Please provide a 34 paragraph response on the solution You a

You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment How would you verify that the equity method is appropriate in this case? Be sure to provide the proper codification standard (and application of the standard) that supports your answer

Solution

as per IAS 28 investment in associates points to be kept in mind are

1. associate is a company in which investor having 20% of voting power or control which is called as significant influence.

2. the accounting for the investment in associate will be made as per equity method.

3. unlike holding subsidiary i.e. if investment is more than 50% other standard is followed and different treatment. one such difference is here in investment in associates assets and liabilities share wont be added in to consolidated balance sheet.

4. investment has to be recorded at cost and goodwill/capital reserve to be determined but it is inclusive of cost shouldnt be shown separately.

5. increase or decrease in carrying amount of investment will be based on share in the post acquisition aprofits in associate.

6. if dividend is distributed deduct from cost of investment.

in consolidated balance sheet it is presented as follows:-

investment in associate @ cost (inclusive of goodwill)

add:- post acquisition profits share

less:- post acquisition loss share

less:- dividend received.