Learning Unit 9 - Investment in associates and joint ventures

Question 1

IAS 28: Investment in associates

When does and entity become a associate?

Answer 1

An entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.

Question 2

When does a entity have significant influence over another entity?

Answer 2

• If a entity hold 20% or more of the voting power in another entity (but less than 50%).
• The power to participate in the financial and operating policy decisions of the investee but is not control over those policies

Other indicators:
- Representation on the board of directors
- Participation in policy making processes
- Material transactions between parties
- Interchange between managerial personnel.

Question 3

What is the initial and subsequent accounting treatment for investments in associates?

Answer 3

Equity method

Initial

Investment in associates is initially measured at cost. Goodwill is included in cost of the investment

Subsequent measurement

Changes in equity of associate since acquisition will be accounted for under profit and loss.

Where assets have been revalued in the associate, the the attributable portion of the revaluation surplus that is created must be recognized within other comprehensive income.

Question 4

How are intragroup transactions treated between a entity and its associates in terms of ISA 28

Answer 4

ISA28.8 requires elimination of intragroup transactions where an associate is one of the parties. Only the percentage of interest in the associate must be eliminated .

Balances such as receivables, payables and loans from associates are not reflected in the equity equity accounted financial statements. Income and expense items such as interest received, interest paid and management fees are not eliminated.

Question 5

When may an entity elect to not use the equity method for measuring a investment in associate IAS28.17?

Answer 5

• The exception of IFRS 10 applies allowing a parent that also has an investment in associate to not prepare consolidated financial statements; or
• the investor is a wholly-owned subsidiary of another entity
• the investor is a partially owned-subsidiary of another entity and the non-controlling shareholders have no objection against not applying the equity method.
• the debt and equity instruments are not traded on the public market
• the ultimate or any intermediate parent of the investor prepares consolidated financial statements.

Question 6

Where the cost of the investment in the associate exceeds the FV of the net assets, how is the excess cost accounted for?

Answer 6

The excess of the cost of the investment over the investor’s share in the fair value of net assets is recognized as goodwill. It is however not recognized as a separate financial asset, but is rather included in the carrying amount of the investment. (accounted for in terms of IFRS 3 Business Combinations)

Question 7

What is the accounting treatment for revaluation of the assets of an associate since acquisition?

Answer 7

If the assets of an associate are revalued after the acquisition of the investment, the attributable portion of the revaluation surplus that is created must be recognized within other comprehensive income in the consolidated statements of the investor and the carrying amount of the investment must be increased by the amount of the investor’s share in the revaluation surplus of the associate.

Question 8

Non-coterminous year ends

What must be done where a associate has different reporting dates to the investor?

Answer 8

When financial statements with different reporting dates are used, adjustments are made for the effect of any significant events or transactions that occur between the date of the associate’s financial statements and the date of the investor’s financial statements.

The difference may not be more than 3 months otherwise the associate must prepare statements at the same date as the investor. (IAS 28: 33-34)

Question 9

How do we classify joint arrangements? (What criteria is considered?)

Answer 9

• The structure of the joint arrangement
• When a joint arrangement is structured through a separate vehicle
• the legal form of the separate entity
• the terms of contractual arrangements
• other facts and circumstances where applicable

Question 10

How do we classify a joint arrangement in terms of the structure criteria (Pg 163 of GS Vo. 2)?

Answer 10

A joint arrangement which is not structured through a separate vehicle can only be classified as a joint operation.

If a separate vehicle is created then the joint arrangement may be classified as either a joint venture or joint operation depending on other assessment criteria.

Question 11

How do we classify a joint arrangement in terms of the legal form of the separate vehicle (Pg 163 of GS Vo. 2)?

Answer 11

When a joint arrangement is structured through a separate legal vehicle, the legal form causes the separate vehicle to be considered in its own right (its assets and liabilities are its own and not that of the parties). It must be then classified a joint venture.

If a arrangement exists which modify the legal form and the assets and liabilities of the separate vehicle is that of the parties then it is a joint operation.

Question 12

What other facts or circumstances could modify the initial assessment of the joint arrangement?

Answer 12

• If the parties have rights to substantially all the economic benefits relating to the arrangement; and
• cause the arrangement to depend on a continuous basis on the parties for settling its liabilities

Then it is a joint operation.