IAS 28- Investments in Associates and Joint Venture

Question 1

What classified as a joint venture

35.Stem

Answer 1

• Characteristics of Joint Ventures:
  
  • Structured through a separate legal entity.
  • Joint control by venturers.
  • Control exercised through equity investments.
  • Significant decisions require unanimous consent.
• Emphasis Co Classification as Joint Venture:
  
  • Activities conducted through separate legal entity.
  • Control determined by equity investments.
  • Significant decisions require unanimous consent.
• Accounting Treatment:
  
  • Each joint venturer recognizes an investment.
  • Equity method applied per IAS 28 Investments in Associates and Joint Ventures.
• Tricky Issue:
  
  • Joint venturer initially contributes less than proportionate fair value of net assets.
• • Bargain Purchase Recognition (IAS 28):
  • Investment less than investor’s share of fair value of identifiable net assets.
  • Results in a gain to the investor, known as a bargain purchase.
  • Any difference between cost of acquisition and investor’s share of fair values treated like goodwill per IFRS 3.
• Verification Process:
  
  • Reassess identification of all acquired assets and assumed liabilities.
  • Challenge valuations to ensure proper measurement of identifiable net assets.
• Reasons for Bargain Purchase:
  
  • Investors act in economically rational manner.
  • Strategic reasons may include specialized industry knowledge.
  • Fair value of net assets may have increased before finalization of agreement.
• Calculation:
  
  • Stem Co contributed $150,000 cash to Emphasis Co.
  • Carrying amount of net assets contributed: $310,000.
  • Fair value of net assets contributed: $470,000.
  • Stem Co’s share of fair value: 40% of $470,000 = $188,000.
• Recording Entry:
  
  • Stem Co records investment at $188,000.
  • Recognizes gain of $38,000 ($188,000 - $150,000).
    
    • Dr Investment in Emphasis Co $188,000
    • Cr Cash $150,000
    • Cr Profit or loss $38,000

Question 2

Compare equity method for an associate to using the cost or fair value

35.Stem

Answer 2

• Nature of Equity Method:
  
  • Measurement method, not a consolidation method.
  • Equity-accounted entity remains as a single line in the investor’s statement of financial position.
  • Consolidation in IFRS standards is based on control.
• Purpose and Application:
  
  • Used for investments where there is ‘significant influence’.
  • Recognizes an associate’s profits not received but attributable to the investor.
• Components of Equity Method:
  
  • Cost of the investment in the associate.
  • Parent’s share of the associate’s post-acquisition movement in net assets.
• Comparative Analysis:
  
  • Equity method provides better information than cost.
  • Fair value may be preferable for listed investments.
• Advantages of Fair Value for Listed Investments:
  
  • Easier to establish fair value for listed investments.
  • Fair value more intuitively appealing than equity method.
• Challenges with Fair Value for Unlisted Investments:
  
  • Verifiability of fair value for unlisted investments may be questioned.
• Consideration of IFRS 13 Fair Value Measurement:
  
  • Equity method may not be preferred over IFRS 13 for unlisted investments.