IAS 28

IAS 28: Investments in Associates and Joint Ventures

IAS 28 Investments in Associates and Joint Ventures prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

An associate is an entity over which the investor has significant influence. A shareholding of 20% or more of an entity is presumed to result in significant influence, although where a shareholding is less than this, significant influence can be established by other means.

In the consolidated financial statements, equity accounting is applied to investments in associates and joint ventures:

• In the consolidated statement of financial position the investment is initially carried at cost and subsequently adjusted for the investor’s share of profits or losses and other comprehensive income made by the investee. Distributions received from the investee reduce the carrying value of the investment.

• The investor’s share of the investee’s profit or loss and other comprehensive income are reported in the consolidated statement of profit or loss and other comprehensive income

Significant influence

Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be presumed the investor has significant influence unless it can be clearly demonstrated that this is not the case.

The existence of significant influence by an entity is usually evidenced in one or more of the following ways:

• Representation on the board of directors or equivalent governing body of the investee;
• Participation in the policy-making process, including participation in decisions about dividends or other distributions;
• Material transactions between the entity and the investee;
• Interchange of managerial personnel; or
• Provision of essential technical information

An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels.

Equity method

Basic principle

Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition.

Consolidation

The procedures used in consolidation are applied wherever possible to accounting for associates. So:

• Profits and losses on transactions between the investor and the associate should be eliminated to the extent of the investor’s share
• There are provisions as to reporting dates, adjustments for material transactions when the dates do not coincide and uniform accounting policies which are very similar to those for subsidiaries
• Recognition of a share of an associate’s losses should only result in the investor’s interest being written down below nil (so as to become a liability) if the investor has incurred obligations on behalf of the associate.

The differences are that:

• There is no cancellation of the investment against the share of the associate’s net assets. This is because there is no line-by-line addition to items in the statement of financial position of the investor’s share of the associate’s assets and liabilities. Such addition is appropriate under conditions of control, but not under those of significant influence
• There is no goodwill calculation at the date the investment is made.
• Instead, the investor’s interest in the associate is shown in the statement of financial position, as a single line under non-current assets.
• The whole of that interest is subjected to an impairment review if there is an indicator of impairment.
• That interest includes items which are in substance a part of the investment, such as long-term loans to the associate. But short-term receivables which will be settled in the ordinary course of business remain in current assets.
• The investor’s interest in the associate’s post-tax profits less any impairment loss is recognised in its consolidated statement of profit or loss

Exemptions

An entity is exempt from applying the equity method if the investment meets one of the following conditions:

• The entity is a parent that is exempt from preparing consolidated financial statements under IFRS 10 Consolidated Financial Statements - OR if all of the following conditions are met:
  • The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method
  • The investor or joint venturer’s debt or equity instruments are not traded in a public market
  • The entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market
  • The ultimate or any intermediate parent of the parent produces financial statements available for public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10
• When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS 9. The election is made separately for each associate or joint venture on initial recognition.

Discontinuing the equity method

Use of the equity method should cease from the date that significant influence or joint control ceases:

• If the investment becomes a subsidiary, the entity accounts for its investment in accordance with IFRS 3 Business Combinations and IFRS 10
• If the retained interest is a financial asset, it is measured at fair value and subsequently accounted for under IFRS 9
• Any amounts recognised in other comprehensive income in relation to the investment in the associate or joint venture are accounted for on the same basis as if the investee had directly disposed of the related assets or liabilities (which may require reclassification to profit or loss)
• If an investment in an associate becomes an investment in a joint venture (or vice versa), the entity continues to apply the equity method and does not remeasure the retained interest.

Changes in ownership

• If an entity’s interest in an associate or joint venture is reduced, but the equity method is continued to be applied, the entity reclassifies to profit or loss the proportion of the gain or loss previously recognised in other comprehensive income relative to that reduction in ownership interest.

Interaction with IFRS 9

IFRS 9 Financial Instruments does not apply to interests in associates and joint ventures that are accounted for using the equity method.

An entity applies IFRS 9, including its impairment requirements, to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied.

Instruments containing potential voting rights in an associate or a joint venture are accounted for in accordance with IFRS 9, unless they currently give access to the returns associated with an ownership interest in an associate or a joint venture.

Classification as non-current asset

An investment in an associate or a joint venture is generally classified as non-current asset, unless it is classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

When the investment, or portion of an investment, meets the criteria to be classified as held for sale, the portion so classified is accounted for in accordance with IFRS 5. Any remaining portion is accounted for using the equity method until the time of disposal, at which time the retained investment is accounted under IFRS 9, unless the retained interest continues to be an associate or joint venture.

Impairment

• After application of the equity method an entity applies Financial Instruments to determine whether it is necessary to recognise any additional impairment loss with respect to its net investment in the associate or joint venture.
• If impairment is indicated, the amount is calculated by reference to IAS 36 Impairment of Assets. The entire carrying amount of the investment is tested for impairment as a single asset, that is, goodwill is not tested separately.
• The recoverable amount of an investment in an associate is assessed for each individual associate or joint venture, unless the associate or joint venture does not generate cash flows independently.

Transactions between group and its associate

As an associate is not part of the group. This means that while the single entity concept applies to the parent and subsidiaries it does not apply to any associates. One of the consequences of this is that transactions between a group member and an associate should not be cancelled on consolidation.

Dividends

Dividend income from the associate should not be recorded in the consolidated statement of profit or loss. This is because under the equity method the group’s share of the associate’s profit before dividends has been recognised. If the dividend income was also recognised the same profits would be recognised twice.

In the statement of financial position the investment in the associate will be recognised as the cost of the investment plus the group share of the post-acquisition profits of the associate, less any dividends received. This could also be calculated as cost of the investment plus group share of the retained earnings of the associate.

Unrealised Profits

While transactions between the group and the associate are not cancelled on consolidation any unrealised profit on these transactions should be eliminated. In this respect the principle applied is similar to that applied to a subsidiary.

The key difference is that only the investor’s share of the unrealised profit should be eliminated, because only this share of the associate’s net assets and profit for the year is brought into the consolidated financial statements.

Separate financial statements

An investment in an associate or a joint venture shall be accounted for in the entity’s separate financial statements in accordance with IAS 27 Separate Financial Statements.

Disclosures

IAS 28 does not include any disclosure requirements; these are included in IFRS 12 Disclosure of Interests in Other Entities.

Further Information