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IAS 28 – INVESTMENT IN ASSOCIATES AND
JOINT VENTURES
OBJECTIVE
The
objective of IAS 28 is to prescribe the accounting for investment in associate
and to set out the requirements for the application of the equity method when
accounting for investments in associates and joint ventures.
Associate
An
associate is an entity over which investor has significant influence.
Joint venture
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.
Equity Method
Equity
method is a method accounting whereby the investment is initially recognised at
cost and adjusted thereafter for post-acquisition change in the investor’s
share of the investee’s net assets. The investor’s profit or loss includes its
share of the investee’s profit or loss and the investor’s other comprehensive
income includes its share of the investee’s other comprehensive income.
Significant influence
Significant
influence is the power to participate in the financial and operating policy
decisions of the investee, but is not
a control or joint control of those policies.
The
indicator of significant influence is when an entity holds 20% or more of the
voting power on the investee. However, this indicator is not sufficient enough
to indicate the presence of or absence of significant influence.
Indicators of Significant Influence
The
following factors are indicative of significant influence:
1.
Representation on the board of directors or equivalent governing body;
2.
Participation in the policy-making process, including decisions about dividends
and other distributions;
3.
Material transactions between parties;
4.
Interchange of managerial personnel; and
5.
Provision of essential technical information
APPLICATION OF THE EQUITY METHOD
An
investor applies equity method once the investor acquires significant influence
or joint control of a joint venture.
Initial Recognition
1.
The investment in an associate or a joint venture is recognised at cost. This
is done by debiting investment in associate and crediting cashbook (either cash
or bank where applicable).
2.
The difference between the cost of the investment and the investor’s share on
investee’s net fair value of identifiable assets and liabilities will be
recognised
a.
if difference is positive, then goodwill (difference) will be included in the
cost of the investment and not
amortized.
b.
if difference is negative, then recognise as an income in profit or loss at the
acquisition date.
Subsequent Recognition
1.
The carrying amount is increased or decreased to recognise the investor’s share
of the profit or
loss
of the investee after the date of acquisition by crediting investment in
associate and cashbook (either cash or bank where applicable).
Note: 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 beyond zero.
2.
Decrease the carrying amount of the investment if an investee distributes some
dividends to the investor by debiting cashbook (either cash or bank where applicable)
and crediting investment in associate.
Exemptions from applying the equity
method
1.
The entity is a parent that is exempt from preparing consolidated financial statements
under IFRS 10 or all of the following conditions applies:
a.
the parent itself is a wholly owned subsidiary or a partially-owned subsidiary
and its owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not preparing consolidated
financial statements
b.
the parent's debt or equity instruments are not traded in a public market
c.
the parent did not file its financial statements with a securities commission
or other regulatory organisation for the purpose of issuing any class of
instruments in a public market
d.
the ultimate parent company produces consolidated financial statements that
comply with IFRS Standards and are available for public use.
2.
When an investment in an associate or a joint venture is held by an entity that
is a venture capital organisation, mutual fund, unit trust or similar entity,
then the investor might opt to measure investments at fair value through profit
or loss under IFRS 9.
Discontinuing the equity method
An
investor discontinues the application of the equity method when its investment ceases
to be an associate or a joint venture.
Specific
circumstances in which a significant influence or joint arrangement ceases is
when:
1.
the investment becomes a subsidiary accounted for under IFRS 3 and IFRS 10.
2.
the retained interest is a financial asset accounted for under IFRS 9.
3.
amounts recognised in other comprehensive income in relation to the investment
in the associate or joint venture are accounted for on the same basis as if the
investee had directly disposed of the related assets or liabilities.
Note: when an investment in an
associate becomes an investment in a joint venture or an investment in a joint
venture becomes an investment in associate, the entity continues to apply the
equity method and does not remeasure the retained interest.
DISCLOSURES
There are no disclosures laid out in IAS 28 – Investment in Associates and Joint Ventures. However, IFRS 12 – Disclosure of Interest in Other Entities outlines the disclosures required for entities with joint control of, or significant influence over an investee.