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ACCA Applied Knowledge · Financial Accounting

Associates in ACCA Financial Accounting: Chapter Guide

An associate is an entity where the investor has significant influence, usually shown by holding 20% to 50% of the voting power. You do not consolidate it line by line. You use the equity method: one line in the statement of financial position, one line in profit or loss, adjusted for unrealised profit.

What this chapter covers

This chapter covers investments where you have influence but not control. If you hold enough voting power to take part in financial and operating policy decisions, the investee is an associate. IAS 28 requires the equity method for it. You show the investment as a single line and include your share of the associate's results.

The chapter has a clear sequence. First you decide whether the investment is an associate. Then you learn the equity method. Then you apply it to the consolidated statement of financial position and the consolidated statement of profit or loss. Last, you deal with unrealised profit on trading between the group and the associate.

It builds directly on the subsidiary consolidation work. You use the same ideas: acquisition date, post-acquisition reserves and intragroup profit. The key difference is that an associate has no line-by-line addition and no non-controlling interest. Associates can appear in the 15-mark consolidation question in Section B, and in Section A objective test questions on definitions and calculations.

Associates sit inside consolidations, which is one of the two big Section B questions in FA, so a confident method here protects marks in a 15-mark task. The calculations are short and follow a fixed pattern, which makes them quick marks once you have practised. Section A questions can also test the definition of significant influence or a single carrying amount calculation, so you can pick up two-mark questions fast. Students who mix up associates and subsidiaries lose marks in both places.

Associates: topics in the order to study them

  1. 1Associates: Definition and Significant InfluenceYou must first decide whether an investment is an associate, a subsidiary or a simple investment, because that decides the accounting.
  2. 2Equity Method of Accounting for AssociatesThis gives you the core logic: cost plus your share of post-acquisition profits, which every later topic uses.
  3. 3Associate in the Consolidated Statement of Financial PositionApply the equity method to the investment line and group reserves, using the carrying amount calculation.
  4. 4Associate in the Consolidated Statement of Profit or LossNext you bring in the share of associate profit as one line, which follows from the equity method and needs time apportionment where relevant.
  5. 5Unrealised Profit on Intragroup Trading with AssociatesStudy it last because it adjusts both statements and needs the earlier methods to be secure.

How to prepare Associates

Treat this chapter as a short procedure you can repeat. Speed and accuracy come from practising the same layout many times.

  1. Learn the definition of significant influence and its usual signs: voting power of 20% or more, board representation, and involvement in policy decisions. Remember that 20% to 50% is a presumption, not an automatic test.
  2. Write out the equity method as a one-line formula: cost + share of post-acquisition profit − dividends received, then adjust for unrealised profit.
  3. Practise the consolidated statement of financial position with a template: the investment in associate line, group retained earnings including the share of post-acquisition profit, and no associate assets or liabilities added line by line.
  4. Practise the consolidated statement of profit or loss: group revenue and costs only for the parent and subsidiaries, then one line for share of profit of the associate.
  5. Do unrealised profit questions separately. Identify who sold to whom, the goods still in inventory at the year end, and the group's share of the profit.
  6. Finish with mixed objective tests under time. Include number entry questions so you get used to entering figures with the right rounding and units.

Common mistakes in Associates

  • Adding the associate's assets and liabilities line by line

    Fix: Ask yourself whether the entity is controlled. If not, use one investment line only.

  • Treating dividends received as income in the group figures

    Fix: Under the equity method, dividends reduce the investment carrying amount. Income comes from the share of profit.

  • Using total profit instead of post-acquisition profit

    Fix: Take only profit earned after the acquisition date, and time apportion where needed.

  • Removing all of the intragroup profit rather than the group's share

    Fix: Multiply the unrealised profit by the group's percentage holding in the associate.

  • Calling a holding below 20% an associate without checking influence, or a 30% holding a subsidiary automatically

    Fix: Judge by influence and control. Use the percentages as a guide and look for facts in the question.

  • Adjusting the wrong side for unrealised profit

    Fix: Draw a quick arrow showing the direction of the sale before you calculate.

Last-day revision: Associates

  • 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.

Associates practice questions

Associates in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Associates: frequently asked questions

What is significant influence in an associate?

It is the power to take part in the financial and operating policy decisions of the investee without controlling them. A holding of 20% or more of the voting power normally suggests it. Other signs include board seats and material transactions.

Why is there no non-controlling interest for an associate?

Because you do not consolidate the associate's assets and liabilities. You only show your share through the equity method, so no part of the associate is attributed to other owners in the group accounts.

How do I treat a dividend from an associate?

Deduct it from the carrying amount of the investment. It is not included as income in the consolidated statement of profit or loss, because your share of the associate's profit is already included.

How do I deal with unrealised profit on trading with an associate?

Find the profit on goods still held in inventory at the year end. Take only the group's percentage share of that profit. Remove it from the investment or group inventory and from group profit, depending on who made the sale.

Can associates appear in the objective test questions as well as the long task?

Yes. You may see definition questions, carrying amount calculations or a share of profit figure in Section A, and a fuller associate adjustment within the Section B consolidation task.