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Use International Financial Reporting Standards. Research IFRS 28 and IFRS 9 in the accounting for investments...

Use International Financial Reporting Standards. Research IFRS 28 and IFRS 9 in the accounting for investments to answer the following questions related to Yahoo!’s investment on Alibaba Group (assume the fair value option is not elected): No calculation needed.

a. How should Yahoo! recognize and measure its 46 percent ownership in Alibaba Group for the fiscal year ended December 31, 2005?

b. How should Yahoo! recognize and measure its 24 percent ownership in Alibaba Group for the year ended December 31, 2012?

c. How should Yahoo! recognize and measure its 15 percent ownership in Alibaba Group for the year ended December 31, 2014?

Solutions

Expert Solution

Provision – AS per IAS 28 ‘Investments in associates and joint ventures’, requires that interests in such entities are accounted for using the equity method of accounting. An associate is an entity in which the investor has significant influence, but which is neither a subsidiary nor a joint venture of the investor. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but not to control those policies. It is presumed to exist where the investor holds at least 20% of the investee’s voting power. It is presumed not to exist where less than 20% is held. These presumptions can be rebutted.

Under the equity method, the investment in the associate or joint venture is initially carried at cost. It is increased or decreased to recognize the investor’s share of the profit or loss of the associate or joint venture after the date of acquisition. Associates and joint ventures are accounted for using the equity method, unless they meet the criteria to be classified as ‘held for sale’ under IFRS 5.

Investments in associates or joint ventures are classified as non-current assets and presented as one line item in the balance sheet (inclusive of notional goodwill arising on acquisition).

An entity applies IFRS 9 to financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term interests that, in substance, form part of the entity’s net investment in an associate or joint venture.

In the separate (non-consolidated) financial statements of the investor, the investments in associates or joint ventures are carried at cost, in accordance with IAS 39 and IFRS 9 or using the equity method.

As per IFRS 9 investments should be measured at Fair Value.

Conclusion

Answer a . In the light of above provision 46% ownership in Alibaba Group should be accounted as Investment in Associates under the head Non-Current Liabilities by Yahoo! For the year ended Dec 31,2005. Investment to be measured using the Equity Method.

Answer b. It is still measured as Investment in Associates as ownership is 24% (more than 20 %) using equity method.

Answer c. As investment falls less than 20 % therefore IFRS 28 not applicable. Here investments to be measured on Fair Value. Yahoo! To recognize investment in Alibaba Group at fair value.

ekkarill92 answered 2 years ago
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