Accounting for Associates

Associates are the companies over which the other company has significant influence in such a way that it does not hold more than 50 percent shares. By significant influences we mean the power or right to participate in the operating and financial decisions but such influence does not allow the investor to exercise control over these activities. Usually, the holding of shares between 20 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} to 50 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} constitute the associate status.


Alpha acquired 25{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} shares in the entity C. This entitles Alpha to attend the meetings of C to have a say but this holding of shares does not let him affect any decision singly as he lacks the ownership to exercise significant control over the operating and financial activities.

Accounting Treatment

In order to perform the accounting for associates, there is no need to consolidate its financial figures. The treatment required is to just make one line entry into the financial statements as follows:

Balance Sheets

   Non-Current Assets

      Investment in associates      xxx

Income Statement

   Profit or Loss

      Share of associate                xxx


Alpha acquired 40{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} of the shares in C Plc on 1st June 2013 for $750,000. The accumulated profit figure of C at that time was $700,000. The accounts of both companies for the year ended 30th June 2015 are as follows:

Income Statement  
For the period ended 30th June 2015  
Sale revenue5,140 1,200 
Cost of goods sold(2,000) (420) 
Gross profit3,140 780 
Operating expenses(600) (200) 
Operating profit2,540580
Investment income2020
Profit before interest 2,560 600 
Finance charges (260) (80) 
Profit before tax 2,300 520 
Tax (300) (120) 
Profit after tax 2,000 400 
Balance Sheet   
Ast at 30th June 2015   
   Non-current assets   
      Property,Plant & Equipment 4,000 1,200 
      Investment – Associate company750 – 
      Current Assets 200 600 
Total Assets 4,950 1,800 
  Share capital  1,000 500 
  Accumulated profit/ retained earnings 3,750 1,100 
  Current liabilities 200 200 
Total equity and liabilities4,9501,800
C declared and paid a dividend of $100,000 in the year which is included in the operating expenses of Alpha. There is an impairment of goodwill by 20{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} in C.    
Required: Prepare consolidated income statement for Alpha Group for the year ended 30th June 2015.   

Consolidated income statement

Income Statement  
For the period ended 30th June 2015  
   GoodwillDividendEarnings Alpha
 AlphaCWorking 1Working 2Working 3Group 
Sale revenue5,140 1,200    5,140 
Cost of goods sold(2,000) (420)    (2,000) 
Gross profit3,140 780    3,140 
Operating expenses(600) (200) (54) (40)  (694) 
Profit before interest 2,540 580    2,446 
Investment income2020   20 
Profit before tax2,560600   2,466 
Finance charges (260) (80)    (260) 
Share of associate    160160
Profit before tax 2,300 520    2,366 
Tax (300) (120)    (300) 
Profit after tax 2,000 400    2,066 


Impairment of goodwill: 

Amount paid to acquire the interest in C   $750 

Net asset received: Share capital + Retained earning at the time of acquisition = 500 + 700 = 1200 x 40{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} share of group = 480

Goodwill on acquisition of A = 750 – 480 = 270

Impairment on goodwill = 20 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} x 270 = 54

Dividend recieved from associate company C = 100 x 40{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = 40

Share of profit from associate = 400 x 40{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = 160

Investment in C (Associate company)

Cost of investment 750 + 40{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} x (Change in retained earnings 400) – dividend received 40 – goodwill impairment value 54 = 816