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ACCA Applied Skills · Financial Reporting · Preparation of consolidated financial statements for a simple group

Alpha plc buys 30% of the voting shares of Beta Co and appoints two of Beta's seven directors. Alpha does not control Beta and has no joint arrangement with the other shareholders. How should Beta be accounted for in Alpha's consolidated financial statements?

Beta is an associate, so Alpha applies the equity method. A 30% voting holding with board representation shows significant influence but not control. Full consolidation requires control, and carrying the holding at cost is not permitted in consolidated statements for an associate.

  1. AAs an associate using the equity methodCorrect
  2. BAs a subsidiary using full line-by-line consolidation
  3. CAs a simple investment held at cost with only dividends recognised
  4. DAs a joint operation, with Alpha's share of each asset and liability included

Explanation

A holding of 20% or more of the votes, together with board representation, indicates significant influence, so Beta is an associate. IAS 28 requires the equity method. Full consolidation needs control, which Alpha lacks. Cost accounting is not allowed in the consolidated statements for an associate.

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