psak 40-rev

Accounting for a change in the value of equity of a subsidiary/associates company SFAS No. 40

CONTENTS

Paragraph

INTRODUCTION 01 - 04

Objective 01

Scope 02 - 03

Definitions 04

EXPLANATION 05 - 09

Recognition 06 - 08

Disclosure 09

STATEMENT OF THE FINANCIAL ACCOUNTING STANDARDS No. 40 ACCOUNTING FOR A CHANGE IN THE VALUE OF EQUITY OF A SUBSIDIARIES/ASSOCIATED COMPANIES 10 - 13

Effective Date 13

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INTRODUCTION

Objective

0.1. This Statement prescribes the accounting treatment, from the standpoint of the investor, for changes in the value of the investment in subsidiaries/associated companies resulting from changes in the equity of the related subsidiaries/associated companies. This Statement covers topics not addressed in Statement of Financial Accounting Standard No. 15, Accounting for Investments in Associated Companies, and Statement of Financial Accounting Standard No. 4, Consolidated Financial Statements, for investments in subsidiaries.

Scope

0.2. This Statement addresses only the changes in the value of the investment in subsidiaries/associated companies, resulting from changes in the equity of the related subsidiaries/associated companies, which are not caused by transactions between the investor company and subsidiaries/associated companies.

0.3. This Statement does not address the accounting treatment for changes in the value of the investment in subsidiaries/associated companies, resulting from changes in the equity of the subsidiaries/associated companies, which are caused by transactions between the investor company and subsidiaries/associated companies.

Definitions

0.4. The following terms used in this Statement are defined as follows:

Investments are assets which are utilized by an enterprise for the accretion of wealth through the return on the investments (such as interest, royalties, dividends and rents), for appreciation in investment values, or for other benefits to the investor company, such as benefits obtained through trade affiliations. Inventories and fixed assets are not investments.

Investor is an enterprise which has an investment in the shares of a subsidiary and/or associated company.

Subsidiary is a company controlled by another company (referred to as parent company).

Parent company is a company that owns one or more subsidiaries.

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Controlling is the ability to determine the financial and operating policies of a company in order to obtain the benefit from the activities of the company.

Associated company is an investee company where the investing company possesses a significant degree of influence.This investee company is neither a subsidiary nor a joint venture of the investing company.

Significant influenceis the power to participate in decision involving both the investee company’s financial and operating policies, but does not represent control over such policies.

EXPLANATION

0.5. Transactions which result in changes in the equity of subsidiaries/associated companies are as follows :

a. Transaction which result in change in the investor’s ownership percentage in the subsidiaries/associated companies :

1. Transactions between the subsidiaries/associated companies and the investor(i). subsidiaries/associated companies sell additional shares to the

investors(ii). subsidiaries/associated companies repurchase outstanding shares owned

by the investors

2. Transactions between subsidiaries/associated companies and third parties (other than the investors)(i). subsidiaries/associated companies sell additional shares to third parties

(ii). subsidiaries/associated companies re-acquires outstanding shares owned by third parties.

b. Transactions which do not result in changes in the investor’s percentage of ownership in the subsidiaries/associated companies.

The subsidiaries/associated companies should revalue the fixed assets resulting in a “difference Resulting from the Revaluation of Fixed Assets” account.

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Recognition

0.6. If the investor’s share in the equity of a subsidiary/associated company, subsequent to transactions resulting in a change in the equity of a subsidiary/associated company, is different from the investor’s share in the equity of a subsidiary/associated company prior to such transactions, the difference is recognized as a component of equity in the “Difference Arising from Transactions Resulting in Changes in the Equity of Subsidiaries/Associated Companies” account.

0.7. At the time the investment is disposed of, the difference resulting from changes in the equity of subsidiaries/associated companies is recognized as income or expense in the same period in which the related gain or loss on disposal is recognized.

0.8. Essentially, a subsidiary/associated company represents a part of the investor company. Consequently, changes in the equity of the subsidiaries/associated companies which do not arise from transactions between the investor company and the subsidiaries/associated companies are also treated as a change in the equity of the investor company.

Disclosure

0.9. The main elements of the “Difference Arising from Transactions Resulting in Changes in the Equity of Subsidiaries/Associated Companies” should be disclosed separately in the notes to the financial statements.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS No. 40 ACCOUNTING FOR A CHANGE IN THE EQUITY OF

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SUBSIDIARIES/ ASSOCIATED COMPANIES

Statement of Financial Accounting Standards No. 40 consists of paragraphs 10 - 13. This statement should be read in the context of paragraphs 01 - 09 of this statement.

Recognition

10. If the investor’s share in the equity of a subsidiary/ associated company subsequent to transactions resulting in a change in the equity of a subsidiary/ associate company, is greater than the investor’s share in the equity of a subsidiary/ associated company prior to such transactions, the difference is recognized as a component of equity in the “Difference Arising from Transactions Resulting in Changes in the Equity of Subsidiaries/ Associated Companies” account.

11. At the time the investments is disposed of, the difference resulting from changes in the equity of subsidiaries/associated companies is recognized as income or expense in the same period in which the profit or loss from the disposal of investment is recognized.

Disclosures

12. The main elements of the account “Difference Arising from Transactions Resulting in Changes in the Equity of Subsidiaries/ Associated Companies” should be disclosed separately in the notes to the financial statements.

Effective date

13 This Statement is effective for the preparation an presentation of financial statements covering reporting periods on or after 1 January, 1998. Early application is strongly encouraged.

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APPENDIX

SAMPLE TRANSACTIONS INVOLVING CHANGES IN THE EQUITY OF SUBSIDIARIES/ASSOCIATED COMPANIES

This following appendix is for illustration purposes and is not part of this Statement. The purpose of the appendix is to provide an illustration of the application of the Statement of Financial Accounting Standard No. 40, Accounting for Changes in the equity of Subsidiaries/ Associated Companies

Example 1.

Following are the Balance Sheet of PT ABC and PT XYZ as of 14 September, 19X6 :

(in thousand of Rupiahs)

PT ABC PT XYZ

Investment in PT ABC - 160,000Other assets 280,000 740,000

280,000 900,000====== ======

Liabilities 80,000 150,000Capital shares - par value

Rp. 10,000/share 100,000 500,000Premium 60,000 -Retained Earnings 40,000 250,000

280,000 900,000====== ======

PT XYZ has an investment of 80% in the outstanding shares of PT ABC.

On 15 September, 19X6, PT ABC sold 2,000 additional shares (in addition to the 10,000 shares outstanding) to third parties other than the investing company at a price of Rp. 35,000 per share. The sale of the share was recorded by PT ABC as follows :

Cash/Accounts receivable 70,000,000Capital Shares 20,000,000Premium 50,000,000

(Cash/Account Receivable = 2,000 X Rp. 35,000; Capital Shares = 2,000 X Rp. 10,000 and additional Paid-in Capital = 2,000 X (Rp. 35,000 - Rp. 10,000).

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The sale of shares by PT ABC was recorded by PT XYZ as follows :

Investment in PT ABC 20,000,000Difference In the equitytransaction of a subsidiary 20,000,000

The calculation to adjust the account “Investment in PT ABC” is as follows:

Before the sale of shares transaction, the number of PT ABC shares owned by PT XYZ was 8,000 shares out of 10,000 shares outstanding. In other words, the percentage of ownership of PT XYZ in PT ABC was 8,000/10,000 = 80%. The value of the equity of PT ABC owned by PT XYZ before the sale transaction was 80% X (Rp. 100,000,000 + Rp. 60,000,000 + Rp. 40,000,000) = Rp. 160,000,000.

After the sale of shares transaction, the number of shares of PT ABC owned by PT XYZ is 8,000 out of 12,000 shares outstanding. In other words, the percentage of ownership of PT XYZ in PT ABC is 8,000/12,000 = 66 2/3%. The equity value of PT ABC owned by PT XYZ after the transaction is 66 2/3% X (Rp. 120,000,000 + Rp. 110,000,000 + Rp. 40,000,000) = 180,000,000.

The difference in the change of equity transaction of the subsidiary is :Rp. 180,000,000 - Rp. 160,000,000 = Rp. 20,000,000.

Below are the Balance Sheets of PT ABC and PT XYZ as of 15 September 19X6.

(In thousands of Rupiahs)

PT ABC PT XYZ

Investment in PT ABC - 180,000Other Assets 350,000 740,000

350,000 920,000======= =======

Liabilities 80,000 150,000Capital Shares

par value Rp10,000/share 120,000 500,000Premium 110,000 -Difference in the changeof equity transactionof the subsidiary - 20,000Retained Earnings 40,000 250,000

350,000 920,000======= =======

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Example 2.

Below are the Balance Sheets of PT ABC and PT XYZ as of 14 September, 19X6.


PT ABC PT XYZ


280,000 900,000

Liabilities : 80,000 150,000Capital shares

par value Rp10,000/share 100,000 500,000Premium 60,000 -Retained Earnings 40,000 250,000

280,000 900,000======= =======


On 15 September, 19X6, PT ABC sold 2,000 additional shares (in addition to the 10,000 shares outstanding) to a third party, other than the investing company, at a price of Rp. 15,000 per share.

The sale of the shares was recorded by PT ABC as follows :

Cash/Accounts Receivable 30,000,000Capital Shares 20,000,000Premium 10,000,000

(Cash) Accounting Receivable = 2,000 X Rp. 15,000; Capital Share = 2,000 X Rp. 10,000 and Premium = 2,000 X (Rp. 15,000 - Rp. 10,000).

The sale of shares by PT ABC was recorded by PT XYZ as follows:

Retained Earnings 6,666,667Investment in PT ABC 6,666,667


Before the sale of shares transaction, the number of PT ABC shares owned by PT XYZ was 8,000 out of 10,000 shares outstanding. In other words, the percentage of ownership

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of PT XYZ in PT ABC was 8,000/10,000 = 80%. The value of the equity of PT ABC owned by PT XYZ before the sale transaction was :

80% X (Rp. 100,000,000 + Rp. 60,000,000 + Rp. 40,000,000) = Rp. 160,000,000.

After the sale of shares transaction, the number of shares of PT ABC owned by PT XYZ is 8,000 out of 12,000 shares outstanding. In other words, the percentage of ownership of PT XYZ in PT ABC is 8,000/12,000 = 66 2/3%. The equity value of PT ABC owned by PT XYZ after the transaction is :

66 2/3% X (Rp. 120,000,000 + Rp. 70,000,000 + Rp. 40,000,000) = Rp. 153,333,333.

The difference in the change of equity transaction is :

Rp. 153,333,333 - Rp. 160,000,000 = (Rp. 5,666,667).

Since the balance of the account “Difference in the change of equity transaction of the subsidiary is zero, the adjustment to the “Investment in PT ABC” is recognized as a reduction of the “Retained Earnings” account.



PT ABC PT XYZ


310,000 893,333======= ======

Liabilities 80,000 150,000Capital Sharesper value Rp10,000/share 120,000 500,000Premium 70,000 -Retained Earnings 40,000 243,333

310,000 893,333======= ======

Example 3.


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PT ABC PT XYZ


280,000 900,000============

Liabilities 80,000 150,000Capital Shares

par values - Rp10,000/share 100,000 500,000Premium 60,000 -Retained Earnings 40,000 250,000

280,000 900,000====== ======


On September 18, 19X6, PT ABC re-acquired (on a permanent basis/stock retirement) 1,000 shares out of 10,000 outstanding shares from third parties, other than the investing company, at a price of Rp. 35,000 per share.

The re-acquisition of these shares was recorded by PT ABC as follows:

Capital shares 10,000,000Premium 6,000,000Retained Earnings 19,000,000

Cash/Accounts Payable 35,000,000

(Cash) Accounts Payable = 1,000 X Rp35,000, Capital shares = 1,000 X Rp. 10,000, Premium = 60,000,000 X 1,000/10,000 and the balance to retained earnings).

PT XYZ recorded the transaction by PT ABC as follows:

Retained Earnings 13,333,333Investment in PT ABC 13,333,333


Before the shares re-acquisition transaction, the number of PT ABC shares owned by PT XYZ was 8,000 shares out of 10,000 shares outstanding. In other words, the percentage of ownership of PT XYZ in PT ABC was 8,000/10,000 = 80%.

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The value of the equity of PT ABC owned by PT XYZ before the shares re-acquisition transaction was = 80% X (Rp. 100,000,000 + Rp. 60,000,000 + Rp. 40,000,000) = Rp. 160,000,000.

After the shares re-acquisition transaction, the number of shares of PT ABC owned by PT XYZ is 8,000 out of 9,000 shares outstanding. In other words, the percentage of ownership of PT XYZ in PT ABC is 8,000/9,000 = 88 8/9%. The equity value of PT ABC owned by PT XYZ after the transaction is :

88 8/9% X (Rp. 90,000,000 + Rp. 54,000,000 + Rp. 21,000,000) = Rp. 146,666,667.

The difference in the change of equity transaction in the subsidiary is :

Rp. 146,666,667 - Rp. 160,000,000 = (Rp. 13,333,333).

Since the balance of the account “Difference the change of equity transaction of the subsidiary” is zero, the adjustment to the account “Investment in PT ABC” is recognized as a reduction of the “Retained Earnings” account.

Below are the Balance Sheets of PT ABC and PT XYZ as of 18 September, 19X6:


PT ABC PT XYZ


245,000 886,667====== ======

Liabilities 80,000 150,000Capital Stockper value Rp10,000/share 90,000 500,000Premium 54,000 -Retained Earnings 21,000 236,667

245,000 886,667====== ======

Example 4.

Below are the Balance Sheet of PT ABC and PT XYZ as of 17 September, 19X6.


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PT ABC PT XYZ


280,000 900,000

Liabilities 80,000 150,000Capital Sharesper value of Rp10,000/share 100,000 500,000Premium 60,000 -Retained Earnings 40,000 250,000

280,000 900,000====== ======


On September 18, 19X6, PT ABC re-acquired (temporarily/treasury stocks) 1,000 shares (out of 10,000 shares outstanding) from third parties, other than the investing company, at a price of Rp. 15,000 per share.

The acquisition of the shares shall be recorded by PT ABC using the cost method as follows:

Treasury Stock 15,000,000Cash/Account Payable 15,000,000

(Cash/Account Payable = Treasury Stock = 1,000 X Rp15,000).

If the acquisition of the shares was recorded using the par value method, the transaction would be recorded by PT ABC as follows :

Treasury Stock 10,000,000Premium 6,000,000

Cash/Account Payable 15,000,000Additional capital fromre-acquisition of shares 1,000,000

(Cash/Account Payable = 1,000 X 15,000; Treasury Stock = 1,000 X Rp10,000; Premium = 60,000,000 X (1,000/10,000) and the balance to “Additional capital from re-acquisition of shares).

The re-acquisition of shares by PT ABC shall be recorded by PT XYZ as follows:

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Investment in PT ABC 4,444,444Difference in the changeof equity transactionof a subsidiary 4,444,444

The calculation of the adjustment to the account “Investment in PT ABC” is as follows :

Before the re-acquisition of shares transaction, the number of PT ABC shares owned by PT XYZ was 8,000 shares out of 10,000 shares outstanding. In other words, the percentage of ownership of PT XYZ in PT ABC was 8,000/10,000 = 80%. The value of the equity of PT ABC owned by PT XYZ before the re-acquisition of shares transaction was = 80% X (Rp. 100,000,000 + Rp. 60,000,000 + Rp. 40,000,000) = Rp. 160,000,000.

After the shares re-acquisition transaction, the number of shares of PT ABC owned by PT XYZ is 8,000 out of 9,000 shares outstanding. In other words, the percentage of ownership of PT XYZ in PT ABC is 8,000/9,000 = 88 8/9%. Using the cost method, the equity value of PT ABC owned by PT XYZ after the transaction is :

88 8/9% X (Rp. 100,000,000 + Rp. 60,000,000 - Rp. 150,000,000 + Rp. 40,000,000) = Rp. 164,444,444. If the par value method is used, the equity value of PT ABC owned by PT XYZ after the transaction is :

88 8/9% X (Rp. 100,000,000 + Rp. 54,000,000 - Rp. 10,000,000 + Rp. 1,000,000 + Rp. 40,000,000 = Rp. 164,000,000) = Rp. 164,444,444.

The difference in the change of equity transaction of the subsidiary is = Rp. 164,444,444 - Rp. 160,000,000 = Rp. 4,444,444.

Following are the Balance Sheets of PT ABC and PT XYZ as of 18 September, 19X6.


PT ABC PT ABC PT XYZ

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cost method par value method

Investment in PT ABC - - 164,444Other assets 265,000 265,000 740,000

265,000 265,000 904.444======= ======= =======

Liabilities 80,000 80,000 150,000Capital Sharespar value - Rp10,000/share 100,000 100,000 500,000Premium 60,000 54,000 -Retained Earnings 40,000 40,000 250,000Treasury Stock (15,000) (10,000) -Additional Capital fromre-acquisition of shares - 1,000 -Difference in the changeof equity transaction ofa subsidiary - - 4,444

265,000 265,000 904,444======== ======== =======

Example 5.

Following are the Balance Sheets of PT ABC and PT XYZ as of 11 March, 19X6 :


PT ABC PT XYZ

Investment in PT ABC - 126,000Other Assets 100,000 1,000,000Fixed Assets 400,000 1,374,000

500,000 2,500,000====== =======

Liabilities 80,000 500,000Capital Shares 300,000 1,100,000Retained Earnings 120,000 900,000

500,000 2,500,000====== =======


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On March 12, 19X6, PT ABC revalued its fixed assets. All fixed assets of PT ABC meet the requirements for revaluation in accordance with the Decree of the Minister of Finance No. 507/KMK.04/1996 and the book values of the fixed assets equal the fiscal value. The revaluation was carried out by an independent appraisal company, which sets the fair market value of the assets at Rp. 900,000,000.

The revaluation of fixed assets was recorded by PT ABC as follows :

Fixed assets 900,000,000Income tax 50,000,000

Fixed assets 400,000,000Cash/Income Tax Payable 50,000,000Difference due to the revaluationof fixed assets 500,000,000

(Difference due to the revaluation of fixed assets = 900,000,000 - 400,000,000 = 500,000,000).

The revaluation of fixed assets by PT ABC shall be recorded by PT XYZ as follows:

Investment in PT ABC 150,000,000Difference in the change of equity transaction ofa subsidiary 150,000,000

(Out of the difference due to the revaluation of fixed assets of PT ABC of Rp. 500,000,000, the share of PT XYZ is only 30% X Rp. 500,000,000 = Rp. 150,000,000).

Following are the Balance Sheets of PT ABC and PT XYZ as of 12 March, 19X6 :


PT ABC PT XYZ

Investment in PT ABC - 276,000Other current assets 100,000 1,000,000Fixed assets 900,000 1,374,000

1,000,000 2,650,000======= =======

Liabilities 80,000 500,000Capital shares 300,000 1,100,000

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Difference due to the revaluation of fixed assets 500,000 -Difference in the change of equitytransaction of a subsidiary - 150,000

Retained Earnings 120,000 900,000 1,000,000 2,650,000======= =======

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psak 40-rev

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