AZ company invests in B company and gets 40% of B company shares. AZ company by having significant influence in B company, recognizes Investment in associate - asset in its balance sheet. According to equity accounting, AZ company should record 40% of B company' *** income in its assets and decrease it every time it receives dividends from B company. B company in its Balance sheet estimates useful life of the factory -cash generating unit- 30 years. AZ company assumes that after 15 years, it will sell all 40% of shares and will hold zero shares of B company.
Question 1: AZ company knows that it will possess zero shares of B company in 15 years.Does AZ company need to make adjustment to B company *** income - by changing 30 years depreciation estimate that B company used to 15 years depreciation. Is share position determines the depreciation estimate and whether it is allowed in equity accounting?
2nd Case: all the same as above, except- AZ company assumes that after 15 years, it will sell 35% of shares and will keep only 5% of B company shares. This means of course that AZ company after 15 years have to reclassify investment asset into other financial assets.
Question 2: AZ company knows that its share will decrease substantially in 15 years, which means less earnings after that. Should AZ company need to adjust equity accounting *** income by changing the depreciation estimate of B company to 15 years from 30 years by assuming that main value expected to be received by AZ company in first 15 years? Thanks a lot in advance.
