies of the company (p) and
consequently the equity method should applied in accordance with the proposed
standard on accounting for investments using the equity method.
Solution :
In order to apply the equity
method in accordance with the standard, the solution will be in steps as
follows :
First step :
Calculating the difference
between investment cost and the carrying value of company (m)'s investment
share in company (p)'s net assets.
|
Share in company (p)'s
net assets |
Monetary units |
|
|
Investment cost paid
against 30% of company (p) |
= |
268,000 |
|
Carrying value of
investment share 30%X700,000 |
= |
210,000 |
|
Difference (Excess of paid
cost over carrying value of investment share |
= |
58,000 |
Second
step :
Allocation of the above
calculated difference over the assets that have carrying value different from
its fair value (considering the difference as resulting due to the difference between
the carrying value and the fair value). In this example the difference
resulting from each of the inventory, lands, machinery and equipments, shall be allocated as follow :
|
Item |
Carrying value |
Fair value |
The difference credit/debit |
30% of difference
credit/debit |
|
Inventory |
240,000 |
250,000 |
10,000 |
3,000 |
|
Lands |
150,000 |
200,000 |
50,000 |
15,000 |
|
Machinery and equipotent |
400,000 |
500,000 |
100,000 |
30,000 |
|
Allocated difference |
|
|
|
48,000 |
As the
total difference is 58,000 monetary unit, then the remaining difference which
is equal to 10,000 monetary units represents the share of the investing
enterprise (m) in the total goodwill, not recorded, of the company (p).
Goodwill
may be calculated in another way, as it represents the excess of investment
cost over the fair value of net assets purchased :
|
|
Monetary
Unit |
|
|
Investment cost |
= |
268,000 |
|
Fair value of purchased
share = 30% X 860,000 |
= |
258,000 |
|
Investing enterprise's
share in goodwill |
= |
10,000 |
It
should be noted that , both company (m) and company (p) shall not record the
increase in the value of inventory , lands, machinery or goodwill resulting
from investments, in its record according to the equity method. However, it
will show these items within the value of the investment account. Hence , the
investment account appeared in its value that include the unamortized
difference because , according the equity method the investment account should
be presented in the balance sheet without recording the individual assets and
liabilities of the investee.
But
the investing enterprise maintains the informations related to the difference
and its allocation between the various assets, in the working papers of the
official accounting system. The informations will be used on preparing the financial statements
because, as will be seen later, it effects both the financial position and the
income.
Third
step : Amortization of the amortization
of the difference :
According
to the above indications of this example the difference allocated on the
various assets (including goodwill) is amortized over the remaining estimated
period of benefit of these assets. The increase in the value of inventory is
considered as an increase in the cost of inventory sold during the year in
which that inventory is sold. The following schedule illustrate amortization of
the difference according to the information given in the example :
|
Item |
Difference |
Estimated period of benefit |
Amortization |
||
|
|
Credit(Debit) |
|
2002 |
2003 |
2004 |
|
Inventory |
3,000 |
|
3,000 |
- |
- |
|
Lands |
15,000 |
Not identified |
- |
- |
- |
|
Machinery and equipments |
30,000 |
10 year |
3,000 |
3,000 |
3,000 |
|
Goodwill |
10,000 |
5 year |
2,000 |
2,000 |
2,000 |
|
Total |
58,000 |
|
8,000 |
5,000 |
5,000 |
Note that land share from
the difference (15,000 monetary units) is not amortized because the land is not
depreciable. It is also noted that the share of all mentioned assets from the
difference is a positive amount because the fair value of the assets provided
in the example is larger than its carrying amount.
If the
carrying amount of one(or more) of these assets was larger than the fair value,
then the difference allocated to that asset (assets) will appear negative. If
the fair value of the inventory is less than the carrying amount, this will be
considered as a reduction to cost of inventory sold (from the view of the
investing company) in the year in which the inventory is sold. If the fair
value of machinery and equipments is less than the carrying amount, this will
lead to reduce the expense of depreciation of machinery and equipments (from
the view of the investing enterprise) by the amount of the annual depreciation
of the share of machinery and equipment form the difference (negative), and so
for any depreciable asset.
Forth step : Application of the equity method in the records of the
investing enterprise (m) :
The investing enterprise
performs journal entries in accordance with the equity method provided in this
standard. It shall record the investment at cost on its date and hence,
performs necessary entries to record its share in profits or losses of the investee and also its share of dividends
declared (or paid) by the investee enterprise. This will lead to adjusting its
share in the annual profits (losses) realized by the investee until all
difference is amortized.
In
this example the company (m) shall perform the following entries during the
years 2002, 2003 and 2004.
|
Description |
Year 2002 |
Year 2003 |
Year 2004 |
|
Recording investment in company (m) on 01.01.2002. |
Investment in company (p) 268,000 Cash account
268,000 |
- |
- |
|
Recording company(p)'s share from dividends of company (p). |
Cash account 6,000 Investment in company (p) 6,000 (30% X 2000) |
Cash account 9,000 Investment in company (p) 9000 (30% X 3000) |
Cash account 3,000 Investment in company (p) 3,000 (30% X 10,000) |
|
Recording company (m)'s share form profits (losses) of company (p). |
Investment in company p 27,000 Investment income in 27,000 company (p) (30 % X 90,000) |
Investment in 15,000 company (p) Investment income 15,000 in company (p) (30% X 50,000) |
Investment income 3,000 In company (p) Investment in company (p) (30% X 10,000) 3,000 |
|
Recording total amortization of the difference. |
Investment income 8,000 in company (p) Investment in 8,000 company (p) |
Investment income 5,0000 in company (p) Investment in 5,000 company (p) |
Investment income 5,0000 in company (p) Investment in
5,000 company (p) |
|
Elimination of company (m)'s share from the profits recorded by the
company (p) on inventory sold to the company(m) during the year 2003. |
- |
Investment income 1,800 In company (p) Investment in 1,800 Company (p) (30% X 6,000) |
- |
The
following is an analysis to the effect on the balance of the investment account
in the company (p) and company (m)'s share from the net profits (losses) of the
company (p), as a result of events, operations and transactions performed by
the investee company (p) and recorded by the investing company (m) according to
the equity method :
Effect on the balance of
investment account
|
|
2002 |
2003 |
2004 |
|
Balance at the beginning
of year |
268,000 |
281,000 |
280,200 |
|
Less company (m)'s share
in dividend of company (p). |
(6,000) |
(9,000) |
(3,000) |
|
Plus (less) company (m)'s
share in company (p)'s profits (losses). |
27,000 |
15,000 |
(3,000) |
|
Less company (m)'s share
in the profit of exchanged inventory. |
- |
(1,800) |
- |
|
Less total amortization
of the difference |
(8,000) |
(5,000) |
(5,000) |
|
Balance at the end of the
year. |
281,000 |
280,200 |
269,200 |
Effect on the investing
enterprise (m)'s share in the investee enterprise (p)'s net profits (losses)
|
|
2002 |
2003 |
2004 |
|
Company (m)'s share in
company (p)'s profits (losses). |
27,000 |
150,000 |
(3,000) |
|
Less company (m)'s share
in the profit of exchanged inventory |
- |
(1,800,) |
- |
|
Less total of
depreciation of the difference |
(8,000) |
(5,000) |
(5,000) |
|
Company (m)'s net share
in company (p)'s profits (losses). |
91,000 |
8,200 |
(8,000) |
The
balance of investment account shall be presented in the balance sheet statement
of the company (m) at the end of each year as one line item to be called
(investments in associates). The investing company (m)'s net share in the
investee company (p)'s net profits (losses) shall be presented as single line
item on the income statement of the company (m) following profit from
transactions, it should be considered that, the investor's share in
extraordinary items (if any) of the
investee should be shown under extraordinary items in the income statement. The
investing company share in prior years adjustments in the investee companies
should be presented in the statement of retained earnings.
Second
Case : Applying the equity method for the first time :
On
Therefore
the company (x) became owning 30% (10% + 20%) of the current amount of the net
assets of the company (y). Assume that company (x) decided to transfer from the
fair value method to the equity method to account for it investments in the
company (y) starting from
Data
of the company (x) :
1. The credit balance of
unrealized gains accounts from financial securities available for sale which
represents the investment in company (y) on 30.12.2003, is 2,000,000 monetary
units, (within equity ownership). The same amounts appeared, on the opposite
side as debit balance for the account of change in the fair value of financial
securities available for sale (an account opposite to the account of investment
in the company (y) within assets).
2. Net profits and dividends received from the company
(y), for the years 2002,2003, and 2004 were as follow :
|
|
2002 |
2003 |
2004 |
|
Net income (including
dividends received from company (y) |
50,000,000 |
80,000,000 |
100,000,000 |
|
Dividends received from
the company (y) |
400,000 |
600,000 |
2,000,000 |
Data
of company (y) :
Net
profits of company (y) for the years 2002,203, and 2004 reached an amount
of 10 millions monetary units, 20
millions monetary units and 25 millions monetary units respectively.
According
to this standard, it is observed that when the company transfer from using the
fair value method to the equity method, the company (x) performs a retroactive
adjustment to the investor's investment balances, retained earnings and results
of operations for all presented years as
if the equity method was followed during those years. Thus the company (x), in
this case, performs the following entries on the date of transference to the
equity method :
On
01.01.2004 (date of transference) :
1.
Investment in company (y) 7,000,000
Investment in financial securities 7,000,000
available for sale
(reclassification of
first investment which is equal to 10% , so as to be consistent which the
equity method).
2. Investment in company (y) 16,600,000
Cash account 15,000,000
Retained earnings 1,600,000
(Recording
the purchase of additional 20% of the net assets of the company (y) and
adjustment of retained earnings by the amount of accumulated effect resulting
from transference from the fair value method to the equity method).
The accumulated effect is
calculated, for adjustment of retained earning , as follow :
|
|
2002 |
2003 |
Total |
|
Company (x)'s share in
the net income of company (y) (10%). |
1,000,000 |
2,000,000 |
3,000,000 |
Less :
Goodwill amortization
resulting from
First investment :
|
7,000,000 – (10% X
60,000,000) ÷ 5 = |
(200,000) |
(200,000) |
(400,000) |
|
Received dividends |
(400,000) |
(600,000) |
(1,000,000) |
|
Total adjustments of
prior years |
400,000 |
1,200,000 |
1,600,000 |
3. Unrealized gains from financial 2,000,000
securities available for sale
Change in fair value of financial 2,000,000
securities available for sale
30.12.2004 :
|
1. |
Investment in company (y) |
7,500,000 |
|
|
|
|
Income of investment in
company (y) |
|
7,500,000 |
|
(Recording company(x)'s
share in company (y)'s net income for the year 2004, according to the equity
method 25,000,000 X 30%).
|
2. |
Cash account |
2,000,000 |
|
|
|
|
Investment in company (y) |
|
2,000,000 |
|
(recording the receiving of
2,000,000 monetary unit from the company (y) as dividends).
|
3. |
Income of investment in
company (y) |
400,000 |
|
|
|
|
Investment in company (y) |
|
400,000 |
|
(Recording the annual
amortization of goodwill)
The annual amortization of
goodwill is calculated as follow :
Amortization of the first
investment goodwill + Amortization of additional investment goodwill.
|
(7,000,000 – (10% X 60,000,000 |
+ |
(15,000,000 – (20% X 70,000,000) |
|
5 |
5 |
= 200,000 + 200,000 =
400,000 Monetary units.
Retroactive adjustment to
investment balance in company(y), results of operations of company (x) and
retained earnings of company (x), should be made as follow :
First : Investment in
company (x) :
|
|
2002 |
2003 |
2004 |
|
Balance at beginning of
the year |
7,000,000 |
7,400,000 |
23,600,000(*) |
|
Company (x)'s share in
company (y)'s |
1,000,000 |
2,000,000 |
7,500,000 |
|
Net income |
|
|
|
Less :
Amortization of goodwill
resulting from first investment :
First investment :
|
(7,000,000 – (10% X
60,000,000) ÷ 5) |
(2,000,000) |
(2,000,000) |
(4,000,0000) |
|
Received dividends |
(400,000) |
(600,000) |
(2,000,000) |
|
Total adjustment for
prior years |
7,400,000 |
8,600,000 |
28,700,000 |
(*) 8,600,000 + 15,000,000
(additional investment) = 23,600,000
Second
: Company (x)'s results of operations :
|
|
2002 |
2003 |
2004 |
|
Net income (including
received dividends) |
(*)50,000,000 |
80,000,000 |
100,000,000 |
|
+ Company (x)'s share in
company (y)'s |
1,000,000 |
2,000,000 |
7,500,000 |
|
Net income |
|
|
|
|
- Dividend received from
company (y) |
(400,000) |
(600,000) |
(2,000,000) |
|
- Annual depreciation of
goodwill |
(200,000) |
(200,000) |
(400,000) |
|
Net income after begin
adjusted accounting to the equity method |
50,400,000 |
81,200,000 |
(105,100,000 |
|
|
|
|
|
Third
: Retained carrying (company (x):
|
|
2002 |
2003 |
2004 |
|
Retained earnings at the
beginning of period |
500,000,000 |
540,000,000 |
600,000 |
|
+ The year's profits (see
the results of operations above) |
50,400,000 |
81,200,000 |
105,100,000 |
|
- Dividents (estimated) |
(10,400,000) |
(2,200,000) |
65,100,000) |
|
Retained earnings at end
of period |
540,000,000 |
600,000,000 |
640,000,000 |
(**) Estimated number