The initial cost of the investment

Learning objectives

• Record the acquisition of an equity-accounted investment at cost.L1, L2
• Calculate the investor's share of the net fair value of the identifiable assets and liabilities at the acquisition date.L2

Normative references

• IAS 28 §10Under the equity method, the investment in an associate or a joint venture is initially recognised at cost, and its carrying amount is then increased or decreased to recognise the investor's share of the investee's profit or loss after the date of acquisition, that share being recognised in the investor's profit or loss; distributions received reduce the carrying amount; adjustments are also required for the investor's share of changes in the investee's other comprehensive income (for example, revaluation of property, plant and equipment, foreign exchange translation differences), recognised in the investor's other comprehensive income.
• IAS 28 §32The equity method is applied from the date on which the investment becomes an associate or a joint venture. On acquisition, the difference between the cost of the investment and the entity's share of the net fair value of the investee's identifiable assets and liabilities is accounted for as follows: (a) goodwill is included in the carrying amount of the investment and its amortisation is not permitted; (b) any excess of the share of net fair value over cost is income included in the share of profit or loss of the period of acquisition. The subsequent share of profit or loss is adjusted, for example for depreciation based on fair values at the acquisition date and for impairment losses (goodwill, property, plant and equipment).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Alba SA acquires 30% of Brise SA, over which it has significant influence, and pays {investment_cost} in cash. Case convention: no incidental costs, and the cost includes any implicit goodwill. Record the entry for the initial recognition of the investment.L1
• Alba SA acquires {ownership} of Brise SA. At the acquisition date, the fair value of Brise's identifiable net assets (identifiable assets and liabilities) is {identifiable_net_assets}. Calculate Alba's share of the net fair value of Brise's identifiable assets and liabilities.L2
• Alba SA acquires an interest in Brise SA, an associate, for 1,500,000. A colleague records the investment at 1,200,000, i.e. its share of the carrying amount of Brise's equity. What is the error?L1