Department of Accountancy 01
Faculty of Commerce & Management Studies
University of Kelaniya
Business Reporting, Governance and Ethics
Academic Year 2021/2022 – Year II Semester II
Accounting for Investments
Entities will often invest in the equity of other businesses. The extent of the equity share-holding will
normally determine how the investment is accounted for. The accounting treatment applied for investments
is intended to reflect the importance of the investment in the financial statements of the investee and how
the future performance and financial position might be affected by these investments. It follows then that
the greater the level of investment the more detailed the financial information will be. A significant
investment in another entity may require additional financial statements to be produced.
Intercompany investment has become a common practice in the modern business context and used as a
strategic weapon to expand and diversify the businesses in the form of Simple investments, Investment in
Associates, Investment in Subsidiaries, & Investment in Joint venture.
Investment in Associates
If an investor holds, directly or indirectly, 20% of the voting rights of an entity then it is normally considered
an associated entity and is accounted for in accordance with LKAS 28 Investments in Associates. LKAS
28 states that there is a presumption that the investor has significant influence over the entity, unless it can
be clearly demonstrated that this is not the case.
The key concept in the definition is ‘significant influence’. LKAS 28 explains that significant influence
is the power to participate in the financial and operating policy decisions of the entity but is not control over
those policies. The existence of significant influence by an investor is usually evidenced in one or more of
the following ways:
ü representation on the board of directors
ü participation in policy-making processes
ü material transactions between the investor and the entity
ü interchange of managerial personnel
ü provision of essential technical information.
Investment in Joint Ventures
Where an entity enters into an arrangement whereby control over an economic activity is shared between
it and other parties, a joint venture arrangement exists. The method of accounting reflects the level of
investment made. It is greater than significant influence (associate) but not as much as full control
(Subsidiary). LKAS 28 and SLFRS 11 explain about the accounting for joint ventures.
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Investment in Subsidiaries
If a company has the control over another company then the parent subsidiary relationship exist there.
SLFRS 03 and SLFRS 10 set out the requirements for recognition of an entity as a subsidiary and
preparation of group financial statements.
A subsidiary: is an entity, including an unincorporated entity such as a partnership, which is controlled
by another entity (known as the parent).
A parent: is an enterprise that has one or more subsidiaries.
A group: is a parent and all its subsidiaries.
Consolidated financial statement: are the financial statements of a group presented as those of a single
enterprise.
Non-Controlling interest (NCI): is that part of the net results of operations and of net assets of a subsidiary
attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent.
Other Investments
The accounting in the investees’ individual accounts for all investments and for simple investments
(commonly less than 20% of the total equity share capital of the entity invested in), will be determined by
applying the recognition, measurement and disclosure requirements of the accounting standards that
specifically deal with investments:
ü SLFRS 9 Financial Instruments
ü SLFRS 12 Financial instruments: disclosure
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Investment in Subsidiaries
Concept of Control
Control is the power to govern the financial and operating policies of an entity so as to obtain benefit from
its activities.
Generally these decisions are taken by the board of directors and are appointed by the shareholders of the
enterprise. Therefore the control is presumed to exist in the following circumstances
ü when the parent owns, directly or indirectly through subsidiaries, more than one half (50%) of
the voting power of an enterprise
Control also exists even when the parent owns one half or less of the voting power of an enterprise when
there is
ü Power over more than one half of the voting rights by virtue of an agreement with other investors
ü Power to govern the financial and operating policies of the enterprise under a statute or an
agreement.
ü Power to appoint or remove the majority of the members of the board of directors or equivalent
governing body.
Example 01: Control or not?
Carmart is a car manufacturer who acquires 52% of ordinary shares in Tyremart. Voting rights of Tyremart
are associated with the ordinary shares.
Example 02: Control or not?
Carmart owns 40% of ordinary shares in Tyremart associated with voting rights. On top of that, Carmart
has the power to appoint, remunerate and dismiss key management personnel (KMP) of Tyremart based on
contractual arrangement. Each of other shareholders holds max. 1% of shares issued by Tyremart.
Example 03: Control or not?
Carmart owns 40% of ordinary shares in Tyremart associated with voting rights. No other contractual
arrangements related to decision-making are in place. Two other shareholders each hold 30% in Tyremart.
Example 04: Control or not?
Carmart owns 40% of ordinary shares in Tyremart associated with voting rights. No other contractual
arrangements related to decision-making are in place. Other small shareholders each hold max. 1% in
Tyremart. Major decisions are approved by major votes cast at relevant shareholders meeting. Small
shareholders rarely attended these meetings in the past (max. 5% of exercisable voting rights).
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The requirement of Consolidated Financial Statements
Where a parent/subsidiary relationship exists, SLFRS 10 requires that the parent should prepare
consolidated financial statements. It is important to realize from the outset that this is an additional set of
financial statements. The parent and subsidiary continue to prepare their own financial statements.Therefore
in a group comprising one parent and one subsidiary, a total of three sets of financial statementsare required.
Where a group comprises, say, the parent and four subsidiaries, a total of six sets of financialstatements are
required: one for the parent, one for each of the four subsidiaries and one set of consolidatedfinancial
statements.
Consolidation Procedures
In preparing consolidation financial statements for the parent and its subsidiary are combined by adding
line by line basis by adding together like terms of assets, liabilities, equity, income & expenditures in order
that the consolidation financial statements present the financial information about the group as at of single
enterprise. SLFRS 3 requires that entities should account for business combinations by applying the
Acquisition method of Accounting. Applying the acquisition method requires:
ü Identifying the acquirer;
ü determining the acquisition date
ü recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquire;
ü recognizing and measuring goodwill or a gain on bargain purchas
