Interpretation of a Listed Company’s Accounts (2/2)
In this lesson, you’re expected to learn about:
– accounting for associates and joint ventures
– accounting for investments
– tangible fixed assets: property, plant, and equipment
What are Associates?
A company is usually an associate of yours if it is not a subsidiary but you exert a significant influence over the company. If you own 20% or more of the voting rights, you would normally be considered to exert significant influence over the company.
What is a Joint Venture?
A joint venture is used when two or more businesses want to carry out a business venture together under a joint venture agreement.
It is similar in nature to a partnership except that the businesses form the joint venture for a specific business transaction, and once that transaction is completed the joint venture ends.
Instead we’re just concerned with the net figure.
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’.
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.
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
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.
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 an asset is sold, we recognize the difference between its carrying value* and what we sell it for in the P&L.
· 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).
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.
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.