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EQUITY METHOD OF ACCOUNTING - SIDE EFFECTS
03-08-2007, 10:56 PM
Post: #1
EQUITY METHOD OF ACCOUNTING - SIDE EFFECTS
Dears,

I again place an issue for professional discussion.

Investment in associates is required to be accounted for under Equity Method in accordance with IAS-28 ‘Investments in Associates’ effective from the accounting years commencing from 01 January 2005. In Pakistan it is mandatory for the listed companies to follow the International Accounting Standards in preparation of financial statements. Under equity method, an investor having investment in associates is required to account for the share in the post acquisition profits of the associates in its Profit and Loss account. Whilst the dividend actually received from such associates is deducted from the carrying value of the investments in the associates, instead of recognizing as income in the Profit and Loss account.

There has emerged some difference of opinion among various accounting circles in respect of calculation of provision for workers’ participation fund. Some circles accentuate to provide workers’ participation fund on the profit arrived at after accounting for the share in the profit of associates thus ignoring the dividend income that has been deducted from the carrying value of the investment in such associates. They stress that profit is arrived at under various accounting conventions laid down by the Generally Accepted Accounting Principles and only those receipts/incomes could be excluded which have been specifically mentioned in the definition of profit given by section 87C of the Companies Act, 1913. They further stress that no adjustments are required to be made to the profit, which has been arrived at from ordinary activities under the identified accounting framework.

At the same time, some other accounting circles are of the view that for the purpose of calculation of provision for workers’ participation fund, the amount of share in profit of associates should be reversed from the ‘net profit before taxation’ and dividend received from such associates should be included in the profit. They emphasize that actually realized income is dividend income whilst the share in profit of the associates is merely an accounting adjustment and would never be realized unless the investment in such associate is disposed of, which is again dependent upon the market value at the time of disposal/sale. They further state that the share of profit from associates accounted for by an investor is already net of the provision of workers participation fund that has been paid by such associates to their own workers and the calculation of provision for workers’ participation fund on the profit including the share from associates would result in twice payment to the workers of two companies on the same profit i.e. the profit that was earned by the associate and the share of such profit accounted for by the investor. They stress that the share of profit in associates does not represent the actual return in the hands of the investor, which infact is represented by the amount of dividend received on such investments in the associates. Accordingly, they opine that the share in the profit of associates should be excluded from the figure of ‘net profit before taxation’ and the dividend earned on investment in such associates should be included in the resultant profit to calculate 5 percent provision for the workers’ participation fund.

I seek the valuable views of the forum's members on this issue.

Best regards,

Kamran
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03-09-2007, 03:37 PM
Post: #2
 
No comments so far Mr. AbdulRehman (

Kamran
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01-22-2010, 12:36 PM
Post: #3
 
I unable to understabd equity acounting method while studying, can any body give me example?

Thanks
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01-22-2010, 02:05 PM
Post: #4
 
Aren't post aquisition share of profits added to the carrying value rather than the dividend deducted???
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