Page 19 - MCS August Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

Associate – IAS 28 Accounting for Investments in Associates and Joint Ventures (IAS 28) defines an
associate as an entity over which an investor has significant influence. IAS 28 defines significant
influence as the ability to participate in the financial and operating policy decisions, but without
exercising control. It is normally indicated by having an equity shareholding of between 20% ‐ 50%
in another entity, typically with representation on the board of directors. An investor with an
interest in another entity will receive a return on that investment when the entity make a
dividend payment.

As an associate is not controlled by the investor, goodwill cannot be calculated and recognised in
the consolidated financial statements. Instead, such an investment is ‘equity accounted’ by
accounting for the initial cost of the investment, plus the investor’s share of post‐acquisition
retained earnings. It is classified as a non‐current asset in the consolidated statement of financial
position.

Based upon the consolidated financial statements for the year ended 31 March 2018, Montel
does not have any interests in associates, joint operations or joint ventures. However, it is
possible that this could occur if, for example, Montel entered into some form of research and
development agreement with another entity in which it was not able to exercise sole control over
key decision‐making.

Lease of assets by Montel

IAS 17 Leases (IAS 11) classifies a lease into two types as follows:

Finance lease – A finance lease is one in which the lease transfers substantially all of the risks and
rewards of ownership to the lessee. This may or may not also result in the transfer of legal title
from the lessor to the lessee.

Whether or not a lease will be classified and accounted for as a finance lease depends upon a
number of judgements by the lessor, including:

 the lease term is for substantially most of the economic useful life of the asset
 the lessee can purchase the asset at the end of the lease term at substantially below the
fair value of the asset
 the lease term may be extended on terms which are below market rental for a similar asset
 the leased asset is of a specialised nature that only the lessee could use the asset without
substantial modification
 legal title is transferred at the end of the lease term

If the lease meets the definition of a finance lease, a finance lease obligation should be recognised
in the financial statements at the present value of the future minimum expected lease payments.
A finance lease asset is also recognised in the financial statements for the equivalent amount.

The obligation then attracts an annual finance charge based upon the implicit rate contained
within the lease. The finance lease asset is subject to an annual depreciation charge, spread over
the expected useful life of the asset.

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