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ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements

Theta Group holds 25% of Iota Ltd, an associate carried at $4,000,000 before the current year's results. Iota reports a loss of $20,000,000 for the year. Theta also has a long-term loan to Iota of $1,500,000 that is in substance part of its net investment, and has no obligation to fund Iota's losses. Ignoring any impairment, what does Theta recognise as its share of the loss for the year, and what remains of the investment and loan?

Theta recognises a $5,000,000 share of loss. The first $4,000,000 reduces the investment to nil, and the remaining $1,000,000 reduces the long-term loan that is part of the net investment, leaving $500,000. No negative balance arises because Theta has no obligation to fund losses.

  1. ALoss of $5,000,000 is shared: investment reduced to nil and the loan reduced to $500,000Correct
  2. BLoss of $4,000,000 only, investment reduced to nil and the loan unchanged
  3. CLoss of $5,000,000 deducted fully from the investment, giving a negative balance of $1,000,000
  4. DLoss of $5,500,000, investment and loan both reduced to nil

Explanation

Share of loss = 25% x 20,000,000 = 5,000,000. Under IAS 28 losses reduce the investment to nil, and then other long-term interests forming part of the net investment. The investment absorbs 4,000,000 and the loan absorbs the remaining 1,000,000, leaving 500,000. With no obligation, no further liability is recognised, and the loan is not left unchanged.

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