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AS 28 Investments in Associates and Joint Ventures: What Is The Objective of IAS 28?
AS 28 Investments in Associates and Joint Ventures: What Is The Objective of IAS 28?
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You have already learned various aspects of having control over some investment: how to identify
it, how to account for it and we also learned basic consolidation procedures step by step.
It was all covered by IFRS 3 Business Combinations and IFRS 10 Consolidated Financial
Statements.
Another very frequent type of investment is an associate over which an entity has significant
influence. It is all arranged by the standard IAS 28 Investments in Associates and Joint
Ventures, so let’s take a look.
A joint venture is a joint arrangement whereby the parties having joint control of the arrangement
have rights to the net assets of the joint arrangement.
Sometimes, it can be quite difficult to determine whether we deal with control or significant influence
– and we can’t make a mistake, because the whole accounting treatment and reporting depends on
this classification.
BUT!
It’s not the rule of thumb and often, the truth is different.
Sometimes, when an investor holds more than 20% of the voting power (but less than 50), it can still
control the investee.
Here, CarProd does not own the majority (over 50%), but it’s still more than 20% – that would
indicate significant influence.
But, as other investors own max. 1% each, the probability of outvoting CarProd in major decisions is
very low, so CarProd may in fact exercise control over TyreCorp, rather than significant influence. Of
course, you would need to examine it further.
Investor has a representation on the board of directors (or other equivalent governing body)
of the investee.
Investor participates in policy-making processes (including dividend decisions).
There are material transactions between the investor and its investee.
There’s interchange of managerial personnel.
Provision of essential technical information.
When you assess the presence of significant influence, you should not forget to examine potential
voting rights (in form of some options to buy shares, or convertible debt instruments, etc).
2. If there’s a difference between cost and investor’s share on investee’s net fair value of
identifiable assets and liabilities, then it depends, whether this difference is positive or
negative:
o When the difference is positive (cost is higher than the share on net assets), then there’s
a goodwill and you don’t recognize it separately. It is included in the cost of an
investment and NOT amortized.
o When the difference is negative (cost is lower than the share on net assets), then it’s
recognized as an income in profit or loss in the period when the investment is
acquired.
Subsequently, after the initial recognition:
1. The carrying amount of the investment is increased or decreased by the investor’s share on
investee’s net profit or loss after the acquisition date. The journal entry is:
o Debit Investment in the statement of financial position, and
When an associate or joint venture make losses and these losses exceed the carrying amount
of the investment, investor cannot bring down the carrying amount of the investment below
zero. Investor simply stops bringing in further losses.
2. When an investee distributes some dividends to the investor, then such a distribution
decreases the carrying amount of the investment. The journal entry is:
o Debit Cash (or whatever applies here) and
Both investor and investee shall apply uniform accounting policies for the similar
transactions.
The same reporting date shall be used, unless it’s impracticable.
Investor’s share on gain or loss from mutual „upstream“ and „downstream“ transactions is
eliminated.
So here, you don’t eliminate mutual balances (receivables or payables) outstanding at the end
of the reporting period, but you eliminate just investor’s share on trading profit and similar
items.
1. Investor is a parent that is exempt from preparing consolidated financial statements by the
scope exception of paragraph 4(a) of IFRS 10 (it’s similar as below point); OR
2. All of the following applies:
o The entity’s debit or equity Instruments are not traded in a public market;
o The entity did not file, nor is in the process of filing, its financial statements with a
securities commission or other body for the purpose of issuing any class of Instruments
in a public market;
o The ultimate or any intermediate parent of the entity produces consolidated financial
statements available for public use that comply with IFRS.
Here, I’d like to add that when an investment meets the criteria in IFRS 5 and is classified as held
for sale, then an investor shall apply IFRS 5 to that investment and not equity method (even when it
relates to a portion of investment, then IFRS 5 is applied to that portion).
The way of discontinuing depends on specific circumstances, for example if the investment becomes
a subsidiary, then an investor stops equity method and starts full consolidation in line with IFRS
10/IFRS 3.
You can watch a video with the summary of IAS 28 here: