IAS 28 Investments in Associates and Joint Ventures

 

Other factors to consider while accounting for the equity method

• ·    Distributions and other adjustments to book value. The investor's share of the investee's profit or loss is measured in the investor's profit or loss. Receipt of distribution from an investee reduce the carrying value of investment. Adjustments to the carrying amount may also be necessary for changes in the investor's proportional interest in the investee that arise from changes in the investee's other comprehensive income (for example, to account for changes that arise from revaluations of property, plant and equipment and foreign currency conversions).
• ·    Possible voting rights. An entity's interest in an associate or joint venture is determined solely on the basis of existing ownership interests and generally does not represent the probable exercise or conversion of potential voting rights and other derivative instruments.
• ·    Interaction with IFRS 9. IFRS 9 Financial Instruments does NOT apply to interests in associates and joint ventures that are accounted for using the equity method. An entity applies IFRS 9, including its impairment requirements, to long-term interests in an associate or joint venture that are part of the net investment in the associate or joint venture, but to which the disclosure method does not apply. participation. Instruments that contain potential voting rights in an associate or joint venture are accounted for in accordance with IFRS 9, unless they currently give access to the returns associated with an ownership interest in an associate or joint venture.
• ·    Classification as a non-current asset. An investment in an associate or joint venture is generally classified as a non-current asset, unless it is classified as held for sale in accordance with IFRS 5 Non-current assets held for sale and discontinued operations.

Application of the equity accounting method

Basic accounting principle. In its consolidated financial statements, an investor uses the capital accounting method for investments in associates and joint ventures. Many of the procedures that are appropriate to apply the equity method are similar to the consolidation procedures described in IFRS 10. In addition, the concepts underlying the procedures used in accounting for the acquisition of a subsidiary are also adopted in accounting. from the acquisition of an investment in an associate or a joint venture.

Exceptions from applying the equity method:

Exclusions from application of the equity method for the entity if the investment of said entity satisfies one of the following conditions:

·       Equity method need not to apply if the investing entity is a parent that has exemption from preparing consolidated financial statements by the scope exception in paragraph 4(a) of IFRS 10 or if all of the following apply:

Ø  the entity is a wholly or partly owned subsidiary of another entity and its other owners, includes those not otherwise eligible to vote and also informed about the investor not opting the equity method;

Ø  the debt or equity instruments of investor or joint venturer's aren’t traded in a public market

Ø  the entity didn’t provide financial statements with a securities commission or other regulatory organisation for issuing anything in the public market, and

Ø  the ultimate/any intermediate parent of the parent prepares financial statements available for public, complies with IFRSs, in which subsidiaries are consolidated or are considered at fair value through profit or loss (FVTPL) according to IFRS 10.

·       Investment is held by (or is held indirectly through) an entity that is a venture capital organisation, mutual fund, unit trust and similar organisation including investment-linked insurance funds, the entity may elect to recognise investments in those associates and joint ventures at fair value through profit or loss (FVTPL) in accordance with IFRS 9.

o   For every investment on initial recognition, the election will be made separately.

o   Entity’s investment in any associate, a portion held indirectly through a venture capital organisation, mutual fund, unit trust and similar organisation which includes investment-linked insurance funds, the entity may choose to measure that share of the investment in associate at fair value through profit or loss (FVTPL) in according to IFRS 9 nevertheless of whether the venture capital organisation, mutual fund, unit trust and similar organisation which includes investment-linked insurance funds, has significant influence over that share of the investment. If the entity elect that election, the entity will apply the equity method to any remaining share of its investment in an associate that is not held via a venture capital organisation, mutual fund, unit trust and similar organisation including investment-linked insurance funds.

Consideration of held for sale

When the investment (or part) satisfies the criteria to be classified as held for sale, the part so classified is accounted for in accordance with IFRS 5. Any remaining part is accounted for using the equity method so far. , available at that time, the retained investment is accounted for in accordance with IFRS 9, unless the retained interest continues to be an associate or joint venture.

Discontinue use of equity method

An entity will discontinue use of the equity method from the date its investment ceases to be an associate or a joint venture as follows:

 If the investment becomes a subsidiary, the entity accounts for its investment in accordance with IFRS 3 Business Combinations and IFRS 10

 If the interest retained in the former associate or joint venture is a financial asset, the entity will measure the retained interest at fair value. The fair value of the retained interest will be considered as its fair value at initial recognition as a financial asset in accordance with IFRS 9. The entity shall recognize in profit any difference between:

(i) the fair value of any interest withheld and any product of the disposition of a partial interest in the associate or joint venture; and

(ii) the carrying amount of the investment on the date the participation method was suspended.

 When an entity discontinues the use of the equity method, the entity shall account for all amounts previously recognized in other comprehensive income in relation to that investment on the same basis that would have been required if the investee had directly disposed of the related assets or liability.

The amounts recognized in other comprehensive income in relation to the investment in the associate or joint venture are accounted for in the same way as if the investee had directly disposed of the related assets or liabilities (which may require reclassification to results)

If an investment in an associate becomes an investment in a joint venture (or vice versa), the entity continues to apply the equity method and does not measure the retained interest again.

Changes in ownership interests

In the cases when the entity's interest in investment get reduced, but the equity method continues to apply, then the entity reclassifies the proportion (in relation to that reduction in interest) of gains or losses previously recognized in other comprehensive income to profit or loss.

Equity method procedures.

Most of the appropriate procedures of equity method are similar to the consolidation procedures described in IFRS 10. Furthermore, the concepts outline the procedure for accounting of acquisition of subsidiary are also applied for investment in associate or Joint ventures (JV).

Assessment of holding - Group’s share in investment is the cumulative of the holdings in that related associate or JV by the parent and its subsidiaries. The holdings of the group’s other associates or joint ventures should be ignored for this purpose.

Dealings with associates or joint ventures – Follow below for treatment of transactions occurred with associate or JV:-

o      Profit & loss resulting from upstream (associate to investor, or joint venture to joint venturer) and downstream (investor to associate, or joint venturer to joint venture) relations are eliminated to the extent of the investor's interest in the investment.

o      Unrealised losses should not eliminated to the extent that the transaction shows evidence of a reduction in the net realisable value or in the recoverable amount of the transferred assets.

o      Non-monetary assets contributions (defined in IFRS 3) to associate or JV in exchange for equity share in the associate or joint venture should be accounted for in accordance with these requirements.

o       If along with equity interest in associate or JV, an entity also receives monetary or non-monetary assets, then the entity measures that portion of the gain or loss on the non-monetary contribution relating to the monetary or non-monetary assets received fully in profit or loss.

Initial accounting - Investment should be accounted by using equity method from the date when it becomes an associate or a joint venture. At the time of acquisition, if there is any difference between the cost of the investment and the entity's involvement in the net fair value of the identifiable assets and liabilities of the investee should be accounted as follows:

(a) Goodwill related to investment should be included in the investment carrying amount. Note that amortization of that goodwill is not allowed.

(b) Any excess of the entity's interest in the net fair value of the investee's identifiable assets and liabilities over the cost of the investment should be included as income and accounted in the profit or loss.

Suitable adjustments to the entity's share of profit or loss of the associate or joint venture after the acquisition are required. For example, for the depreciation of depreciable assets should be based on their fair values ​​at the acquisition date. Similarly, necessary adjustments to the entity's stake of the profit or loss of the associate or joint venture post acquisition are made for impairment losses, such as goodwill or property, plant and equipment.

Date of financial statements: For application of equity method, the entity shall use the financial statements of the associate or joint venture on the same date as the financial statements of the investor or joint venture, unless feasible to do so. Otherwise, the most recent available financial statements of the associate or joint venture should be used, with necessary adjustments made for the effects of any material transactions or events that occurs between the end of the accounting periods. Though, the variations between both the reporting dates cannot exceed three months.

Accounting Policies: The associate or joint venture's financial statements should be adjusted to reflect the investor's accounting policies in order to apply the equity method, if both have different policies.

Application of the equity method by an investor of a non-investment entity to an investee of the investment entity: For application of equity method, an investor of a non-investment entity may retain the fair value measurement applied by the associate or joint venture to its interests in subsidiaries. The election is made separately for each associated investment entity or joint venture, no later than the date on which;

(a) the investment entity associate or joint venture is initially recognised;

(b) the associate or joint venture becomes an investment entity; and

(c) the investment entity associate or joint venture first becomes a parent.

Cumulative preference shares - If an associate or joint venture has cumulative preferred shares outstanding that are held by parties other than the entity and are classified as equity, the entity calculates its share of profit or loss after adjusting the dividends on those shares, whether or not they are dividends. have been declared

Losses in excess of investment: if the share of an investor or joint venture in the losses of an associate or joint venture is equal to or greater than its share in the associate or joint venture, the investor or joint venture does not recognize its share of losses Additional Interest in an associate or joint venture is the carrying amount of the investment in the associate or joint venture under the equity method together with any long-term interest that is essentially part of the investor's or partner's net investment in the associate or joint business.

Once the entity's interest is reduced to zero, a liability is recognized only to the extent that the investor or joint venturer has incurred legal or implicit obligations or made payments on behalf of the associate. If the associate or joint venture subsequently reports the earnings, the investor or the joint venture resumes recognition of its share of those earnings only after its share of the earnings equals the unrecognized share of the losses.

Impairment losses

After applying the equity method, including the recognition of losses of the associate or joint venture, the entity applies the following guidelines to determine if there is objective evidence that its net investment in the associate or joint venture is impaired.

The net investment is impaired and impairment losses are incurred if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the net investment (a 'loss event') and that event (or events) Loss The loss has an impact on the estimated future cash flows of the net investment that can be reliably estimated. Expected losses as a result of future events, no matter how likely they are, are not recognized.

Objective evidence that the net investment is impaired includes observable data that draws the entity's attention to the following loss events:

(a) significant financial difficulty of the associate or joint venture;

(b) a breach of contract, such as a default or late payment from the associate or joint venture;

(c) the entity, for economic or legal reasons related to the financial difficulty of its associate or joint venture, granting the associate or joint venture a concession that the entity would not otherwise consider;

(d) the associate or joint venture is likely to enter bankruptcy or another financial reorganization; or

(e) the disappearance of an active market for net investment due to financial difficulties of the associate or joint venture.

The disappearance of an active market because the equity or financial instruments of the associate or joint venture are no longer publicly traded is not evidence of impairment. A downgrade in the credit rating of an associate or joint venture or a decrease in the fair value of the associate or joint venture is not in itself evidence of impairment, although it may be evidence of impairment when considered with other available information.

In addition to the aforementioned events, the objective evidence of impairment of the net investment in the equity instruments of the associate or joint venture includes information on significant changes with an adverse effect that have taken place in the technological, market, or economic entity. legal entity in which the associate or joint venture operates, and indicates that the cost of investment in the equity instrument cannot be recovered. A significant or prolonged decrease in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.

Goodwill: Goodwill that is part of the carrying amount of the net investment in an associate or joint venture is not recognized separately, its impairment is not tested separately by applying the goodwill impairment test requirements in the IAS 36 Impairment of Assets'. Instead, the full carrying amount of the investment is tested for impairment in accordance with IAS 36 as a single asset, comparing its recoverable amount (higher value in use and fair value less disposal costs) with its carrying amount.

An impairment loss recognized in these circumstances is not assigned to any asset, including goodwill, that is part of the book value of the net investment in the associate or joint venture. Accordingly, any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the net investment subsequently increases.

In determining the value in use of the net investment, an entity estimates:

(a) its share of the present value of the estimated future cash flows expected to be generated by the associate or joint venture, including the cash flows from the operations of the associate or joint venture

and the income from the final disposal of the investment; or

(b) the present value of the estimated future cash flows expected to arise from the dividends to be received from the investment and from its final disposal.

Using appropriate assumptions, both methods give the same result.

The recoverable amount of an investment in an associate or joint venture will be evaluated for each associate or joint venture, unless the associate or joint venture does not generate cash inflows from continued use that are largely independent of those of other assets of the entity.

Separate financial statements

Any investment in an associate or a joint venture will be accounted in the entity's separate financial statements in accordance with IAS 27 Separate Financial Statements.

Disclosure

No disclosures specified in IAS 28. Instead, IFRS 12 Disclosure of Interests in Other Entities prescribe the disclosures essential for entities with joint control of, or significant influence over, an investee.