associate’s or joint venture’s net identifiable assets are determined at a date that corresponds to the date
at which consideration was given. Therefore, the fair values are determined for each tranche. This may
require the fair values to be determined for previous periods when no such exercise was performed at
the date of the original purchase.
By including a catch-up adjustment for the post-acquisition changes in the fair values of the underlying net
identifiable assets relating to the first tranche, this method overcomes the mixed-measurement drawback of
Approach 2.
II
Applying a fair value (IFRS 3) approach
Where a fair value (IFRS 3) approach is applied to accounting for a step acquisition of
an associate or a joint venture, the fair value of the previously held interest at the date
that significant influence or joint control is obtained is deemed to be the cost for the
initial application of equity accounting. Because the investment should previously be
measured at fair value, this means that there is no further change to its carrying value.
If the investment was accounted for as at fair value through other comprehensive
income under IFRS 9, amounts accumulated in equity are not reclassified to profit or
loss at the date that significant influence is gained, although the cumulative gain or loss
may be transferred within equity. [IFRS 9.5.2.1, 5.7.5, B5.7.1, B5.7.3]. If the investment was
accounted for as a ‘fair value through profit or loss’ investment, any changes from
original cost would already be reflected in profit or loss.
Under this approach, consistent with the guidance in IFRS 3 for acquisitions
achieved in stages, the calculation of goodwill at the date the investor obtains
significant influence or joint control is made only at that date, using information
available at that date. Paragraph 42 of IFRS 3 also requires the amounts that was
recognised in other comprehensive income shall be recognised on the same basis
as would be required if the acquirer had disposed directly of the previously held
equity interest.
This fair value (IFRS 3) approach is illustrated in Example 11.7 below. Although the
example illustrates the step-acquisition of an associate, the accounting would be the
same if the transaction had resulted in the step-acquisition of a joint venture.
Investments in associates and joint ventures 775
Example 11.7: Accounting for existing financial instruments on the
step-acquisition of an associate (fair value (IFRS 3) approach)
Using the same information as in Example 11.6 above, under a fair value (IFRS 3) approach to acquisitions
in stages, in the consolidated financial statements of the investor, the fair value of the 10% existing interest
would be deemed to be part of the cost for the initial application of equity accounting. The 10% existing
interest was effectively revalued through profit or loss to $150 if the investor measured the original investment
at fair value through profit or loss. If the investor measured the original investment at fair value through other
comprehensive income (OCI), any amount in other comprehensive income relating to this interest would be
reclassified within equity. Goodwill would then be calculated as the difference between $375 (the fair value
of the existing 10% interest and the cost of the additional 15% interest) and $300 (25% of the fair value of
net identifiable assets at the date significant influence is attained of $1,200).
It should be noted that the methodology illustrated in Example 11.7 above is, in fact,
consistent with the accounting that is required by IAS 28 in the reverse situation i.e.
when there is a loss of significant influence in an associate (or loss of joint control in a
joint venture), resulting in the discontinuance of the equity method (see 7.12.2 below).
7.4.2.B
Step increase in an existing associate or joint venture without a change
in status of the investee
An entity may acquire an additional interest in an existing associate that continues to be
an associate accounted for under the equity method. Similarly, an entity may acquire an
additional interest in an existing joint venture that continues to be a joint venture
accounted for under the equity method. IAS 28 does not explicitly deal with such
transactions.
In these situations, we believe that the purchase price paid for the additional interest is
added to the existing carrying amount of the associate or the joint venture and the
existing interest in the associate or joint venture is not remeasured.
This increase in the investment must still be notionally split between goodwill and
the additional interest in the fair value of the net identifiable assets of the associate
or joint venture. This split is based on the fair value of the net identifiable assets at
the date of the increase in the associate or joint venture. However, no
remeasurement is made for previously unrecognised changes in the fair values of
identifiable net identifiable assets.
The reasons for using the above treatment are discussed further below and the
treatment is illustrated in Example 11.8. This differs from that which is required to be
applied under IFRS 3 when as a result of an increased investment in an associate or joint
venture an investor obtains control over the investee.
IFRS 3 is clear that where an entity acquires an additional interest in an existing
associate or joint venture, revaluation of the previously held interests in equity
accounted for investments (with recognition of any gain or loss in profit or loss) is
required when the investor acquires control of the investee. [IFRS 3.41-42]. However, the
reason for this treatment is that there is a significant change in the nature of, and
economic circumstances surrounding, that investment and it is this that warrants a
change in the classification and measurement of that investment. [IFRS 3.BC384].
776 Chapter
11
When an investor increases its ownership interest in an existing associate that remains
an associate after that increase, or increases its ownership interest in an existing joint
venture that remains a joint venture, there is no significant change in the nature and
economic circumstances of the investment. Hence, there is no justification for
remeasurement of the existing ownership interest at the time of the increase. Rather the
investor applies a cost-accumulation approach that might be applicable when an entity
initially applies equity accounting (as discussed at 7.4.2.A above). Approach 1 discussed
at 7.4.2.A above is however not appropriate as there was no change in status of the
investee. Therefore, the purchase price paid for the additional interest is added to the
existing carrying amount of the associate or joint venture and the existing interest in the
associate or joint venture is not remeasured.
Paragraph 32 of IAS 28 establishes the requirement that the cost of an investment in an
associate or joint venture is allocated to the purchase of a share of the fair value of net
identifiable assets and the goodwill. This requirement is not limited to the initial
application of equity accounting, but applies to each acquisition of an investment.
However, this does not result in any revaluation of the existing share of n
et assets.
Rather, the existing ownership interests are accounted for under paragraphs 10 and 32
of IAS 28, whereby the carrying value is adjusted only for the investor’s share of the
associate or joint venture’s profits or losses and other recognised equity transactions.
No entry is recognised to reflect changes in the fair value of assets and liabilities that are
not recognised under the accounting policies applied for the associate or joint venture.
Although Example 11.8 below illustrates an increase in ownership of an associate that
continues to be an associate, the accounting would be the same if the transaction had
been an increase in ownership of a joint venture.
Example 11.8: Accounting for an increase in the ownership of an associate
Entity A obtains significant influence over Entity B by acquiring an investment of 25% at a cost of £3,000. At
the date of the acquisition of the investment, the fair value of the associate’s net identifiable assets is £10,000.
The investment is accounted for under the equity method in the consolidated financial statements of Entity A.
Two years later, Entity A acquires an additional investment of 20% in Entity B at a cost of £4,000, increasing
its total investment in Entity B to 45%. The investment is, however, still an associate and still accounted for
using the equity method of accounting.
For the purposes of the example, directly attributable costs have been ignored and it is assumed that no profit
or loss arose during the period since the acquisition of the first 25%. Therefore, the carrying amount of the
investment immediately prior to the additional investment is £3,000. However, an asset held by the associate
has increased in value by £5,000 so that the fair value of the associate’s net identifiable assets is now £15,000.
To summarise, amounts are as follows:
£
Fair value of net identifiable assets of Entity B
10,000
at acquisition
Increase in fair value
5,000
Fair value of net identifiable assets of Entity B
15,000
two years later
Investments in associates and joint ventures 777
As a result of the additional investment, the equity-accounted amount for the associate increases by £4,000. The
notional goodwill applicable to the second tranche of the acquisition is £1,000 [£4,000 – (20% × £15,000)].
The impact of the additional investment on Entity A’s equity-accounted amount for Entity B is summarised
as follows:
%
held
Carrying
Share of net
Goodwill
amount
identifiable
included in
assets
investment
£
£
£
Existing investment
25
3,000
2,500
500
Additional investment
20
4,000
3,000
1,000
Total investment
45
7,000
5,500
1,500
The accounting described above applies when the additional interest in an existing
associate continues to be accounted for as an associate under the equity method or
when the additional interest in an existing joint venture continues to be accounted for
as a joint venture under the equity method. The accounting for an increase in an
associate or a joint venture that becomes a subsidiary is discussed in Chapter 9 at 9.
7.4.2.C
Existing associate that becomes a joint venture, or vice versa
In the situations discussed at 7.4.2.B above, the acquisition of the additional interests did
not result in a change in status of the investee i.e. the associate remained an associate
or the joint venture remained a joint venture. However, an associate may become a joint
venture, either by the acquisition of an additional interest, or through a contractual
agreement that gives the investor joint control. Equally, in some situations, a contractual
agreement may end or part of an interest may be disposed of and a joint venture
becomes an associate. In all of these situations, IAS 28 requires that the entity continues
to apply the equity method and does not remeasure the retained interest. [IAS 28.24].
Therefore, the accounting described in Example 11.8 above would apply.
7.5
Share of the investee
7.5.1
Accounting for potential voting rights
In applying the equity method to a single investment of a specified number of ordinary
shares of the investee, the proportionate share of the associate or joint venture to be
accounted for will be based on the investor’s ownership interest in the ordinary shares.
This will also generally be the case when potential voting rights or other derivatives
containing potential voting rights exist in addition to the single investment in the ordinary
shares, as IAS 28 states that an entity’s interest in an associate or a joint venture is determined
solely on the basis of existing ownership interests and does not reflect the possible exercise
or conversion of potential voting rights and other derivative instruments. [IAS 28.12].
However, as an exception to this, IAS 28 recognises that in some circumstances, an
entity has, in substance, an existing ownership interest as a result of a transaction that
currently gives it access to the returns associated with an ownership interest. In such
circumstances, the proportion allocated to the entity is determined by taking into
778 Chapter
11
account the eventual exercise of those potential voting rights and other derivative
instruments that currently give the entity access to the returns. [IAS 28.13]. The standard
does not provide any example of such circumstances, but an example might be a
presently exercisable option over shares in the investee at a fixed price combined with
the right to veto any distribution by the investee before the option is exercised or
combined with features that adjust the exercise price with respect to dividends paid.
IFRS 9 does not apply to interests in associates and joint ventures that are accounted for
using the equity method. When instruments containing potential voting rights in substance
currently give access to the returns associated with an ownership interest in an associate
or a joint venture, the instruments are not subject to IFRS 9. In all other cases, instruments
containing potential voting rights in an associate or a joint venture are accounted for in
accordance with IFRS 9. [IAS 28.14]. Once the potential voting rights are exercised and the
share in the investee increases, the fair value of such instruments at the exercise date is
part of the cost to be recognised in accounting for the step increase.
7.5.2
Cumulative preference shares held by parties other than the investor
If an associate or joint venture has outstanding cumulative preference shares that are
held by parties other than the investor and that are classified as equity, the investor
computes its share of profits or losses after adjusting for the dividends on such shares,
whether or not the dividends have been declared. [IAS 28.37].
Although Example 11.9 below illustrates cumulative preference shares iss
ued by an
associate, the accounting would be the same if the shares were issued by a joint venture.
Example 11.9: Cumulative preference shares issued by an associate
An entity holds an investment of 30% in the ordinary shares of an associate that has net assets of £200,000 and
net profit for the year of £24,500. The associate has issued 5,000 cumulative preference shares with a nominal
value of £10 which entitle its holders to a 9% cumulative preference dividend. The cumulative preference shares
are classified by the associate as equity in accordance with the requirements of IAS 32 – Financial Instruments:
Presentation. The associate has not declared dividends on the cumulative preference shares in the past two years.
The investor calculates its share of the associate’s net assets and net profit as follows:
£
Net assets
200,000
9% Cumulative preference shares
(50,000)
Undeclared dividend on cumulative preference shares
2 years × 9% × £50,000 =
(9,000)
Net assets value attributable to ordinary shareholders
141,000
Investor’s 30% share of the net assets
42,300
Net profit for the year 24,500
Share of profit of holders of cumulative preference shares
9% of £50,000 =
(4,500)
Net profit attributable to ordinary shareholders
20,000
Investor’s 30% share of the net profit
6,000
If the investor also owned all of the cumulative preference shares then its share in the net assets of the associate
would be £42,300 + £50,000 + £9,000 = £101,300. Its share in the net profit would be £6,000 + £4,500 = £10,500.
Investments in associates and joint ventures 779
7.5.3
Several classes of equity
When an associate or joint venture has a complicated equity structure with several classes
of equity shares that have varying entitlements to net profits, equity or liquidation
preferences, the investor needs to assess carefully the rights attaching to each class of
equity share in determining the appropriate percentage of ownership interest.
7.5.4
Where the reporting entity is a group
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 153
