venture to prepare, for the use of the investor, financial statements as of the same date
as those of the investor unless it is impracticable to do so. [IAS 28.33].
When the financial statements of an associate or joint venture used in applying the equity
method are prepared as of a different reporting date from that of the investor, adjustments
must be made for the effects of significant transactions or events, for example a sale of a
significant asset or a major loss on a contract, that occurred between that date and the date
of the investor’s financial statements. In no circumstances can the difference between the
reporting date of the associate or the joint venture and that of the investor be more than
three months. [IAS.28.34, BCZ19]. There are no exemptions from this requirement despite the
fact that it may be quite onerous in practice, for example, because:
• the associate or joint venture might need to produce interim financial statements
so that the investor can comply with this requirement; or
• the associate or joint venture may be a listed company in its own right whose financial
information is considered price-sensitive, which means that the associate or joint
venture may not be able to provide detailed financial information to one investor
without providing equivalent information to all other investors at the same time.
The length of the reporting periods and any difference in the reporting dates must be
the same from period to period. [IAS 28.34]. This implies that where an associate or joint
venture was previously equity accounted for on the basis of non-coterminous financial
statements and is now equity accounted for using coterminous financial statements, it is
necessary to restate comparative information so that financial information in respect of
the associate or joint venture is included in the investor’s financial statements for an
equivalent period in each period presented.
IAS 28 requires merely that a non-coterminous accounting period of an associate or a
joint venture used for equity accounting purposes ends within three months of that of
the investor. It is not necessary for such a non-coterminous period to end before that
of the investor.
7.8
Consistent accounting policies
IAS 28 requires the investor’s financial statements to be prepared using uniform
accounting policies for like transactions and events in similar circumstances. [IAS 28.35].
If an associate or joint venture uses accounting policies different from those of the
investor for like transactions and events in similar circumstances, adjustments must be
made to conform the associate’s or joint venture’s accounting policies to those of the
Investments in associates and joint ventures 799
investor when the associate’s or joint ventures financial statements are used by the
investor in applying the equity method. [IAS 28.36].
In practice, this may be easier said than done, since the investor only has significant
influence, and not control, over the associate, and therefore may not have access to the
relevant underlying information in sufficient detail to make such adjustments with
certainty. Restating the financial statements of an associate to IFRS may require
extensive detailed information that may simply not be required under the associate’s
local GAAP (for example, in respect of business combinations, share-based payments,
financial instruments and revenue recognition). Although there may be some practical
difficulties where the entity has joint control over a joint venture, we would expect this
to arise less often, as joint control is likely to give the investor more access to the
information required.
7.9
Loss-making associates or joint ventures
An investor in an associate or joint venture should recognise its share of the losses of
the associate or joint venture until its share of losses equals or exceeds its interest in the
associate or joint venture, at which point the investor discontinues recognising its share
of further losses. For this purpose, the investor’s interest in an associate or joint venture
is the carrying amount of the investment in the associate or joint venture under the
equity method together with any long-term interests that, in substance, form part of the
investor’s net investment in the associate or joint venture. For example, an item for
which settlement is neither planned nor likely to occur in the foreseeable future is, in
substance, an extension of the entity’s investment in that associate or joint venture.
[IAS 28.38]. The items that form part of the net investment are discussed further in
Chapter 15 at 6.3.1. The IASB argued that this requirement ensures that investors are not
able to avoid recognising the loss of an associate or joint venture by restructuring their
investment to provide the majority of funding through non-equity investments.
[IAS 28.BCZ39-40].
Such items include:
• preference shares; or
• long-term receivables or loans (unless supported by adequate collateral),
but do not include:
• trade receivables;
• trade payables; or
• any long-term receivables for which adequate collateral exists, such as secured
loans. [IAS 28.38].
Once the investor’s share of losses recognised under the equity method has reduced the
investor’s investment in ordinary shares to zero, its share of any further losses is applied
so as to reduce the other components of the investor’s interest in an associate or joint
venture in the reverse order of their seniority (i.e. priority in liquidation). [IAS 28.38].
Once the investor’s interest is reduced to zero, additional losses are provided for, and a
liability is recognised, only to the extent that the investor has incurred legal or
constructive obligations or made payments on behalf of the associate or joint venture.
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If the associate or joint venture subsequently reports profits, the investor resumes
recognising its share of those profits only after its share of the profits equals the share
of losses not recognised. [IAS 28.39]. Whilst IAS 28 does not say so explicitly, it is
presumably envisaged that, when profits begin to be recognised again, they are applied
to write back the various components of the investor’s interest in the associate or joint
venture (see previous paragraph) in the reverse order to that in which they were written
down (i.e. in order of their priority in a liquidation).
IAS 28 is not explicit about the allocation of losses recognised in the income statement
and losses incurred in OCI. Therefore management will need to develop an appropriate
policy. The policy chosen should be disclosed and consistently applied.
In addition to the recognition of losses arising from application of the equity method,
an investor in an associate or joint venture must consider the additional requirements
of IAS 28 in respect of impairment losses (see 8 below).
Example 11.22: Accounting for a loss-making associate
At the beginning of the year entity H invests €5 million to acquire a 30% equity interest in an associate, entity A.
In addition, H lends €9 million to the associate, but does not provide any guarantees or commit i
tself to provide
further funding. How should H account for the €20 million loss that the associate made during the year?
H’s share in A’s loss is €20 million × 30% = €6 million. If H’s loan to A is considered part of the net
investment in the associate then the carrying amount of the associate is reduced by €6 million, from
€14 million (= €5 million + €9 million) to €8 million. That is, the equity interest is reduced to nil and the loan
is reduced to €8 million. However, if the loan is not part of the net investment in the associate then H accounts
for the loss as follows:
• the equity interest in the associate is reduced from €5 million to zero;
• a loss of €1 million remains unrecognised because H did not provide any guarantees and has no
commitments to provide further funding. If in the second year, however, A were to make a profit of
€10 million then H would only recognise a profit of €2 million (= €10 million × 30% – €1 million).
However, if in the second year H were to provide a €1.5 million guarantee to A and A’s net profit
were nil, then H would need to recognise an immediate loss of €1 million (i.e. the lower of the
unrecognised loss of €1 million and the guarantee of €1.5 million) because it now has a legal
obligation pay A’s debts; and
• as there are a number of indicators of impairment, the loan from H to A should be tested for impairment
in accordance with IFRS 9.
7.10 Distributions received in excess of the carrying amount
When an associate or joint venture makes dividend distributions to the investor in
excess of the investor’s carrying amount it is not immediately clear how the excess
should be accounted for. A liability under IAS 37 – Provisions, Contingent Liabilities
and Contingent Assets – should only be recognised if the investor is obliged to refund
the dividend, has incurred a legal or constructive obligation or made payments on behalf
of the associate. In the absence of such obligations, it would seem appropriate that the
investor recognises the excess in net profit for the period. When the associate or joint
venture subsequently makes profits, the investor should only start recognising profits
when they exceed the excess cash distributions recognised in net profit plus any
previously unrecognised losses (see 7.9 above).
Investments in associates and joint ventures 801
7.11 Equity transactions in an associate’s or joint venture’s financial
statements
The financial statements of an associate or joint venture that are used for the purposes of
equity accounting by the investor may include items within its statement of changes in
equity that are not reflected in the profit or loss or other components of comprehensive
income, for example, dividends or other forms of distributions, issues of equity
instruments and equity-settled share-based payment transactions. Where the associate or
joint venture has subsidiaries and consolidated financial statements are prepared, those
financial statements may include the effects of changes in the parent’s (i.e. the associate’s
or joint venture’s) ownership interest and non-controlling interest in a subsidiary that did
not arise from a transaction that resulted in loss of control of that subsidiary.
Although the description of the equity method in IAS 28 requires that the investor’s
share of the profit or loss of the associate or joint venture is recognised in the investor’s
profit or loss, and the investor’s share of changes in items of other comprehensive
income of the associate or joint venture is recognised in other comprehensive income
of the investor, [IAS 28.10], no explicit reference is made to other items that the associate
or joint venture may have in its statement of changes in equity.
Therefore, the guidance in the sections that follow may be considered in determining
an appropriate accounting treatment.
7.11.1
Dividends or other forms of distributions
Although paragraph 10 of IAS 28 does not explicitly refer to dividends or other forms of
distribution that are reflected in the associate’s statement of changes in equity, it does
state that distributions received from an investee reduce the carrying amount of the
investment. Generally, the distributions received will be the equivalent of the investor’s
share of the distributions made to the owners of the associate reflected in the associate’s
statement of changes in equity. Thus, they are effectively eliminated as part of applying
the equity method.
However, this may not always be the case. For example, when an associate declares
scrip dividends which are not taken up by the investor, the investor’s proportionate
interest in the associate is reduced. In this situation, the investor should account for this
as a deemed disposal (see 7.12.5 below).
7.11.2
Issues of equity instruments
Where an associate or joint venture has issued equity instruments, the effect on its net
assets will be reflected in the associate’s or joint venture’s statement of changes in equity.
Where the investor has participated in the issue of these equity instruments, it will account
for its cost of doing so by increasing its carrying amount of the associate or joint venture.
If, as a consequence of the investor’s participation in such a transaction, the investee has
become an associate or joint venture of the investor, or the investor has increased its
percentage ownership interest in an existing associate or joint venture (but without
obtaining control), the investor should account for this as an acquisition of an associate or
joint venture or a piecemeal acquisition of an associate or joint venture (see 7.4.2 above).
Thus, the amounts reflected in the associate’s or joint venture’s statement of changes in
equity are effectively eliminated as part of applying the equity method.
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If, on the other hand, the investor has not participated in the issue of equity instruments
reflected in the associate’s or joint venture’s statement of changes in equity, e.g. shares
have been issued to third parties or the investor has not taken up its full allocation of a
rights issue by the associate or joint venture, the investor’s proportionate interest in the
associate or joint venture is diminished. In such situations, it should account for the
transaction as a deemed disposal (see 7.12.5 below).
7.11.3
Equity-settled share-based payment transactions
Another item that may feature in an associate’s or joint venture’s statement of changes
in equity is the credit entry relating to any equity-settled share-based payment
transactions of the associate or joint venture; the debit entry of such transactions is
recognised by the associate or joint venture as an expense within its profit or loss.
How should such a transaction be reflected by the investor in equity accounting for the
associate or joint venture, particularly the impact of the credit to equity recognised by
the associate or joint venture?
As the share-based payment expense is included within the profit or loss of the associate
or joint venture, this will be reflected in the share of the associate’s or joint venture’s
profit or loss recognised in the
investor’s profit or loss. [IAS 28.10]. As far as the credit to
equity that is included in the associate’s or joint venture’s statement of changes in equity
is concerned, there are two possible approaches:
(a) ignore the credit entry; or
(b) reflect the investor’s share of the credit entry as a ‘share of other changes in equity
of associates or joint ventures’ in the investor’s statement of changes in equity.
We believe that approach (a) should be followed, rather than approach (b). The description
of the equity method in IAS 28 states that ‘the carrying amount [of the investment in an
associate or a joint venture] is increased or decreased to recognise the investor’s share of
the profit or loss of the investee after the date of acquisition. ... 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.’ [IAS 28.10].
As far as the credit to shareholders’ equity recognised by the associate or joint venture
is concerned, this is not part of comprehensive income and given that paragraph 10 of
IAS 28 implies that the investor only recognises its share of the elements of profit or loss
and of other comprehensive income, the investor should not recognise any portion of
the credit to shareholders’ equity recognised by the associate or joint venture. If and
when the options are exercised, the investor will account for its reduction in its
proportionate interest as a deemed disposal (see 7.12.5 below).
This approach results in the carrying amount of the equity investment no longer
corresponding to the proportionate share of the net assets of the investee (as reported
by the investee). However, this is consistent with the requirement in IAS 28 for dealing
with undeclared dividends on cumulative preference shares held by parties other than
the investor (see 7.5.2 above). [IAS 28.37]. In that situation, the undeclared dividends have
not yet been recognised by the investee at all, but the investor still reduces its share of
the profit or loss (and therefore its share of net assets). The impact of applying this
approach is illustrated in Example 11.23 below. Although the example is based on an
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 158
