1 Groups and consolidation: an overview

investments
under non-current assets in the consolidated 
statement of financial position of the group. 
QUESTION 
Associates
 
Which 
two
of the following investments would be treated as an associate in the consolidated financial 
statements of Smith Co?
A 
Smith Co owns 15% of the ordinary shares of Red Co and has significant influence over Red Co. 
B 
Smith Co owns 45% of the ordinary shares of Pink Co and can appoint 4 out of 5 directors to the 
board of directors of Pink Co. 
C 
Smith co owns 40% of the preference shares (non-voting) and 15% of the ordinary shares of 
Yellow Co. 
D 
Smith Co owns 60% of the preference shares (non-voting) and 40% of the ordinary shares of 
Aquamarine 
Co. 
ANSWER 
The correct answers are A and D. 
Red Co is an 
associate
of Smith Co, as Smith Co has significant influence over Red Co. 
Pink Co is a 
subsidiary
of Smith Co, as Smith Co's ability to appoint 4 out of 5 directors gives it 
control
over Pink Co.
Yellow Co is a trade investment of Smith Co, as Smith Co holds less than 20% of the voting rights of 
Yellow Co, so is assumed not to have significant influence. Note that the preference shares do not have 
voting rights so do not have any influence over the running of the company. Remember that 
shareholdings are not the only way of demonstrating control or significant influence. If it could be shown 
 EXAM FOCUS POINT 
The FFA/FA syllabus requires you to understand the principle of equity accounting, but you will not be 
expected to perform calculations using equity accounting techniques in your exam. 
BPP Tutor Toolkit Copy

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CHAPTER 23
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INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS