I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

decrease) in post-acquisition retained reserves. 

3.2.4 Example: equity accounting 

P Co acquires 25,000 of the 100,000 $1 ordinary shares in A Co for $60,000 on 1 January 20X8. In 

the year to 31 December 20X8, A Co earns profits after tax of $24,000, from which it pays a dividend of 

$6,000. 

How will A Co's results be accounted for in the individual and consolidated accounts of P Co for the year 

ended 31 December 20X8? 

Solution 

In the individual accounts of P Co, the investment can be recorded on 1 January 20X8 at cost. Unless 

there is an impairment in the value of the investment, this amount will remain in the individual 

statement of financial position of P Co permanently. The only entry in P Co's individual statement of 

profit or loss will be to record dividends received. For the year ended 31 December 20X8, P Co will: 

DEBIT  

Cash 

$1,500 

CREDIT  

Dividends received (6,000 × 25%) 

 

$1,500 

Another option available for the individual accounts of P Co is to use the equity accounting method to 

account for the investment, as per Equity Method in Separate Financial Statements (Amendments to 

IAS 27), effective 1 January 2016. However, for this syllabus, we will only look at the equity method in 

the consolidated accounts. 

In the consolidated accounts of P Co, equity accounting principles will be used to account for the 

investment in A Co.  

Instead of showing the dividend received, the consolidated statement of profit or loss will include the 

group's share of A Co's net profit for the year (25%  $24,000 = $6,000), which is shown before group 

profit before tax.  

The consolidated statement of financial position will include the asset 'Investment in associate', 

calculated as follows.  

 

$     

Cost of investment in associate 

60,000 

Share of A's profit for the year 

6,000 

Less dividend received 

  (1,500) 

Investment in associate 

 64,500 

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