(c) At 1 June 2006, Router held a 25% shareholding in a film distribution company, Wireles

Question

(c) At 1 June 2006, Router held a 25% shareholding in a film distribution company, Wireless, a public limited

company. On 1 January 2007, Router sold a 15% holding in Wireless thus reducing its investment to a 10%

holding. Router no longer exercises significant influence over Wireless. Before the sale of the shares the net asset

value of Wireless on 1 January 2007 was $200 million and goodwill relating to the acquisition of Wireless was

$5 million. Router received $40 million for its sale of the 15% holding in Wireless. At 1 January 2007, the fair

value of the remaining investment in Wireless was $23 million and at 31 May 2007 the fair value was

$26 million. (6 marks)

Required:

Discuss how the above items should be dealt with in the group financial statements of Router for the year ended

31 May 2007.Required:

Discuss how the above items should be dealt with in the group financial statements of Router for the year ended

31 May 2007.

Answer 1

正确答案：
(c) The investment in Wireless is currently accounted for using the equity method of accounting under IAS28 ‘Investments in
Associates’. On the sale of a 15% holding, the investment in Wireless will be accounted for in accordance with IAS39. Router
should recognise a gain on the sale of the holding in Wireless of $7 million (Working 1). The gain comprises the following:
(i) the difference between the sale proceeds and the proportion of the net assets sold and
(ii) the goodwill disposed of.
The total gain is shown in the income statement.
The remaining 10 per cent investment will be classified as an ‘available for sale’ financial asset or at ‘fair value through profit
or loss’ financial asset. Changes in fair value for these categories are reported in equity or in the income statement respectively.
At 1 January 2007, the investment will be recorded at fair value and a gain of $1 million $(23 – 22) recorded. At 31 May
2007 a further gain of $(26 – 23) million, i.e. $3 million will be recorded. In order for the investment to be categorised as
at fair value through profit or loss, certain conditions have to be fulfilled. An entity may use this designation when doing so
results in more relevant information by eliminating or significantly reducing a measurement or recognition inconsistency (an
‘accounting mismatch’) or where a group of financial assets and/or financial liabilities is managed and its performance is
evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information
about the assets and/ or liabilities is provided internally to the entity’s key management personnel.