Equity accounting: how does it measure up?

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. Originally, equity accounting was used as a consolidation technique for subsidiaries at a time when it was thought that acquisition accounting was inappropriate. Why was acquisition accounting originally thought to be inappropriate?

  2. The equity method evolved as a basis of reporting the performance of subsidiaries partly as it was seen as more appropriate than using cost as a measurement basis. Eventually international consensus on the equity method led to an amendment of the EC Seventh Directive to require the use of the equity accounting. In what circumstances is equity accounting predominantly used in IFRS?

  3. Accounting standards do not state what equity accounting is trying to portray. Many of the principles that are used for the application of the equity method are similar to the consolidation procedures described in IFRS 10 Consolidated Financial Statements. What is the basis of equity accounting on the initial recognition of an investment in an associate or a joint venture?

  4. What are the two main characteristics that underpin the equity method?

  5. There are a number of differences between consolidation and equity accounting that may give a different result. Which of the following is not a difference between consolidation accounting and equity accounting?

  6. IAS 27 Separate Financial Statements does not currently permit equity accounting as an option for investments in separate financial statements. The IASB has been asked to restore this option and to this end, an exposure draft was issued in December 2013 entitled Equity Method in Separate Financial Statements (Proposed amendments to IAS 27). Why does the IASB wish to restore this option?

  7. There is some doubt about the objective of separate financial statements. IAS 27 points out that the focus of such statements is on the financial performance of the assets as investments. In what circumstances are separate financial statements required?

  8. Recent developments have helped preparers understand the thinking behind the use of the equity method. In December 2012, the IASB published two Exposure Drafts with a view to amending IAS 28.They were IAS 28 Equity Method: Share of Other Net Asset Changes, and Sale or Contribution of Assets between an Investor and its Associate or Joint Venture. What was the main thrust of the comment letters sent to the IASB regarding the above ED's?

  9. When an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for under the rules of IAS 27. What are the current options for accounting for investments in subsidiaries, associates, and jointly controlled entities in separate financial statements under IAS 27?

  10. The proposed change to IAS 27 will align the accounting principles across boundaries but some respondents feel that the use of the equity method in separate financial statements is inappropriate because the proposed amendment lacks a conceptual basis. What is the basis of the argument from respondents opposing the introduction of the equity method?