Lesson 4 – IFRS vs. ASPE for Investments in Associates

Which of the following statements correctly describes how an entity accounts for an investment over which it has significant influence under ASPE?

If the investee is a public company, te equity method or the FV method may be used under ASPE

Alligator Co. has significant influence over Boat Co. Under ASPE, which one of the following factors could cause Alligator’s investment account to decrease?

Unrealized profit in inventory

Which of the following is the main difference in applying the equity method between IFRS and ASPE?

On January 1, Year 1, Ski Equipment Inc. (Ski) paid $700,000 cash to acquire 35% of the common shares of Ride Inc. Ski paid transaction costs of $15,000 related to this acquisition, which are expensed. At the time of acquisition, the carrying value of Ride’s ordinary shares and its retained earnings were $300,000 and $1,100,000, respectively. The FV of the identifiable net assets approximated their carrying value except for the building, which had an FV of $5,000,000 and a carrying value of $4,600,000. The building has a remaining useful life of 20 years with no residual value, and straight-line depreciation is used by both companies. At acquisition, Ski determined that it has significant influence over Ride and chose to report its investment using the equity method.

During Year 1, Ride paid dividends of $120,000 and reported net income of $110,000. As at December 31, Year 1, the investment was impaired by $20,000.

What is the investment account balance as at December 31, Year 1? Assume that Ski prepares its financial statements in accordance with ASPE.

The investment account balance is calculated as follows:

Original purchase price January 1, Year 1	$700,000
Investor's share of associate's income ($110,000 × 35%)	38,500
Investor's share of dividend from associate ($120,000 × 35%)	(42,000)
Amortization of FV differential of building ($400,000 / 20) × 35%	(7,000)
Impairment loss	(20,000)
Closing balance of investment account	$669,500

(Choice D) Incorrect. The impairment loss has been adjusted for the ownership percentage of 35%; however, this is an investor cost and not an associate’s cost and is therefore included at 100%. Incorrect calculation: $700,000 + ($110,000 × 35%) – ($120,000 × 35%) – [($400,000 / 20) × 35%] – ($20,000 × 35%) = $682,500.

Snack Time Co. (STC) holds 19% of the common shares of Red Stix Inc. (Red). STC can appoint three members of Red’s 12-member board of directors and is a major supplier of raw materials to Red. The remaining 81% of Red’s common shares are widely held and Red is a private company.

If STC reports under ASPE, which of the following represents the reporting options for its investment in Red?

Equity method or cost methiod