Acca aaa s21 Notes

September 2021 to June 2022 exams
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3. The proper accounting treatment of investments
Type of investment
Test
Appropriate treatment
Subsidiary
Associate
Joint venture
Control: the power to govern the 
financial and operating policies of an 
entity. The investor has the right to 
variable returns and these are affected 
by the exercise of power by the 
investor. Generally presumed to exist 
if at least 50% of the equity is owned. 
However, owning less than 50% can 
sometimes be enough to give control 
(eg if there is a right to appoint board 
members).
Consolidation i.e:
๏
sum 100% line-by-line the 
elements of the financial 
statements
๏
eliminate parent's investment
๏
eliminate all intra-group items
One company has significant influence 
over another. Usually the shareholding 
is 20 to 50%
Equity accounting. The investment is 
initially recognised at cost and the 
carrying amount is then increased or 
decreased to recognise the 
investor’s share of the retained profit 
or loss of post acquisition (ie the 
post-acquisition change in the 
investor's share of the associate's net 
assets.) 
A contractual arrangement in which 
two or more parties undertake an 
economic activity that is the subject of 
joint control.
Equity accounting
4. Responsibility for the group auditor's report
The group auditor has the 
sole
responsibility for expressing an audit opinion on the group financial 
statements. This is so even if the group auditor is not the auditor of all the group components. 
The group engagement partner is responsible for all aspects of the group audit: planning, setting 
materiality levels, review, seeking more information where necessary and for forming an opinion on 
the group financial statements. Indeed, the group auditor is not allowed to even comment that some 
components of the group were audited by another firm.