IAS 28 – INVESTMENTS IN ASSOCIATES
This Standard shall be applied in accounting for investments in associates.
The following terms are used in this Standard with the meanings specified:-
- An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
- The equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post-acquisition change in the investor‘s share of net assets of the investee. The profit or loss of the investor includes the investor‘s share of the profit or loss of the investee.
- Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Investments of 20% to 50% in voting power of companies lead to existence of significant influence. Significant influence by an investor is usually evidenced in one or more of the following ways:-
- Representation on the board of directors or equivalent governing body of the investee.
- Participating in policy making process, including participation in decisions about dividends or other distributions.
- Material transactions between the investor and the investee
- Interchange of managerial personnel; or
- Provision of essential technical information.
ACCOUNTING OF ASSOCIATE
Associate should be accounted for in consolidated financial statement using equity method; i.e. investment is
- Initially recorded at cost;
- Adjusted for post-acquisition change in net assets (investor share); Or post acquisition profits/losses (investor share);
- The profit or loss of the investor includes the investor‘s share of the profit or loss of the investee.
- Dividend paid or distributions made will reduce the investment.
- On acquisition any difference between the cost of investment and investor‘s share of net fair value of associate‘s identifiable assets, liabilities and contingent liabilities is accounted for in accordance with IFRS-3.
- Goodwill relating to an associate is included in the carrying value of investment
- Any excess of the investor‘s share of net fair value of the associate‘s assets, liabilities and contingent liabilities over the cost of investment is excluded from the carrying value of investment and is included in the income statement of the year of acquisition.
- Adjustments in investor‘s share of profit and loss after acquisition are made in respect of depreciation based on Fair Value.
- If different reporting dates, adjust the effect of significant events between reporting dates;
- The investor‘s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances.
- If the investor‘s share of losses exceeds or equals its interest in associate, the investor will discontinue the recognition of further losses. Additional losses can only be recognized if there exist any legal or constructive obligation
- Impairment test will be applied on the entire amount of investment under IAS -36 and the impairment loss will be recognized.
- No netting-off is done between receivables and payables
EXCEPTIONS TO THE EQUITY METHOD
An investment in an associate shall be accounted for using the equity method except when:
- There is an evidence that the investment is acquired and held exclusively with a view to its disposal within twelve months from acquisition date (Then apply IFRS -5).
- All of the following apply:
- The investor is a wholly-owned subsidiary its other owners do not object if the investor does not apply the equity method;
- The investor‘s debt or equity instruments are not traded in a public market
- The investor did not file its financial statements with securities commission, and
- The ultimate parent of the investor produces consolidated financial statements.
Some noteworthy points include:
- Investment described in 1 above shall be classified as held for trading and accounted for in accordance with IFRS-5.
STATEMENT OF PROFIT OR LOSS
- Dividend income from associates (reported in the investor’s books) is replaced by the profit after tax of the associate.
STATEMENT OF FINANCIAL POSITION
Initially the Investments in Associates is shown at cost (same as in the individual accounts), identifying any goodwill included in the cost.
In subsequent years the Investor’s accounts will show:
- The investment at cost
- Plus group share of associate’s post acquisition reserves. Less any impairment of investment to date.
On the bottom of the balance sheet consolidated reserves will reflect the other side of these adjustments.
Cost of Investment X
Plus group share of post-acquisition reserves X
Less impairment of investment (X)
INVESTMENT IN ASSOCIATES
Transactions between a Group and Associate
Profits and losses resulting from ‗upstream‘ and ‗downstream‘ transactions between an investor (including its consolidated subsidiaries) and an associate are recognised in the investor‘s financial statements only to the extent of unrelated investors‘ interests in the associate.
Upstream‘ transactions are, for example, sales of assets from an associate to the investor.
‗Downstream‘ transactions are, for example, sales of assets from the investor to an associate.
The investor‘s share in the associate‘s profits and losses resulting from these transactions is eliminated.
The double entry is as follows, where a% is the parent’s holding in the associate, and PUP is the provision for unrealised profit.
DEBIT Retained earnings of parent PUP × A%
CREDIT Group inventories PUP × A%
For upstream transactions (associate sells to parent/subsidiary) where the parent holds the inventories.
DEBIT Retained earnings of parent /subsidiary PUP × A%
CREDIT Investment in associate PUP × A%
For downstream transactions, (parent/subsidiary sells to associate) where the associate holds the inventory.
There are no disclosures specified in IAS 28. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required for entities with joint control of, or significant influence over, an investee.
IFRS 11 – JOINT ARRANGEMENTS
The objective of this IFRS is to establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (i.e. joint arrangements).
This IFRS shall be applied by all entities that are a party to a joint arrangement.
Joint arrangement: An arrangement of which two or more parties have joint control.
Joint control: The contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
Joint operation A joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.
Separate vehicle A separately identifiable financial structure, including separate legal entities or entities recognised by statute, regardless of whether those entities have a legal personality.
A joint arrangement has the following characteristics:
- The parties are bound by a contractual arrangement.
- The contractual arrangement gives two or more of those parties joint control of the arrangement.
The contractual arrangement sets out the terms upon which the parties participate in the activity that is the subject of the arrangement.
The contractual arrangement generally deals with such matters as:
- The purpose, activity and duration of the joint arrangement.
- How the members of the board of directors, or equivalent governing body, of the joint arrangement, are appointed.
- The decision-making process: the matters requiring decisions from the parties, the voting rights of the parties and the required level of support for those matters. The decision-making process reflected in the contractual arrangement establishes joint control of the arrangement.
- The capital or other contributions required of the parties.
- How the parties share assets, liabilities, revenues, expenses or profit or loss relating to the joint arrangement.
Classification of a Joint Arrangement
The classification of joint arrangements requires the parties to assess their rights and obligations arising from the arrangement. When making that assessment, an entity shall consider the following:
- The structure of the joint arrangement.
- When the joint arrangement is structured through a separate vehicle:
(i) The legal form of the separate vehicle ; (ii) The terms of the contractual arrangement and
(iii) When relevant, other facts and circumstances.
A joint arrangement is either a joint operation or a joint venture.
The following table compares common terms in contractual arrangements of parties to a joint operation and common terms in contractual arrangements of parties to a joint venture. The examples of the contractual terms provided in the following table are not exhaustive.
|Joint operation||Joint venture|
|The terms of the contractual Arrangement||The parties to the joint arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.||The parties to the joint arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.|
|Rights to assets||The parties to the joint arrangement share all interests (eg rights, title or ownership) in the assets relating to the arrangement in a specified proportion (eg in proportion to the parties‘ ownership interest in the arrangement or in proportion to the activity carried out through the arrangement that is directly attributed to them).||The assets brought into the arrangement or subsequently acquired by the joint arrangement are the arrangement‘s assets. The parties have no interests (ie no rights, title or ownership) in the assets of the arrangement.|
|Obligations for liabilities||The parties share all liabilities, obligations, costs and expenses in a specified proportion (e.g. in proportion to their ownership interest in the arrangement or in proportion to the activity carried out through the arrangement that is directly attributed to them).||The joint arrangement is liable for the debts and obligations of the arrangement.|
|The parties are liable to the arrangement only to the extent of Their respective:
• Investments in the arrangement, or
• Obligations to contribute any unpaid or additional capital to the arrangement, or
|The parties to the joint arrangement are liable for claims by third parties.||Creditors of the joint arrangement do not have rights of recourse against any party.|
|Revenues, expenses, profit or loss||The contractual arrangement establishes the allocation of revenues and expenses on the basis of the relative performance of each party to the joint arrangement. For example, the contractual arrangement might establish that revenues and expenses are allocated on the basis of the capacity that each party uses in a plant operated jointly.||The contractual arrangement establishes each party‘s share in the profit or loss relating to the activities of the arrangement.|
|Guarantees||The provision of guarantees to third parties, or the commitment by the parties to provide them, does not, by itself, determine that the joint arrangement is a joint operation.|
FINANCIAL STATEMENTS OF PARTIES TO JOINT ARRANGEMENTS
A joint operator shall recognise in relation to its interest in a joint operation:
- its assets, including its share of any assets held jointly;
- its liabilities, including its share of any liabilities incurred jointly;
- its revenue from the sale of its share of the output arising from the joint operation; (d) its share of the revenue from the sale of the output by the joint operation; and (e) Its expenses, including its share of any expenses incurred jointly.
A joint venture shall recognise its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the equity method as specified in that standard.
Application of IAS 28 (2011) To Joint Ventures
The consolidated statement of financial position is prepared by:
- Including the interest in the joint venture at cost plus share of post-acquisition total comprehensive income
- Including the group share of the post-acquisition total comprehensive income in group reserves The consolidated statement of profit or loss and other comprehensive income will include:
- The group share of the joint venture‘s profit or loss
- The group share of the joint venture‘s other comprehensive income.
The use of the equity method should be discontinued from the date on which the joint venture ceases to have joint control over, or have significant influence on, a joint venture.
Transactions between a Joint Venture and a Joint Venture
Upstream transactions: A joint venture may sell or contribute assets to a joint venture so making a profit or loss. Any such gain or loss should, however, only be recognised to the extent that it reflects the substance of the transaction.
Only the gain attributable to the interest of the other joint ventures should be recognised in the financial statements.
The full amount of any loss should be recognised when the transaction shows evidence that the net realisable value of current assets is less than cost, or that there is an impairment loss.
Downstream transactions: When a joint venture purchases assets from a joint venture, the joint venture should not recognise its share of the profit made by the joint venture on the transaction in question until it resells the assets to an independent third party, i.e. until the profit is realised.
Losses should be treated in the same way, except losses should be recognised immediately if they represent a reduction in the net realisable value of current assets, or a permanent decline in the carrying amount of non-current assets.
te major line of business or geographical area of operations then it must be “part of a single co-ordinated plan” to dispose of such a line of business or geographical area of operations. The single plan might relate to a disposal in one transaction or piecemeal.
- Non-current assets that meet the criteria are presented separately on the Statement of Financial Position within current assets.
- If the held for sale item is a disposal group then related liabilities are also reported separately within current liabilities.
- Discontinued operations and operations held for sale must be disclosed separately in the statement of financial position at the lower of their carrying value less costs to sell.
IFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES
The objective of IFRS 12 is to require the disclosure of information that enables users of financial statements to evaluate:
- The nature of, and risks associated with, its interests in other entities
- The effects of those interests on its financial position, financial performance and cash flows
Structured entity An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements
The standard requires disclosure of:
- Significant judgements and assumptions.
- Information about interests in subsidiaries, associates, joint arrangements and structured entitiesthat are not controlled by an investor.
Significant judgements and assumptions
An entity discloses information about significant judgements and assumptions it has made (and changes in those judgements and assumptions) in determining:
- That it controls another entity
- That it has joint control of an arrangement or significant influence over another entity
- The type of joint arrangement (i.e. joint operation or joint venture) when the arrangement has been structured through a separate vehicle
Interests in subsidiaries
An entity shall disclose information that enables users of its consolidated financial statements to:
- Understand the composition of the group
- Understand the interest that non-controlling interests have in the group‘s activities and cash flows
- Evaluate the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group
- Evaluate the nature of, and changes in, the risks associated with its interests in consolidated structured entities
- Evaluate the consequences of changes in its ownership interest in a subsidiary that do not result in a loss of control
- Evaluate the consequences of losing control of a subsidiary during the reporting period.
Interests in joint arrangements and associates
An entity shall disclose information that enables users of its financial statements to evaluate:
- The nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates
- The nature of, and changes in, the risks associated with its interests in joint ventures and associates.
Interests in unconsolidated structured entities (not controlled by an investor)
An entity shall disclose information that enables users of its financial statements to:
- Understand the nature and extent of its interests in unconsolidated structured entities
- Evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.