Interpretation of a Listed Company’s Accounts (2/2)

Since associates are not controlled by the parent company, we don’t include all the individual assets and liabilities of the associate on the group’s balance sheet.

Instead we’re just concerned with the net figure.

For example, if a company invests €12m to buy 25% of a company which has total net assets at the time of €20m, then the investor company has paid €12m for €5m worth of net assets.

We would account for this initially in the following way:
– decrease cash by €12m
– increase investment in associates by €12m

So if the investor company has paid more than net asset value for the shares it has bought, it is effectively paying for some previously unrecognized intangible assets and/or goodwill but this is all just included in ‘investment in associates’.

Subsequently, at each period end, the parent adds its share of any increase or decrease I the net assets of the associate during the period to the ‘investment in associates’.

Thus, the group P&L and, if any increase/decrease is unrealised, the statement of comprehensive income show the share of the associate’s profit.

If at any time, the directors of the parent believe the value of their investment has declined, then they would have to recognize an impairment charge.

What if the associate pays a dividend?

In that case, the group accounts would reflect the cash from the dividend and the reduction in the investment the associate with an:
– increase in cash
– decrease in investment in associates

When a company invests in another company but not such that it is a subsidiary or an associate/joint venture, it is accounted for in two different ways:

1) If the shares are listed on an exchange such that you can determine the fair value of the shares easily, the investment should be recognized on each balance sheet at its fair value on that date.

Any increase or decrease since the last balance sheet is included in the P&L.

2) If the fair value of the shares is not easily determined, then the shares are carried on the balance sheet at cost (subject to impairment testing).

Company vs. Consolidated Accounts

In consolidated account, you’ll also find some information about the parent company’s individual (i.e. unconsolidated) accounts.

This is often only a balance sheet with some limited notes. In other cases, you may have full accounts and notes, often presented alongside the consolidated accounts.

Generally, the parent’s accounts will not be of much interest to you. The consolidated statements are where you should focus your attention.

When accounting for plant, property, and equipment at fair value, there are a few conditions that must be kept in mind:

· All assets of the same type must be treated in the same way.
· Assets need to be revalued on a regular basis.
· Any gain or loss after revaluation must be shown in OCI (other comprehensive income).

Investment Properties 

If a company owns properties that it holds purely for the purpose of investment rather than for use in its business, then the accounting is different. You can choose to include your investment properties at either fair value or at cost less depreciation.

Fair Value Approach 

Any increase or decrease in value from the previous year is shown in the P&L. This is done because if you’re holding a property as an investment, then you expect this asset to go up in value. Thus, any gain or loss is a real gain or loss for shareholders.

You need to apply the same approach to all your investment properties except in cases where you can’t measure the fair value.