7.8 Consistent
accounting policies .......................................................................... 798
7.9 Loss-making
associates
or joint ventures ........................................................ 799
7.10 Distributions received in excess of the carrying amount ............................ 800
7.11 Equity
transactions in an associate’s or joint venture’s financial
statements .............................................................................................................. 801
7.11.1
Dividends or other forms of distributions ....................................... 801
7.11.2
Issues of equity instruments ............................................................... 801
7.11.3
Equity-settled share-based payment transactions ........................ 802
7.11.4
Effects of changes in parent/non-controlling interests in
subsidiaries ............................................................................................ 804
7.12 Discontinuing the use of the equity method .................................................. 807
7.12.1
Investment in associate or joint venture becoming a
subsidiary .............................................................................................. 807
7.12.2
Retained investment in the former associate or joint
venture is a financial asset ................................................................. 808
7.12.3
Investment in associate becomes a joint venture (or vice
versa) ...................................................................................................... 809
7.12.4
Partial disposals of interests in associate or joint venture
where the equity method continues to be applied ....................... 809
7.12.5 Deemed
disposals ................................................................................. 810
8 IMPAIRMENT LOSSES .................................................................................... 812
9 SEPARATE FINANCIAL STATEMENTS ........................................................... 817
9.1
Impairment of investments in associates or joint ventures in
separate financial statements ............................................................................. 817
10 PRESENTATION AND DISCLOSURES ............................................................. 818
10.1 Presentation ........................................................................................................... 818
10.1.1
Statement of financial position .......................................................... 818
10.1.2 Profit
or loss ........................................................................................... 819
10.1.2.A
Impairment of associates or joint ventures ............... 820
10.1.3
Other items of comprehensive income ........................................... 820
10.1.4 Statement
of cash flows...................................................................... 820
10.2 Disclosures ............................................................................................................ 820
748 Chapter
11
11 FUTURE DEVELOPMENTS ............................................................................. 821
List of examples
Example 11.1:
Entity owning a discrete venture capital organisation .................. 759
Example 11.2:
Entity with a venture capital organisation segment ...................... 759
Example 11.3:
Venture capital consolidations and partial use of fair value
through profit or loss .......................................................................... 760
Example 11.4:
Application of the equity method ..................................................... 763
Example 11.5:
Accounting for retained interest in an associate or joint
venture following loss of control of a subsidiary that is a
business due to sale of shares to third party ................................... 767
Example 11.6:
Accounting for existing financial instruments on the step-
acquisition of an associate (cost-based approach) .......................... 771
Example 11.7:
Accounting for existing financial instruments on the step-
acquisition of an associate (fair value (IFRS 3) approach) ............ 775
Example 11.8:
Accounting for an increase in the ownership of an
associate ................................................................................................. 776
Example 11.9:
Cumulative preference shares issued by an associate .................. 778
Example 11.10:
Share in an associate or a joint venture ........................................... 779
Example 11.11:
Elimination of profit on sale by investor to associate
(‘downstream transaction’) .................................................................. 781
Example 11.12:
Elimination of profit on sale by associate to reporting
entity (‘upstream transaction’) ............................................................ 782
Example 11.13:
Sale of asset from venturer to joint venture at a loss .................... 783
Example 11.14:
Sale of asset from joint venture to venturer at a loss .................... 783
Example 11.15:
Elimination of downstream unrealised profits in excess of
the investment ....................................................................................... 784
Example 11.16:
Elimination of profits and losses resulting from
transactions between associates and/or joint ventures ................ 785
Example 11.17:
Elimination of equity-accounted reciprocal interests .................. 786
Example 11.18:
Elimination of reciprocal interests not accounted for
under the equity method .................................................................... 788
Example 11.19:
Contribution of non-monetary assets to form a joint
venture .................................................................................................... 792
Example 11.20:
Contribution of non-monetary assets to form a joint
venture with cash equalisation payment between
venturers/investors ............................................................................... 793
Example 11.21:
Contribution of subsidiary to form a joint venture – applying
IFRS 10 .................................................................................................... 797
Example 11.22:
Accounting for a loss-making associate .......................................... 800
Example 11.23:
Equity-settled share based payment transactions of
associate ................................................................................................ 803
Investments in associates and joint ventures 749
Example 11.24:
Accounting for the effect of transactions with non-
controlling interests recognised through equity by
an
associate ................................................................................................ 806
Example 11.25:
Deemed disposal of an associate ........................................................ 811
Example 11.26:
Long-term Interests in Associates and Joint Ventures .................. 815
750 Chapter
11
751
Chapter 11 Investments in associates
and joint ventures
1 INTRODUCTION
An entity may conduct its business directly or through strategic investments in other
entities. IFRS broadly distinguishes three types of such strategic investment:
• entities controlled by the reporting entity (subsidiaries);
• entities jointly controlled by the reporting entity and one or more third parties
(joint arrangements classified as either joint operations or joint ventures); and
• entities that, while not controlled or jointly controlled by the reporting entity, are
subject to significant influence by it (associates).
The equity method of accounting is generally used to account for investments in
associates and joint ventures. It involves a modified form of consolidation of the results
and assets of investees in the investor’s financial statements. The essence of the equity
method of accounting is that, rather than full scale consolidation on a line-by-line basis,
it requires incorporation of the investor’s share of the investee’s net assets in one line in
the investor’s consolidated statement of financial position, the share of its profit or loss
in one line in the investor’s consolidated statement of profit or loss and the share of its
other comprehensive income in one line in the investor’s consolidated statement of
other comprehensive income.
2
OBJECTIVE AND SCOPE OF IAS 28
2.1 Objective
The objective of the standard is to prescribe the accounting for investments in
associates and to set out the requirements for the application of the equity method when
accounting for investments in associates and joint ventures. [IAS 28.1].
IAS 27 – Separate Financial Statements – was amended in 2014 to allow an entity, in its
separate financial statements, to account for its investments in subsidiaries, joint ventures
and associates using the equity method of accounting as described in IAS 28 –
Investments in Associates and Joint Ventures. This is discussed further in Chapter 8 at 2.3.
752 Chapter
11
2.2 Scope
The standard is applied by all entities that are investors with joint control of a joint
venture, or significant influence over an associate. [IAS 28.2]. Although there are no
exemptions from the standard itself, there are exemptions from applying the equity
method by certain types of entities as discussed at 5 below.
3 DEFINITIONS
The following terms are used in IAS 28 with the meanings specified: [IAS 28.3]
An associate is an entity over which the investor has significant influence.
Consolidated financial statements are the financial statements of a group in which
assets, liabilities, equity, income, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity.
The equity method is a method of accounting whereby the investment is initially
recognised at cost and adjusted thereafter for the post-acquisition change in the
investor’s share of the investee’s net assets. The investor’s profit or loss includes its
share of the investee’s profit or loss and the investor’s other comprehensive income
includes its share of the investee’s other comprehensive income.
A joint arrangement is an arrangement of which two or more parties have joint control.
Joint control is 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.
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement.
A joint venturer is a party to a joint venture that has joint control of that joint venture.
Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control of those policies. [IAS 28.3].
IAS 28 also notes that the following terms are defined in paragraph 4 of IAS 27 and in
Appendix A of IFRS 10 – Consolidated Financial Statements – and are used in IAS 28,
with the meanings specified in the IFRS in which they are defined:
• control of an investee;
• group;
• parent;
• separate financial statements; and
• subsidiary. [IAS 28.4].
4 SIGNIFICANT
INFLUENCE
Under IAS 28, a holding of 20% or more of the voting power of the investee (held directly
or indirectly, through subsidiaries) is presumed to give rise to significant influence, unless
it can be clearly demonstrated that this is not the case. Conversely, a holding of less than
20% of the voting power is presumed not to give rise to significant influence, unless it can
Investments in associates and joint ventures 753
be clearly demonstrated that there is in fact significant influence. The existence of a
substantial or majority interest of another investor does not necessarily preclude the
investor from having significant influence. [IAS 28.5]. An entity should consider both
ordinary shares and other categories of shares in determining its voting rights.
At its November 2016 meeting, the IFRS Interpretations Committee discussed a request
to clarify whether, and how, a fund manager assesses if it has significant influence over
a fund that it manages and in which it has a direct investment. In the scenario described
in the submission, the fund manager applies IFRS 10 and determines that it is an agent,
and thus does not control the fund. The fund manager has also concluded that it does
not have joint control of the fund. This issue was previously discussed in 2014 and 2015
but at that time the Interpretations Committee decided not to finalise the agenda
decision, but instead to place this issue on hold and monitor how any research project
on equity accounting progresses. The Interpretations Committee however did not see
any benefit in keeping this issue on hold until further progress is made on the research
project, which is now part of the IASB’s research pipeline. The Interpretations
Committee observed that a fund manager assesses whether it has control, joint control
or significant influence over a fund that it manages by applying the relevant IFRS
standard, which in the case of significant influence is IAS 28. Unlike IFRS 10, IAS 28
does not contemplate whether and how decision-making authority held in the capacity
of an agent affects the assessment of significant influence. It believes that developing
any such requirements could not be undertaken in isolation of a comprehensive review
of the definition of significant influence in IAS 28. Additionally, paragraph 7(b) of
IFRS 12 – Disclosure of Interests in Other Entities – requires an entity to disclose
information about significant jud
gements and assumptions it has made in determining
that it has significant influence over another entity. The Interpretations Committee
concluded that it would be unable to resolve the question efficiently within the confines
of existing IFRS standards. Consequently, it decided not to add the issue to its agenda.1
IAS 28 states that the exercise of significant influence will usually be evidenced in one
or more of the following ways:
(a) representation on the board of directors or equivalent governing body of the
investee;
(b) participation in policy-making processes, including participation in decisions
about dividends and other distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information. [IAS 28.6].
Significant influence may also exist over another entity through potential voting rights
(see 4.3 below).
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. It could occur as a result of a contractual arrangement. It could also
occur, for example, when an associate becomes subject to the control of a government,
court, administrator or regulator. [IAS 28.9].
754 Chapter
11
In some jurisdictions, an entity is able to seek protection from creditors in order to
reorganise its business (e.g. under Chapter 11 of the Bankruptcy Code in the United
States). In such situations, an investor (which is not under bankruptcy protection itself)
with an interest in such an associate will need to evaluate the facts and circumstances
to assess whether it is still able to exercise significant influence over the financial and
operating policies of the investee.
An investor should, when assessing its ability to exercise significant influence over an
entity, consider severe long-term restrictions on the transfer of funds from the associate
to the investor or other restrictions in exercising significant influence. However, such
restrictions do not, in isolation, preclude the exercise of significant influence.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 148
