To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).
Day 52 (28 Apr)
Today, let's consider 'Equity Accounting for Losers'. Now, to be clear, I'm not trying to be disparaging to my precious readership (I need both of you, after all!) because I mean more specifically, how to equity account for a severely loss-making associate.
I'm not going to explore equity accounting in huge depth here; the principles of FRS 9 are retained in FRS 102. In brief, the investor accounts for its share of the underlying results and equity of the associate. If those results mean losses rather than profits, these are nonetheless accounted for in this way.
But what happens if the associate's losses are so severe that they equal or even exceed the carrying value of the associate in the investor's accounts? FRS 9 para 44 is unsympathetic to the investor in such cases - the appropriate share of the associate's losses continue to be shown, even if this results in an interest in net liabilities rather than net assets. The only point at which the treatment would change is 'where there is sufficient evidence that an event has irrevocably changed the relationship between the investor and its investee, marking its irreversible withdrawal from its investee as its associate...' So while the investor-associate relationship is unbroken, the losses continue to flow into the investor's accounts.
FRS 102 para 14.8(h) is kinder to the poor investor. Once losses have downgraded its carrying value in the associate to zero, no further losses are recognised. However, if the investor is committed to further outflows on the associate's behalf, either by incurring obligations directly or because it has already parted with payments on the associate's behalf, then a provision is recognised to cover these.
More tomorrow as we plough steadily through section 14...
P.S. If you missed the last instalment click here