Sukura Ltd is preparing its financial statements for the year ended 31 December 2018. Sukura Ltd entered into a contractual arrangement on 1 September 2018 with another company, Mammobi Ltd, setting up an unquoted entity, Awoshi Electronics. However, in this arrangement Sukura Ltd only has a 15% shareholding and does not have any influence in the day to day financial and operating policies. Sukura Ltd has recorded the investment in Awoshi Electronics at its cost on 1 September 2018, being the carrying amount of the equipment and cash transferred at that date. No subsequent changes were made to the carrying amount.
Required:
Advise the directors on the accounting treatment of the above in Sukura Ltd’s financial statements for the year ended 31 December 2018. (4 marks)
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- The investment in Awoshi Electronics is a financial asset as it is an investment in shares. Such investments must initially be recorded at fair value under IFRS 9: Financial Instruments.
- Consequently, the fair value is the fair value of the equipment plus the cash transferred. As a result, a profit or loss on recognition of the equipment may arise.
- At the year end, as this is an investment in equity instruments, it must be held at fair value. Sukura can choose whether to hold the investment at fair value through profit or loss or fair value through other comprehensive income. The decision is irrevocable.
- As the investment is an unquoted one, fair value cannot be determined by reference to market data, so a business valuation needs to be performed.