IAS 28 - Investments in Associates and Joint Ventures

Content

IFRS

VAS

IAS 28 – Investments in Associates and Joint Ventures

Objective

The objective of this Standard is to prescribe the accounting for investments in associates and to provide requirements for the application of the equity method when accounting for investments in associates and joint ventures.

It is covered in VAS 7 and VAS 8. The objective of this Standard is to prescribe the accounting policies and procedures about investments in associates, including the recognition of investments in associates in the separate financial statement of investor and consolidated financial statement as the basis for recognition, preparation, and presentation of financial statements.

Significant influence

Significant influence is assumed when the investor has the power to participate in the financial and operating policy decisions of the investee, but not control or joint control over those policies (usually when holding ownership of more than 20% but less than 50%).

The existences and influences of potential voting rights which are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether those entities have significant influences or not.

Not mentioned.

The equity method

Under the equity method, on initial recognition the investment in an associate or a joint venture is recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the investee’s profit or loss is recognized in the investor’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. The investor’s share of those changes is recognized in the investor’s other comprehensive income.

If an entity’s share of the loss of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, the entity discontinues recognizing its share of further loss.

After the entity's gain is reduced to zero, additional losses and liabilities are recognized to the extent that the entity has a legal and implicit obligation or makes payments on behalf of the associates or joint ventures. If the associate or joint venture subsequently reports surpluses, the entity resumes recognizing its share of those surpluses only after its share of the surpluses equals the share of deficits not recognized.

Discontinuing the equity

method

An entity ceases to use the equity method from the date on which its investment in an associate or joint venture is eliminated if:

(a) If the investment for a subsidiary, the entity shall record its investment in accordance with IFRS 3 Business Combinations and IFRS 10 Consolidated Financial Statements.

(b) If the retained interest in the former associate or joint venture is a financial asset, the entity shall record the retained interest at fair value. The fair value of the retained interest shall be regarded as its fair value on initial recognition of a financial asset in accordance with IFRS 9 Financial Instruments. The entity will recognize any differences in the statement of profit or loss, between:

(i) The fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture; and

(ii) The carrying amount of the investment at the date the equity method was discontinued.

(c) When an entity discontinues the use of the equity method, the entity shall account for all amounts previously recognized directly in the entity’s net assets/equity in relation to that investment on the same basis as would have been required if the investee had directly disposed of the related assets or liabilities.

The Standard requires to treat the carrying amount of the investment at the date equity method ceases to be used as the new cost basis.

Changes in ownership

interests

If the owner's interest in an associate or joint venture is reduced, but the investment remains an investment in the respective associate or joint venture, the entity reclassifies to profit or loss the proportion of the gain or loss previously recognized in other comprehensive income relative to that reduction in ownership interest.

Not mentioned.

Exception for applying equity

method for investment in

associates

An entity need not apply the equity method to its investment in an associate or a joint

venture if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in paragraph 4(a) of IFRS 10 or:

(a) The investor is itself 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.

(b) The investor's debt or equity instruments are not traded in a public market (domestic or oversea stock market or regional over the counter market).

(c) The investor did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization to issue any class of instruments in a public market.

(d) The ultimate or any intermediate parent of the investor produces consolidated financial statements available for public use that comply with IFRS, where the subsidiaries are either consolidated or measured at fair value through the statement of profit or loss in accordance with IFRS 10.

Exceptions:

(a) The investment is acquired and held exclusively with a view to its disposal in near future (under 12 months), or

(b) The associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. In this case, an investment in the associate is accounted for using the costs method in the consolidated financial statements.

Investor's separate financial statements

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

Investments in associates are only presented under the cost method in the investor's separate financial statements.