IAS 28 Investments in Associates Overview

Investments in Associates Overview

The objective is:

• to prescribe the accounting for investments in associates, and
• to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

IAS 28 is applied by all entities that are investors with joint control of, or significant influence over, an investee, but not to venture capital organisations or mutual funds, unit trusts or similar entities that upon initial recognition designate them at fair value through profit and loss or as held for trading

in  accordance with IAS 39.

Significant influence is based on the presumption that between 20% – 50% shareholding gives rise to significant influence unless evidence is provided that proves differently (less than 20% but still significant influence or more than 20% but still no significant influence).

Significant influence is usually evidenced in one or more of the following ways:

• Representation in the board of directors or equivalent governing body of the investee,
• Participation in policy-making processes, including participation in decisions about dividends or other distributions,
• Material transactions between the investor and the investee,
• Interchange of managerial personnel, and/or
• Provision of essential technical information.

Potential voting rights have to be considered when management assesses whether it has significant influence

Significant influence ceases once an entity loses its power to participate in the financial and operating policy decisions.

The equity method is:

• A method of accounting whereby the investment is initially recognised at cost.
• Adjusted thereafter for the post-acquisition change in the investor’s share of net  assets of the investee,
• The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.

It should be noted that in this equity method goodwill and other intangible assets acquired at the moment of purchasing an investment in an associate or joint venture are not separated from the equity value (using the investor’s accounting policies) at the moment of acquisition. 

Other events causing changes in the carrying amount of investments in associates are:

• Distributions received from an investee: these reduce the carrying amount of the investment,
• Adjustments to the carrying amount may arise from changes in the investee’s equity, for example the revaluation of property, plant and equipment and foreign  exchange translation differences. The investor’s share of  those changes is recognised directly in equity of the investor
• An investment in an associate that meets the definition of a ‘non-current asset held for sale’ should be recognised in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

The investor uses the equity method to account for its investment in the associate from the date significant influence arises, to the date significant influence ceases.

Items were management judgement is required are:

• Potential voting rights are taken in into account to determine whether significant influence exists, but equity accounting is based on present ownership interest at the reporting date,
• Financial statements reporting date of the investor and investee used for equity accounting must not differ by more than 3 months in terms of the reporting date,
• The investor’s share in the associate’s profits and losses resulting from transactions with the associate are eliminated in the equity accounted financial statements of the parent,
• Use uniform accounting policies for like transactions and other  events in similar circumstances,
• If an investor’s share of losses of an associate exceeds its interest in the associate, the investor discontinues recognising its share of further losses (unless it has a future obligation to fund losses),
• The interest in an associate is the carrying amount of the investment in the associate under the equity method together with any long-term interests that, in substance, form part of the investor’s net investment in the associate. For example, a loan 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.