ACCA Applied Knowledge · Financial Accounting

Associates: formula sheet

Full chapter guide

Key formulas

Significant influence presumption: Voting power ≥ 20% → significant influence presumed; Presumption only. It can be rebutted with clear evidence.
No influence presumption: Voting power < 20% → no significant influence presumed; Can be rebutted, for example by board representation.
Control indicator: Voting power > 50% → control usually exists (subsidiary); Control under IFRS 10 depends on power, exposure to returns and ability to use power. Over 50% is the usual sign, not the full test.
Classification summary: Control → subsidiary (consolidate). Significant influence → associate (equity method). Neither → IFRS 9 investment.; Always decide the classification before choosing the accounting.
Definition of significant influence: Power to participate in financial and operating policy decisions, without control or joint control; Learn this wording for multiple choice questions.
Investment in associate at year end: Cost + share of post-acquisition profit (and OCI) − dividends received from the associate − impairment; Use the associate's profit after tax. Share = group % held.
Share of post-acquisition profit: Associate's profit after tax since acquisition × group %; For a full year after acquisition, use the whole year's profit. For a part year, time-apportion unless told otherwise.
Alternative proof: Group % × associate's net assets at year end + unimpaired goodwill, ignoring any unrealised profit adjustment; Use this only as a check. It assumes the associate's net assets are at fair value.
Associate in the statement of profit or loss: Group % × associate's profit after tax for the period of ownership; Shown as one line below group operating profit and finance costs. Dividends received are not shown as income.
Significant influence indicator: Holding of 20% or more of voting power is presumed to give significant influence; It is a presumption, not a rule. Other evidence such as board representation can rebut it.
Share of profit of associate: Group % × associate's profit after tax for the year; Shown as one line. Use profit after tax, and time-apportion if the holding was acquired part-way through the year.
Adjusted share where unrealised profit exists: Group % × associate's profit after tax − group share of unrealised profit (where the associate sold goods to the group); The adjustment for associate sales is usually made against the share of profit line and against inventory in the statement of financial position. Check the question wording.
Position in the statement: Group operating profit − finance costs + share of profit of associate = group profit before tax; Group tax is then deducted. No associate revenue, costs or tax are added line by line.
Dividend from associate: Dividend received from associate = not included in group profit; Remove it from the parent's investment income to avoid counting the profit twice.
Significant influence: Holding usually 20% to 50% of voting power; This is a presumption, not an absolute rule. Other evidence of influence matters.
Profit in closing inventory (mark-up on cost): Unrealised profit = inventory at transfer price × mark-up ÷ (100 + mark-up); Example: 25% mark-up means profit is 25/125 = 1/5 of the transfer price.
Profit in closing inventory (margin on selling price): Unrealised profit = inventory at transfer price × margin %; Example: a 20% margin means profit is 20% of the transfer price.
Group share of unrealised profit (PUP): PUP = unrealised profit in inventory × group's % holding in the associate; Never 100%. Use only the percentage the investor owns.
Parent sells to associate: Dr Group retained earnings (or parent's profit) ; Cr Investment in associate; The inventory is held by the associate, so the investment is reduced.
Associate sells to parent: Dr Share of profit of associate (or retained earnings) ; Cr Group inventory; The inventory is held by the group, so inventory is reduced.
Associate balances: Receivables and payables with the associate are not cancelled; Show them as normal balances. Do not offset them against each other.

Quick revision

An associate is an entity over which the investor has significant influence but not control.
Holding 20% or more of voting power normally indicates significant influence, unless evidence shows otherwise.
Over 50% voting power with control means a subsidiary, not an associate.
Use the equity method: do not add the associate's assets and liabilities line by line.
Carrying amount = cost + share of post-acquisition profit − dividends received − impairment.
Dividends from the associate reduce the investment. They are not group income.
In the consolidated statement of profit or loss, show the share of the associate's profit after tax as one line.
Time apportion the associate's profit if you acquired it part-way through the year.
There is no non-controlling interest for an associate.
Intragroup sales to or from an associate are not eliminated in full. Only the group's share of unrealised profit is removed.
If the parent sells to the associate, reduce the parent's profit and the investment. If the associate sells to the parent, reduce the associate profit share and group inventory.
Check what is still in closing inventory. Only that part carries unrealised profit.

Common mistakes

Treating 20% as an absolute rule that always makes an associate. Fix: Say 'presumed' every time. Check the scenario for evidence that rebuts the presumption.
Saying a holding below 20% can never be an associate. Fix: A holding below 20% with board representation and policy involvement can still give significant influence.
Adding the associate's assets and liabilities line by line Fix: Remember an associate is one line only. Ask whether the investor has control. If not, use one line.
Using the whole of the associate's profit instead of the group share Fix: Always multiply the associate's profit by the group percentage. There is no non-controlling interest for an associate.
Adding the associate's revenue and expenses line by line. Fix: Ask if there is control. If not, use one line only: share of profit of associate.
Using profit before tax instead of profit after tax. Fix: Always take profit after tax for the associate. Its tax is already inside the line.
Eliminating 100% of the unrealised profit instead of the group share. Fix: For an associate always multiply by the holding percentage. Write the percentage next to your working.
Using the mark-up as if it were a margin, such as taking 25% of the transfer price. Fix: Mark-up is on cost, so use mark-up ÷ (100 + mark-up). Margin is on selling price, so multiply by the margin %.

Exam tips

Learn the exact IAS 28 definition of significant influence. Multiple choice options often change one word.
Use the words 'presumed' and 'rebutted'. Options that say '20% always means associate' are traps.
Rule out subsidiary first. Control comes before significant influence in the classification order.
Watch for clues such as board seats, technical help or interchange of managers. They point to influence below 20%.
Remember the treatment: associates use the equity method, not line-by-line consolidation.
In objective tests, check whether the question gives profit for the whole year or since acquisition before multiplying.
Write the four-line working on scrap paper even for a quick question. It prevents missed dividend or OCI adjustments.
For multiple response questions about associates, remember that the equity method does not include line-by-line consolidation or non-controlling interest.