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

Tern Co holds 35% of Umber Co, an associate, with a carrying amount of $50,000 at the start of the year. Umber makes a loss for the year and Tern's 35% share is $70,000. Tern has no legal or constructive obligation to fund Umber's losses and has made no guarantees on its behalf. What share of the associate's loss should Tern recognise in consolidated profit or loss for the year?

Tern recognises a loss of $50,000. The equity-accounted investment cannot go below zero, so losses are recognised only up to its $50,000 carrying amount. The extra $20,000 is not recognised because Tern has no obligation to make payments on Umber's behalf.

  1. A$70,000, with a $20,000 liability recognised
  2. B$20,000
  3. C$50,000Correct
  4. DNil, as losses on associates are not recognised until disposal

Explanation

Under IAS 28 the investor recognises losses only until the carrying amount of its interest reaches zero. Here that is $50,000. The remaining $20,000 is not recognised because Tern has no obligation to fund it. A liability would arise only if Tern had such an obligation.

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