group investments

1. Explain why control is important when deciding how a group’s investments should be reported in their
consolidated financial statements. How is control determined?
2. Until 1 January 2012, JP operated a payroll services division providing payroll services for itself and
also for a number of external customers. On 1 January 2012 the business of the division and assets with a value of
£500,000 were transferred into a separate company called KN, which was set up by JP. The sales director of KN owns
100% of its equity share capital. A contractual agreement signed by both the sales director of KN and a director
of JP states that the operating and financial policies of KN will be made by the board of JP. KN has acquired a
long-term loan of £1,000,000 with JP acting as guarantor. Profits and losses of KN, after deduction of the sales
director’s salary, flow to JP. The directors of JP wish to avoid consolidating KN as the additional borrowings of
KN would negatively impact on JP’s gearing ratio.

Discuss how the relationship with KN should be reflected in the financial statements of the JP group.
3. Define the following and explain the accounting treatment for each in both the statement of financial
position and the statement of comprehensive income:
An investment
An associate
A joint venture
A subsidiary

4. In May 2011 IFRS 11 Joint Arrangements changed the accounting treatment of joint ventures. Explain the
change in the treatment of joint ventures and discuss whether you consider the new standard provides users of
financial statements with more useful information.

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