IAS-28 - Accounting for Investment in Associates (Revised Dec 2003)
Objective of IAS 28
The objective of IAS 28 is to prescribe the accounting treatment to be adopted by an investor for investments in associates.
Associate: An enterprise in which the investor has signfiicant influece but not control or joint control.
Significant influence: Power to participate in the financial and operating policy decisions but not control them.
Equity method: A method of accounting by which an equity investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the net profit or loss of the associate (investee).
Identification of Associates
A holding of 20% or more of the voting power will indicate significant influence unless it can be clearly demonstrated otherwise. If the holding is less than 20%, the investor will be presumed not to have significant influence unless such influence can be clearly demonstrated. [IAS 28.4]
The existence of significant influence by an investor is usually evidenced in one or more of the following ways: [IAS 28.5]
- representation on the board of directors or equivalent governing body of the investee;
- participation in the policy-making process;
- material transactions between the investor and the investee;
- interchange of managerial personnel; or
- provision of essential technical information.
Accounting for Associates
In its consolidated financial statements, an investor should use the equity method of accounting for investments in associates, other than in these two exceptional circumstances:
- the investment is acquired and held exclusively with a view to disposal in the near future
- the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor.
In those cases, the investment should accounted for in accordance with IAS 39. [IAS 28.8]
Applying the Equity Method of Accounting
The equity method is a method of accounting whereby an equity investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the net profit or loss of the associate (investee). Distributions received from the investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be required arising from changes in the investee's equity that have not been included in the income statement (for example, revaluations).
On acquisition of the investment in an associate, any difference (whether positive or negative) between the cost of acquisition and the investor's share of the fair values of the net identifiable assets of the associate is accounted for like goodwill in accordance with IAS 22, Business Combinations. Appropriate adjustments to the investor's share of the profits or losses after acquisition are made to account for: [IAS 28.17]
- additional depreciation of the associate's depreciable assets based on the excess of their fair values over their carrying amounts at the time the investment was acquired; and
- amortisation of the difference between the cost of the investment and the investor's share of the fair values of the net identifiable assets.
Use of the equity method should cease from the date that significant influence ceases, or if severe long-term restrictions are imposed that significantly impair the ability of the associate to transfer funds to the investor. The carrying amount of the investment at that date should be regarded as cost thereafter. [IAS 28.11]
If an associate is accounted for using the equity method, unrealised profits and losses resulting from upstream (associate to investor) and downstream (investor to associate) transactions should be eliminated to the extent of the investor's interest in the associate. However, unrealised losses should not be eliminated to the extent that the transaction provides evidence of an impairment of the asset transferred. [SIC 3]
In applying the equity method,the investor normally uses the financial statements of the associate as of the same date as the financial statements of the investor. [IAS 28.18] If it is not possible to obtain financial statements to the same date as the investor, the most recent available financial statements of the associate should be used, with adjustments made for the effects of any significant events occurring between the accounting period ends. [IAS 28.19]
If the associate uses accounting policies that differ from those of the investor, the associate's treatment should be adjusted and, if it is not practicable to make such adjustments, that fact should be disclosed. [IAS 28.20]
If the investor's share of losses of an associate equals or exceeds the carrying amount of the investment, the investor normally discontinues including its share of further losses and the investment is reported at nil value. Additional losses are recognised to the extent that the investor has incurred obligations or made payments to satisfy obligations of the associate that the investor has guaranteed or otherwise committed. If the associate subsequently reports profits, the investor resumes including its share of those profits only after its share of the profits equals the share of net losses not recognised. [IAS 28.22. See also SIC 20]
IAS 36, Impairment of Assets, applies to investments in associates. The recoverable amount of an investment in an associate is assessed for each individual associate, unless the associate does not generate cash flows independently.
Individual Financial Statements of the Investor
If the investor issues consolidated financial statements, in the investor's separate financial statements, associates other than those acquired and held exclusively with a view to disposal in the near future should be either: [IAS 28.12]
- carried at cost;
- accounted for by the equity method; or
- accounted for as available-for-sale financial assets under IAS 39, Financial Instruments: Recognition and Measurement.
If the investor does not issue consolidated financial statements, in the investor's separate financial statements, associates should be either: [IAS 28.14]
- carried at cost;
- accounted for using the equity method, if the equity method would be appropriate for the associate if the investor issued consolidated financial statements; or
- accounted for under IAS 39 as an available-for-sale financial asset or a financial asset held for trading.
Disclosure [IAS 28.27]
- Identification and description of significant associates, including proportion of ownership interest and voting power held.
- Methods used to account for such investments.
Presentation [IAS 28.28]
- Equity method investments should be classified as non-current assets and disclosed as a separate item in the balance sheet
- Investor's share of the associate's profits or losses should be disclosed as a separate item in the income statement
- Investor's share of any extraordinary or prior period items should be separately disclosed
Note: Please note that these summaries are only for reference purposes and are not a substitute for the entire IFRS/IAS. Kindly read the whole text of IFRS/IAS before consulting these summaries.
Summaries are courtesy of Deloitte.
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