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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

Rohan Ltd owns 30% of Sagar Ltd and has significant influence but not control. How is Sagar accounted for in Rohan's consolidated financial statements?

The equity method applies. An investee over which the investor has significant influence but not control is an associate, so the investment is carried at cost adjusted for the investor's share of the associate's post-acquisition profits, rather than being consolidated line by line.

  1. AEquity method, with the group's share of Sagar's profit included and the investment adjustedCorrect
  2. BFull line-by-line consolidation with non-controlling interest of 70%
  3. CProportionate consolidation of 30% of each asset and liability
  4. DCost less dividends, ignoring Sagar's profit
  5. Fair value through profit or loss only

Explanation

Significant influence indicates an associate, which is accounted for using the equity method: the investment starts at cost and is adjusted for the investor's share of post-acquisition profit. Line-by-line consolidation applies to subsidiaries, and proportionate consolidation applies to joint ventures in some frameworks, not associates.

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