To account for an associate, the entity should follow the principles and rules of accounting for associates, which are the principles and rules that govern the recognition, measurement, and disclosure of associates in the financial statements.
The key steps in accounting for an associate are as follows:
- Identify the associate: The first step in accounting for an associate is to identify the associate. An associate is an entity over which the entity has significant influence, but not control. Significant influence is the power to participate in the financial and operating policies of the associate, but not the power to control those policies.
- Measure the investment in the associate: The second step in accounting for an associate is to measure the investment in the associate. The investment in the associate is measured at the cost of acquisition, adjusted for post-acquisition changes in the entity’s share of the associate’s net assets. The cost of acquisition includes the fair value of any assets or liabilities assumed by the entity in the acquisition of the associate.
- Recognize the entity’s share of the associate’s net income and net assets: The third step in accounting for an associate is to recognize the entity’s share of the associate’s net income and net assets. The entity’s share of the associate’s net income is recognized in the income statement, and the entity’s share of the associate’s net assets is recognized in the balance sheet.
- Disclose the investment in the associate and the entity’s share of the associate’s financial performance: The fourth step in accounting for an associate is to disclose the investment in the associate and the entity’s share of the associate’s financial performance. The entity should disclose the carrying amount of the investment in the associate, the nature of the investment, and the entity’s share of the associate’s profit or loss and other comprehensive income.
Overall, the key steps in accounting for an associate are to identify the associate, measure the investment in the associate, recognize the entity’s share of the associate’s net income and net assets, and disclose the investment in the associate and the entity’s share of the associate’s financial performance.
