CAF-6 · Chapter 10

Associates (IAS 28) MCQs with Answers

15 multiple-choice questions on Associates (IAS 28) for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   An 'Associate' is an entity over which the investor has:

   • A) Control
   • B) Significant Influence
   • C) Joint Control
   • D) No influence at all
   Show answer & explanation

   Answer: B) Significant Influence

   An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence.

2. Question 2

   Significant influence is generally presumed to exist if the investor holds, directly or indirectly, what percentage of the voting power of the investee?

   • A) 10% or more
   • B) 20% or more
   • C) 50% or more
   • D) Exactly 51%
   Show answer & explanation

   Answer: B) 20% or more

   IAS 28 states that if an investor holds 20% or more of the voting power, it is presumed to have significant influence, unless it can be clearly demonstrated otherwise.

3. Question 3

   Which accounting method is used to account for investments in associates in consolidated financial statements?

   • A) Acquisition Method
   • B) Cost Method
   • C) Equity Method
   • D) Proportionate Consolidation
   Show answer & explanation

   Answer: C) Equity Method

   IAS 28 requires the use of the equity method for investments in associates (and joint ventures).

4. Question 4

   Under the 'Equity Method', the investment is initially recognized at:

   • A) Fair Value
   • B) Cost
   • C) Nominal Value
   • D) Liquidation Value
   Show answer & explanation

   Answer: B) Cost

   The investment in an associate is initially recognized at cost and the carrying amount is increased or decreased thereafter to recognize the investor's share of the profit or loss of the investee.

5. Question 5

   When the associate pays a 'Dividend' to the investor, how is it recorded under the Equity Method?

   • A) Recognized as dividend income in profit or loss.
   • B) Added to the carrying amount of the investment.
   • C) Deducted from the carrying amount of the investment.
   • D) Recognized in OCI.
   Show answer & explanation

   Answer: C) Deducted from the carrying amount of the investment.

   Distributions (dividends) received from an investee reduce the carrying amount of the investment.

6. Question 6

   Which of the following is NOT an indicator of Significant Influence?

   • A) Representation on the board of directors.
   • B) Participation in policy-making processes.
   • C) Material transactions between the investor and the investee.
   • D) Having the power to govern the financial and operating policies of the investee.
   Show answer & explanation

   Answer: D) Having the power to govern the financial and operating policies of the investee.

   Power to 'govern' or 'direct' suggests control (subsidiary) rather than just significant influence (associate).

7. Question 7

   In the Consolidated Statement of Profit or Loss, the investor's share of the associate's profit is shown as:

   • A) Revenue
   • B) A single line item: 'Share of profit of associate'.
   • C) Added to the parent's operating profit.
   • D) Other Comprehensive Income.
   Show answer & explanation

   Answer: B) A single line item: 'Share of profit of associate'.

   The investor's share of the profit or loss of the investee is recognized in the investor's profit or loss as a separate line item.

8. Question 8

   If an investor's share of 'Losses' of an associate equals or exceeds its interest in the associate, the investor:

   • A) Continues to recognize its share of further losses in P&L.
   • B) Discontinues recognizing its share of further losses.
   • C) Must pay the associate's debts immediately.
   • D) Writes off its own share capital.
   Show answer & explanation

   Answer: B) Discontinues recognizing its share of further losses.

   Once the investment's carrying amount is reduced to zero, additional losses are generally not recognized unless the investor has incurred legal or constructive obligations on behalf of the associate.

9. Question 9

   If an investor sells goods to its associate (downstream transaction) and some goods remain in the associate's inventory, the unrealized profit should be:

   • A) Eliminated in full (100%).
   • B) Eliminated only to the extent of the investor's interest in the associate.
   • C) Ignored.
   • D) Added to the carrying amount of the associate.
   Show answer & explanation

   Answer: B) Eliminated only to the extent of the investor's interest in the associate.

   Profits and losses resulting from 'upstream' and 'downstream' transactions are recognized in the investor's financial statements only to the extent of unrelated investors' interests in the associate.

10. Question 10

    In the Statement of Financial Position, an investment in an associate is classified as a:

    • A) Current Asset
    • B) Non-Current Asset
    • C) Equity Item
    • D) Intangible Asset
    Show answer & explanation

    Answer: B) Non-Current Asset

    Investments in associates are long-term strategic investments and are classified as non-current assets.

11. Question 11

    The 'Carrying Amount' of an associate at the reporting date is calculated as:

    • A) Cost + Share of post-acquisition retained earnings.
    • B) Cost + Share of post-acquisition profit - Dividends received - Impairment (if any).
    • C) Current market value of the shares.
    • D) Nominal value of the shares held.
    Show answer & explanation

    Answer: B) Cost + Share of post-acquisition profit - Dividends received - Impairment (if any).

    This is the standard formula for the equity method carrying amount.

12. Question 12

    Which of the following is NOT required for the application of the equity method?

    • A) The investor and associate should have the same reporting date (or within 3 months).
    • B) The investor and associate must use uniform accounting policies.
    • C) The investor must own at least 51% of the associate.
    • D) The investor must have significant influence.
    Show answer & explanation

    Answer: C) The investor must own at least 51% of the associate.

    51% ownership would imply control, making the entity a subsidiary, not an associate.

13. Question 13

    If an investment in an associate becomes a subsidiary (investor obtains control), the equity method is:

    • A) Continued as before.
    • B) Discontinued and the acquisition method is applied.
    • C) Merged with the cost method.
    • D) Ignored for that year.
    Show answer & explanation

    Answer: B) Discontinued and the acquisition method is applied.

    Once control is obtained, IFRS 10 and IFRS 3 take over and the equity method is no longer applicable.

14. Question 14

    How is 'Goodwill' related to an associate handled in the financial statements?

    • A) It is recognized as a separate intangible asset.
    • B) it is included in the carrying amount of the investment and not amortized.
    • C) It is expensed immediately at the date of acquisition.
    • D) It is amortized over 5 years.
    Show answer & explanation

    Answer: B) it is included in the carrying amount of the investment and not amortized.

    For an associate, any goodwill is 'hidden' within the carrying amount of the investment. It is not recognized separately and not amortized, but it is tested for impairment as part of the overall investment.

15. Question 15

    The entire carrying amount of an investment in an associate is tested for 'Impairment' as a single asset if:

    • A) Every year as per IAS 36.
    • B) Only when there is an objective indicator of impairment.
    • C) Only if the associate reports a loss.
    • D) Never, because associates are not tested for impairment.
    Show answer & explanation

    Answer: B) Only when there is an objective indicator of impairment.

    IAS 28 requires checking for indicators of impairment before performing a full impairment test (unlike goodwill in a subsidiary which is tested annually).