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7 ED Measuring quoted investments in subsidiaries, joint ventures and associates at fair value

7 ED Measuring quoted investments in subsidiaries, joint ventures and associates at fair value

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active market, their fair value must be the product of the quoted price multiplied by the quantity of

the financial instruments that make up the investments without adjustment.

(c)



IAS 28 Investments in associates and joint ventures. As (a), above, when an entity measures its

investments in associates or joint ventures at fair value and those investments are quoted in an

active market.



(d)



IFRS 12 Disclosure of interests in other entities. As (a), above.



(f)



IAS 36 Impairment of assets. This proposed amendment is relevant to cash-generating units.

When the cash-generating unit is an investment in a subsidiary, joint venture or associate that is

quoted in an active market its fair value must be the product of the quoted price multiplied by the

quantity of the financial instruments that make up the investment without adjustment.



(e)



IAS 13 Fair value measurement. An illustrative example would be added showing the application

of the exception in paragraph IFRS 13.48 to a group of financial assets and financial liabilities

whose market risks are substantially the same and whose fair value measurement is categorised

within Level 1 of the fair value hierarchy.



4 IAS 28 Investments in associates and joint ventures

12/14

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IAS 28 deals with accounting for associates and joint ventures. The definitions are important as they

govern the accounting treatment, particularly 'significant influence' and 'joint control'.

IFRS 11 (see Chapter 13) and IAS 28 require joint ventures to be accounted for using the equity method.

We looked at investments in associates briefly in Section 1. IAS 28 Investments in associates and joint

ventures covers this type of investment. IAS 28 does not apply to investments in associates or joint

ventures held by venture capital organisations, mutual funds, unit trusts, and similar entities. Those

investments may be measured at fair value through profit or loss in accordance with IFRS 9.

In this section we will focus on associates. The criteria that exist to identify a joint venture will be covered in

Chapter 13, although the method for accounting for a joint venture is identical to that used for associates.

Some of the important definitions in Section 1 are repeated here, with some additional important terms.



Key terms



Associate. An entity, including an unincorporated entity such as a partnership, over which an investor has

significant influence and which is neither a subsidiary nor a joint venture of the investor.

Significant influence is the power to participate in the financial and operating policy decisions of an

economic activity but is not control or joint control over those policies.

Joint control is the contractually agreed sharing of control over an economic activity.

Equity method. A method of accounting whereby the investment is initially recorded at cost and 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 and the investor’s

other comprehensive income includes its share of the investee's other comprehensive income.

We have already looked at how the status of an investment in an associate should be determined. Go back

to Section 2 to revise it. (Note that, as for an investment in a subsidiary, any potential voting rights

should be taken into account in assessing whether the investor has significant influence over the

investee.)

IAS 28 requires all investments in associates and joint ventures to be accounted for using the equity

method, unless the investment is classified as 'held for sale' in accordance with IFRS 5 in which case it

should be accounted for under IFRS 5 (see Chapter 15).



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12: Revision of basic groups  Part C Group financial statements



An investor is exempt from applying the equity method if:

(a)



It is a parent exempt from preparing consolidated financial statements under IAS 27 (revised) or



(b)



All of the following apply:

(i)



The investor is a wholly-owned subsidiary or it is a partially owned subsidiary of another

entity and its other owners, including those not otherwise entitled to vote, have been

informed about, and do not object to, the investor not applying the equity method



(ii)



Its securities are not publicly traded



(iii)



It is not in the process of issuing securities in public securities markets



(iv)



The ultimate or intermediate parent publishes consolidated financial statements that

comply with International Financial Reporting Standards



IAS 28 does not allow an investment in an associate to be excluded from equity accounting when an

investee operates under severe long-term restrictions that significantly impair its ability to transfer funds

to the investor. Significant influence must be lost before the equity method ceases to be applicable.

The use of the equity method should be discontinued from the date that the investor ceases to have

significant influence.

From that date, the investor shall account for the investment in accordance with IFRS 9 Financial

instruments. The fair value of the retained interest must be regarded as its fair value on initial recognition

as a financial asset under IFRS 9.



4.1 Separate financial statements of the investor

Note that in the separate financial statements of the investor, an interest in an associate is accounted for

either:









At cost, or

In accordance with IFRS 9 Financial instruments, or

Using the equity method as described in IAS 28 Investments in associates and joint ventures*



*Note. This was an amendment to IAS 27 introduced in August 2014.



4.2 Application of the equity method: consolidated accounts

FAST FORWARD



The equity method should be applied in the consolidated accounts:





Statement of financial position: investment in associate at cost plus (or minus) the group's share

of the associate's post-acquisition profits (or losses).







Profit or loss (statement of profit or loss and other comprehensive income): group share of

associate's profit after tax.







Other comprehensive income (statement of profit or loss and other comprehensive income):

group share of associate's other comprehensive income after tax.



Many of the procedures required to apply the equity method are the same as are required for full

consolidation. In particular, fair value adjustments are required and the group share of intra-group

unrealised profits must be excluded.



4.2.1 Consolidated statement of profit or loss and other comprehensive income

The basic principle is that the investing company (X Co) should take account of its share of the earnings

of the associate, Y Co, whether or not Y Co distributes the earnings as dividends. X Co achieves this by

adding to consolidated profit the group's share of Y Co's profit after tax.



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377



Notice the difference between this treatment and the consolidation of a subsidiary company's results. If

Y Co were a subsidiary X Co would take credit for the whole of its sales revenue, cost of sales and so on

and would then prepare a reconciliation at the end of the statement showing how much of the group profit

and total comprehensive income is owned by non-controlling interests.

Under equity accounting, the associate's sales revenue, cost of sales and so on are not amalgamated with

those of the group. Instead, the group share only of the associate's profit after tax and other

comprehensive income for the year is included in the relevant sections of the statement of profit or loss

and other comprehensive income.



4.2.2 Consolidated statement of financial position

A figure for investment in associates is shown which at the time of the acquisition must be stated at cost.

This amount will increase (decrease) each year by the amount of the group's share of the associate's total

comprehensive income retained for the year.

The group share of the associate's reserves are also included within the group reserves figure in the equity

section of the consolidated statement of financial position.



4.2.3 Example: Associate

P Co, a company with subsidiaries, acquires 25,000 of the 100,000 $1 ordinary shares in A Co for

$60,000 on 1 January 20X8. In the year to 31 December 20X8, A Co earns profits after tax of $24,000,

from which it declares a dividend of $6,000.

How will A Co's results be accounted for in the individual and consolidated accounts of P Co for the year

ended 31 December 20X8?



Solution

In the individual accounts of P Co, the investment will be recorded on 1 January 20X8 at cost. Unless

there is an impairment in the value of the investment (see below), this amount will remain in the individual

statement of financial position of P Co permanently. The only entry in P Co's statement of profit or loss

and other comprehensive income will be to record dividends received. For the year ended 31 December

20X8, P Co will:

DEBIT

CREDIT



Cash

Income from shares in associated companies



$1,500

$1,500



In the consolidated accounts of P Co equity accounting principles will be used to account for the

investment in A Co. Consolidated profit after tax will include the group's share of A Co's profit after tax

(25%  $24,000 = $6,000). To the extent that this has been distributed as dividend, it is already included

in P Co's individual accounts and will automatically be brought into the consolidated results. That part of

the group's profit share which has not been distributed as dividend ($4,500) will be brought into

consolidation by the following adjustment.

DEBIT

CREDIT



Investment in associates

Income from shares in associates



$4,500

$4,500



The asset 'Investment in associates' is then stated at $64,500, being cost plus the group share of

post-acquisition retained profits.



4.3 Consolidated statement of profit or loss and other comprehensive

income

The treatment of associates' profits in the following proforma should be studied carefully.



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12: Revision of basic groups  Part C Group financial statements



4.3.1 Pro-forma consolidated statement of profit or loss and other comprehensive

income

The following is a suggested layout (for a statement of profit or loss and other comprehensive income)

for a company having subsidiaries as well as associates.

$'000

1,400

770

630

290

340

30

370

(20)

350

17

367



Sales revenue

Cost of sales

Gross profit

Distribution costs and administrative expenses

Interest and similar income receivable

Finance costs

Share of profit (after tax) of associate

Profit before taxation

Income tax expense

Parent company and subsidiaries

Profit for the year



145

222



Profit attributable to:

Owners of the parent

Non-controlling interest



200

22

222



4.4 Consolidated statement of financial position

As explained earlier, the consolidated statement of financial position will contain an asset 'Investment in

associated companies'. The amount at which this asset is stated will be its original cost plus the group's

share of the associate's total comprehensive income earned since acquisition which has not been

distributed as dividends.



4.5 Other accounting considerations

The following points are also relevant and are similar to a parent-subsidiary consolidation situation.

(a)



Use financial statements drawn up to the same reporting date.



(b)



If this is impracticable, adjust the financial statements for significant transactions/ events in the

intervening period. The difference between the reporting date of the associate and that of the

investor must be no more than three months.



(c)



Use uniform accounting policies for like transactions and events in similar circumstances,

adjusting the associate's statements to reflect group policies if necessary.



(d)



If an associate has cumulative preferred shares held by outside interests, calculate the share of

the investor's profits/losses after adjusting for the preferred dividends (whether or not declared).



4.6 'Upstream' and 'downstream' transactions

A group (made up of a parent and its consolidated subsidiaries) may trade with its associates. This

introduces the possibility of unrealised profits if goods sold within the group are still in inventories at the

year end. This is similar to unrealised profits arising on trading between a parent and a subsidiary. The

important thing to remember is that when an associate is involved, only the group's share is eliminated.'

The precise accounting entries depend on the direction of the transaction. 'Upstream' transactions are

sales from an associate to the investor. 'Downstream' transactions are sales of assets from the investor to

an associate.



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379



The double entry is as follows, where A% is the parent's holding in the associate, and PUP is the provision

for unrealised profit.

DEBIT

CREDIT



Retained earnings of parent

Group inventories



PUP  A%

PUP  A%



For upstream transactions (associate sells to parent/subsidiary) where the parent holds the inventories.

OR

DEBIT

CREDIT



Retained earnings of parent /subsidiary

Investment in associate



PUP  A%

PUP  A%



For downstream transactions, (parent/subsidiary sells to associate) where the associate holds the

inventory.



4.7 Example: Downstream transaction

A Co, a parent with subsidiaries, holds 25% of the equity shares in B Co. During the year, A Co makes

sales of $1,000,000 to B Co at cost plus a 25% mark-up. At the year-end, B Co has all these goods still in

inventories.



Solution

A Co has made an unrealised profit of $200,000 (1,000,000  25/125) on its sales to the associate.

The group's share of this is 25%, ie $50,000. This must be eliminated.

The double entry is:

DEBIT

CREDIT



A: Retained earnings

Investment in associate (B)



$50,000

$50,000



Because the sale was made to the associate, the group's share of the unsold inventories forms part of the

investment in associate at the year end. If the sale had been from the associate B to A, ie an upstream

transaction, the double entry would have been:

DEBIT

CREDIT



A: Retained earnings

A: Inventories



$50,000

$50,000



If preparing the consolidated statement of profit or loss and other comprehensive income, you would add

the $50,000 to cost of sales, as the parent made the sales in this example.



4.7.1 Associate’s losses

When the equity method is being used and the investor's share of losses of the associate equals or

exceeds its interest in the associate, the investor should discontinue including its share of further losses.

The investment is reported at nil value. The interest in the associate is normally the carrying amount of the

investment in the associate, but it also includes any other long-term interests, for example, preference

shares or long term receivables or loans.

After the investor's interest is reduced to nil, additional losses should only be recognised where the

investor has incurred obligations or made payments on behalf of the associate (for example, if it has

guaranteed amounts owed to third parties by the associate).

Should the associate return to profit, the parent may resume recognising its share of profits only after they

equal the share of losses not recognised.



4.8 Impairment losses

IFRS 9 sets out a list of indications that a financial asset (including an associate) may have become

impaired. Any impairment loss is recognised in accordance with IAS 36 Impairment of assets for each

associate as a single asset. There is no separate testing for impairment of goodwill, as the goodwill that

forms part of the carrying amount of an investment in an associate is not separately recognised. An

impairment loss is not allocated to any asset, including goodwill, that forms part of the carrying amount of



380



12: Revision of basic groups  Part C Group financial statements



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