CR – May 2018 – L3 – Q1b – Consolidated Financial Statements

Calculate the consolidated gain or loss on disposal of a 60% equity interest and explain accounting for the remaining investment.

Question

On 30 June 2016, Afoko Ltd acquired a 100% interest in Anyidohu Ltd, a public limited company, for a cash consideration of GH¢195 million. Anyidohu’s identifiable net assets were fair valued at GH¢160 million. On 30 November 2017, Afoko disposed of 60% of the equity of Anyidohu when its identifiable net assets were GH¢180 million. Of the increase in net assets, GH¢15 million had been reported in profit or loss, and GH¢5 million had been reported in other comprehensive income as a gain on an available-for-sale financial asset. The sale proceeds were GH¢115 million, and the remaining equity interest was fair-valued at GH¢65 million. Afoko could still exert significant influence after the disposal of the interest.

Required:
Calculate the consolidated gain or loss arising on the disposal of the equity interest in Anyidohu Ltd and explain how the investment in Anyidohu Ltd is accounted for after the disposal of 60% of equity.

Answer

Afoko Ltd

Commentary/Justification:
After the disposal of 60% of equity, Afoko Ltd retains significant influence over Anyidohu Ltd. As a result, Anyidohu becomes an associate, and Afoko Ltd should account for the remaining investment using the equity method. Under the equity method, the investment is initially measured at the fair value of the retained equity interest (GH¢65 million). The group’s share of subsequent profits, comprehensive income, or losses of Anyidohu will be recognized in the group’s financial statements and will increase or decrease the carrying amount of the investment.