(a) FRS 9, Associates and Joint Ventures, deals not only with the accounting treatment of associated companies and joint venture operations but covers certain types of joint business arrangements not carried on through a separate entity. The main changes made by FRS 9 are to restrict the circumstances in which equity accounting can be applied and to provide detailed rules for accounting for joint ventures.
Required:
(i) Explain the criteria which distinguish an associate from an ordinary fixed asset investment.
(ii) Explain the principal difference between a joint venture and a ‘joint arrangement’ and the impact that this classification has upon the accounting for such relationships.
(b) The following financial statements relate to Baden, a public limited company.
Profit and loss account for year ended 31 December 1998
|
£m |
||
|
Turnover |
212 |
|
|
Cost of sales |
170) |
|
|
Gross profit |
42 |
|
|
Distribution costs |
17 |
|
|
Administrative costs |
8 |
(25) |
|
17 |
||
|
Other operating income |
12 |
|
|
Operating profit |
29 |
|
|
Exceptional item |
(10) |
|
|
Interest payable |
(4) |
|
|
Profit on ordinary activities before tax |
15 |
|
|
Taxation on profit on ordinary activities |
(3) |
|
|
12 |
||
|
Ordinary dividend – paid |
(4) |
|
|
Retained profit for year |
8 |
|
|
Balance sheet as at 31 December 1998 |
||
|
Fixed assets – tangible |
30 |
|
|
goodwill |
7 |
37 |
|
Current assets |
31 |
|
|
Creditors: amounts falling due within one year |
(12) |
|
|
Net current assets |
19 |
|
|
Total assets less current liabilities |
36 |
|
|
Creditors: amounts falling due after more than one year |
(10) |
|
|
46 |
||
|
Capital and Reserves |
||
|
Called up share capital – |
||
|
Ordinary shares of £1 |
10 |
|
|
Share premium account |
4 |
|
|
Profit and loss account |
32 |
|
|
46 |
||
(i) Cable, a public limited company, acquired 30% of the ordinary share capital of Baden at a cost of £14 million on 1 January 1997. The share capital of Baden has not changed since acquisition when the profit and loss reserve of Baden was £9 million.
(ii) At 1 January 1997 the following fair values were attributed to the net assets of Baden but not incorporated in its accounting records.
|
£m |
||
|
Tangible fixed assets |
30 |
(carrying value £20m) |
|
Goodwill (estimate) |
10 |
|
|
Current assets |
31 |
|
|
Creditors: amounts falling due within one year |
20 |
|
|
Creditors: amounts falling after more than one year |
8 |
(iii) Guy, an associated company of Cable, also holds a 25% interest in the ordinary share capital of Baden. This was acquired on 1 January 1998.
(iv) During the year to 31 December 1998, Baden sold goods to Cable to the value of £35 million. The inventory of Cable at 31 December 1998 included goods purchased from Baden on which the company made a profit of £10 million.
(v) The policy of all companies in the Cable Group is to amortise goodwill over four years and to depreciate tangible fixed assets at 20% per annum on the straight line basis.
(vi) Baden does not represent a material part of the group and is significantly less than the 15% additional disclosure threshold required under FRS 9 Associates and Joint Ventures.
Required:
(i) Show how the investment in Baden would be stated in the consolidated balance sheet and profit and loss account of the Cable Group under FRS9 Associates and Joint Ventures, for the year ended 31 December 1998 on the assumption that Baden is an associate.
(ii) Show how the treatment of Baden would change if Baden was classified as an investment in a joint venture.