Alpha is an associate of Delta.
How should profits generated by Alpha be shown in the consolidated accounts of Delta?
A. All the profits after tax generated by Alpha are included by consolidating the revenue and expenses of Alpha on a line-by-line basis from revenue down to profit for the year.
B. Delta's share of Alpha's profit after tax is included by the payment of a dividend from Alpha to Delta, which is shown in the consolidated statement of profit or loss of Delta.
C. Delta's share of Alpha's profit after tax is included in the consolidated statement of profit or loss of Delta as a single amount.
D. All the profits after tax generated by Alpha are included in the consolidated statement of profit or loss of Delta as a single amount.
Answer (2)
Delta is required to include its share of Alpha's profits as a single line item in its consolidated profit or loss statement. This approach follows the equity method of accounting, which is appropriate for associates. Therefore, the correct answer is C.
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In the context of business accounting, particularly when dealing with consolidated financial statements, an associate refers to an entity over which an investor has significant influence. Generally, significant influence is presumed if the investor holds between 20% and 50% of the voting power of the associate.
In this scenario, Delta has an associate, Alpha, and we need to determine how the profits generated by Alpha should be reported in Delta's consolidated financial statements.
The appropriate accounting method for an associate is the equity method. Here's how it works:
Equity Method Application : Delta will include its share of Alpha's profit after tax as a single amount in the consolidated statement of profit or loss. This reflects Delta's ownership percentage of Alpha's net results, without consolidating Alpha's revenue, expenses, and other account lines on a line-by-line basis.
Impact on Financials : Under the equity method, Delta's financials will recognize a proportionate share of Alpha's profit (or loss) after tax. This amount will be shown as a single line item in the consolidated financial statements, typically under 'Share of profit of associates'.
Therefore, the correct answer is:
C. Delta's share of Alpha's profit after tax is included in the consolidated statement of profit or loss of Delta as a single amount.
This approach provides a clear and coherent financial picture to the investors and stakeholders of Delta, showing the influence and financial result attributable to its investment in Alpha.
