Question on associates

Hi Barry

You seem to have dollars and euros going on in your question so I'm going to assume dollars for the answer.

The investor's interest in the associate is 25% of the net assets of $1m which is $250,000 plus the convertible debt of $100,000 - so the investor's total interest is $350,000 (this is before any conversion). You need to work out the increase in the investor's interest which you can do like this:

Variable number of equity shares of $110,000 divided by the share price of $10 = 11,000 extra shares taken up on conversion. Add this onto the investor's original shareholding of 25,000 which means the investor now owns (25,000 + 11,000) 36,000 shares in the associate. The associate's shares have also increased by the 11,000 extra shares resulting in issued share capital of (100,000 plus 11,000) = 111,000 shares. Therefore you can work out the investor's new holding by saying:

36,000 shares / 111,000 shares x 100 = 32.43% (previously 25%)

The investor's share of the net assets and goodwill after conversion comes to $350k which is made up of 32.43% of the net asets of $1,100,000 = $356,730. There is also negative goodwill arising on the increase in the investor's stake of $6,730 which is the difference between the convertible loan (consideration) of $100,000 and the additional share of the net assets of $106,730 which I have worked out as the diff between what the investor originally owned ($250k) and what they own now ($356,730).

That was a challenge for a Friday morning!!

Best wishes

Steve