The following are excerpts from the 2008 financial statements of Renault, a large French automobile manufacturer.
Investment in Nissan: Renault holds 44.3% ownership in Nissan. Renault and Nissan have chosen to develop a unique type of alliance between two distinct companies with common interests, uniting forces to achieve optimum performance. The Alliance is organized so as to preserve individual brand identities and respect each company's corporate culture. Consequently:
- Renault does not hold the majority of Nissan voting rights;
- The terms of the Renault-Nissan agreements do not entitle Renault to appoint the majority of Nissan directors, nor to hold the majority of voting rights at meetings of Nissan's Board of Directors. . . .
- Renault can neither use nor influence the use of Nissan's assets in the same way as its own assets.
- Renault provides no guarantees in respect of Nissan's debt.
In view of this situation, Renault is considered to exercise significant influence in Nissan, and therefore uses the equity method to include its investment in Nissan in the consolidation. . . .
Nissan financial information under IFRS: (When accounting for its investment in Nissan, Renault makes restatements that) include adjustments for harmonization of accounting standards and the adjustments to fair value of assets and liabilities applied by Renault at the time of acquisitions in 1999 and 2002.
Required:
1. Go to Deloitte's IAS Plus website and examine the summary of the IASB's IAS No. 28 (at http://www.iasplus.com/standard/ias28.htm), which governs application of the equity method. Focus on two areas: Identification of Associates and Applying the Equity Method of Accounting.
2. Evaluate Renault's decision to use the equity method to account for its investment in Nissan. Does Renault have insignificant influence, significant influence, or control?
3. Evaluate the fact that, when accounting for its investment in Nissan under the equity method, Renault makes adjustments that take into account the fair value of assets and liabilities at the time Renault invested in Nissan. Give an example of the sorts of adjustments that might be made. Are such adjustments consistent with IFRS? With U.S. GAAP? Explain.
4. Evaluate the fact that, when accounting for its investment in Nissan under the equity method, Renault makes adjustments for harmonization of accounting standards. Are such adjustments consistent with IFRS? With U.S. GAAP? Explain.