IAS 28: INVESTMENT IN ASSOCIATES AND JOINT VENTURES and EQUITY METHOD

Question 1

What is an associate?

Answer 1

An associate is an entity over which the investor has significant influence

Question 2

When can we say that an entity has significant influence?

Answer 2

Significant influence is the power to participate in the financial and operating decisions of the investee but is not control or joint control of those policies.

• Holding > 20% voting power: Significant Influence is presumed;
• Holding < 20% voting power: Presumed the entity does not have significant influence;
  ‐ Significant influence may exist where an entity holds < 20% of the voting power if it can be clearly demonstrated.

Question 3

What are potential voting rights?

Answer 3

Potential voting rights may be in the form of:
‐ Warrants
‐ Share call options
‐ Debt or equity instruments convertible into shares
‐ Other similar instruments

Existence of currently exercisable or convertible potential voting rights may contribute to significant influence.

Question 4

When is significant influence lost?

Answer 4

Significant influence lost when power to participate in financial and operating policy decisions of the investee is lost.

Question 5

Which entities should apply the equity method? (EQUITY METHOD SCOPE)

Answer 5

• Entity with joint control of an investee
• Entity with significant influence over an investee.

Question 6

Exemption of the application of the Equity Method

Answer 6

Exemptions may lead to an entity preparing only separate financial statements in accordance with IAS 27.
Equity accounting does not apply to an investment in associate of joint venture in the separate financial statements of an entity. Investment is accounted for at either cost or Fair value under IAS 39 (IFRS 9)

Question 7

Which is the share to be accounted for when applying the Equity Method?

Answer 7

In a group situation, the share of an associate or joint venture is the aggregate holding by the group, being the parent and its subsidiaries.

Question 8

Initial recognition of an investment (applying the equity method)

Answer 8

1) On initial recognition, the investment in an associate or joint venture is recognised at cost
‐ Cost comprises the purchase price and any directly associated transaction costs necessary to effect the purchase.

2) On acquisition, investor must attribute value to investment in associate based on associates net fair value
The investor would use these fair values to determine subsequent adjustments.

3) any difference between the cost the investment
and the entity’s share of the net fair value of the investee’s identifiable assets and liabilities is:
‐ Goodwill = Cost > Entity’s share of net fair value investees net assets
Goodwill is included in carrying amount of investment
Goodwill is not permitted to be amortised
Separate disclosure of the goodwill amount is not require
‐ Excess Goodwill = Cost < Entity’s share of net fair value investees net assets
Excess included in income in period investment acquired

Question 9

How are accounted the differences between the cost the investment and the entity’s share of the net fai falue of the investee’s identifiable assets and liabilities using equity method?

Answer 9

1) Goodwill = Cost > Entity’s share of net fair value investees net assets
‐ Goodwill is included in carrying amount of investment
‐ Goodwill is not permitted to be amortised
‐ Separate disclosure of the goodwill amount is not required

2) Excess Goodwill = Cost < Entity’s share of net fair value investees net assets
‐ Excess included in income in period investment acquired

Question 10

How is accouted the investor’s share of post acquisition profit or losses in investee using equity method?

Answer 10

Carrying amount of investment is increased or decreased to recognise investor’s share of profit or loss in investee after acquisition date

Investor’s share of investee’s profit or loss recognised in investor’s profit or loss

Any distributions received deducted against carrying amount of investment

Investor’s share of investee’s profit or loss adjusted for fair value adjustments recognised on initial recognition

Question 11

How are accounted Transactions with the associate or joint venture?

Answer 11

‐ Do not eliminate trading transactions
‐ Do not eliminate loans since the associate or JV does not form part of the group
‐ Long-term loans would not be included in investments accounted for under equity method, but under IFRS 9

‐ Do eliminate the investors share of profit in inventory (inventory held by investor and purchased from the associate)
‐ Do eliminate the associates share of profit in inventory (inventory held by associate and purchased from the investor)

• Dividends/distributions received from the associate reduce the carrying value of the associate or joint venture

Question 12

How are accounted the distribution in excess of carrying amount of investment (with no recourse to repayment)?

Answer 12

1. Reduce carrying value of investment in associate or joint venture to Nil
2. Recognise gain in profit or loss
3. In subsequent years if profit is made, choice of accounting to either:
   ‐ Increase carrying value of investment, or
   ‐ Not recognise share of profit until previously recognised gain has been clawed back