IAS 28 Investments in Associates

IAS 28 Investments in Associates


This revised Standard supersedes IAS 28 (revised 2000) Accounting for Investments in Associates and should be appliedfor annual periods beginning on or after 1 January 2005. Earlier application isencouraged.

Contents


Introduction IN1-IN15
International Accounting Standard 28 Investmentsin Associates
Scope 1
Definitions 2-5
Significant Influence 6-10
Equity Method 11-12
Application of the equity method 13-34
Impairment Losses 31-34
Separate financial statements 35-36
Disclosure 37-40
Effective date 41
Withdrawal of other pronouncements 42-43
Appendix: Amendments to Other Pronouncements
Approval of IAS 28 by the Board
Basis for conclusions
Table of concordance
International Accounting Standard 28 Investments in Associates (IAS 28)is set out in paragraphs 1-43and the Appendix. All the paragraphs have equal authority but retain the IASCformat of the Standard when it was adopted by the IASB. IAS 28 should be readin the context of the Basis for Conclusions, the Preface toInternational Financial Reporting Standards and the Frameworkfor the Preparation and Presentation of Financial Statements. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errorsprovides a basis for selecting and applying accounting policies in the absenceof explicit guidance.

Introduction


IN1. International Accounting Standard 28 Investments in Associates replaces IAS 28 Accountingfor Investments in Associates (revised in 2000) and should be appliedfor annual periods beginning on or after 1 January 2005. Earlierapplication is encouraged. The Standard also replaces the followingInterpretations:
•   SIC-3 Eliminationof Unrealised Profits and Losses on Transactions with Associates
•   SIC-20 EquityAccounting Method-Recognition of Losses
•   SIC-33 Consolidationand Equity Method-Potential Voting Rights and Allocation of Ownership Interests.

Reasons for Revising IAS 28


IN2. The International Accounting StandardsBoard developed this revised IAS 28 as part of its project on Improvements toInternational Accounting Standards. The project was undertaken in the light ofqueries and criticisms raised in relation to the Standards by securitiesregulators, professional accountants and other interested parties. Theobjectives of the project were to reduce or eliminate alternatives,redundancies and conflicts within the Standards, to deal with some convergenceissues and to make other improvements.
IN3. For IAS 28 the Board's main objectivewas to reduce alternatives in the application of the equity method and inaccounting for investments in associates in separate financial statements. TheBoard did not reconsider the fundamental approach when accounting forinvestments in associates using the equity method contained in IAS 28.





The Main Changes


IN4. The main changes from the previousversion of IAS 28 are described below.

Scope


IN5. The Standard does not apply toinvestments that would otherwise be associates or interests of venturers injointly controlled entities held by venture capital organisations, mutualfunds, unit trusts and similar entities when those investments are classifiedas held for trading and accounted for in accordance with IAS 39 FinancialInstruments: Recognition and Measurement. Those investments are measuredat fair value, with changes in fair value recognised in profit or loss in theperiod in which they occur.
IN6. Furthermore, the Standard providesexemptions from application of the equity method similar to those provided forcertain parents not to prepare consolidated financial statements. Theseexemptions include when the investor is also a parent exempt in accordance withIAS 27 Consolidated and Separate Financial Statementsfrom preparing consolidated financial statements (paragraph 13(b)), and whenthe investor, though not such a parent, can satisfy the same type of conditionsthat exempt such parents (paragraph 13(c)).

Significant Influence


Potential voting rights
IN7. An entity is required to consider theexistence and effect of potential voting rights currently exercisable orconvertible when assessing whether it has the power to participate in thefinancial and operating policy decisions of the investee. This requirement waspreviously included in SIC-33, which has been superseded.

Equity Method


IN8. The Standard clarifies that investmentsin associates over which the investor has significant influence must beaccounted for using the equity method whether or not the investor also hasinvestments in subsidiaries and prepares consolidated financial statements.However, the investor does not apply the equity method when presenting separatefinancial statements prepared in accordance with IAS 27.
Exemption from applying the equity method
IN9. The Standard does not require theequity method to be applied when an associate is acquired and held with a viewto its disposal within twelve months of acquisition. There must be evidencethat the investment is acquired with the intention to dispose of it and thatmanagement is actively seeking a buyer. The words "in the nearfuture" were replaced with the words "within twelve months".When such an associate is not disposed of within twelve months it must beaccounted for using the equity method as from the date of acquisition, exceptin narrowly specified circumstances.
IN10. The Standard does not permit aninvestor that continues to have significant influence over an associate not toapply the equity method when the associate is operating under severe long-termrestrictions that significantly impair its ability to transfer funds to theinvestor. Significant influence must be lost before the equity method ceases tobe applicable.
Elimination of unrealised profits and losseson transactions with associates
IN11. Profits and losses resulting from'upstream' and 'downstream' transactions between an investor and an associatemust be eliminated to the extent of the investor's interest in the associate.The consensus in SIC-3has been incorporated into the Standard.
Non-coterminous year-ends
IN12. When financial statements of anassociate used in applying the equity method are prepared as of a reportingdate that is different from that of the investor, the difference must be no greaterthan three months.
Uniform accounting policies
IN13. The Standard requires an investor tomake appropriate adjustments to the associate's financial statements to conformthem to the investor's accounting policies for reporting like transactions andother events in similar circumstances. The previous version of IAS 28 providedan exception to this requirement when it was "not practicable to useuniform accounting policies".
Recognition of losses
IN14. An investor must consider the carryingamount of its investment in the equity of the associate and its other long-terminterests in the associate when recognising its share of losses of theassociate. SIC-20 limited the recognition of the investor's share of losses tothe carrying amount of its investment in the equity of the associate.Therefore, that Interpretationhas been superseded.

Separate Financial Statements
IN15. The requirements for the preparation of an investor's separate financial statements are established by reference to IAS 27.

Scope
1. This Standard shall be applied in accounting for investments in associates. However, it does not apply to investments in associates held by:
(a) venture capital organisations, or
(b) mutual funds, unit trusts and similar entities including investment-linked insurance funds
that upon initial recognition are designated as at fair value through profit or loss or are classified as held for trading and accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement. Such investments shall be measured at fair value in accordance with IAS 39, with changes in fair value recognised in profit or loss in the period of the change.
Definitions
2. The following terms are used in this Standard with the meanings specified:
An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Consolidated financial statements are the financial statements of a group presented as those of a single economic entity.
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The equity method is a method of accounting whereby the investment is initially recognised 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.
Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers).
Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.
Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).

Editorial note: Definition of "joint control" substituted by IFRS 3 with effect for business combinations for which the agreement date is on or after 31 March 2004, subject to further transitional provisions. Previously "Joint control is the contractually agreed sharing of control over an economic activity.".
3. Financial statements in which the equity method is applied are not separate financial statements, nor are the financial statements of an entity that does not have a subsidiary, associate or venturer's interest in a joint venture.
4. Separate financial statements are those presented in addition to consolidated financial statements, financial statements in which investments are accounted for using the equity method and financial statements in which venturers' interests in joint ventures are proportionately consolidated. Separate financial statements may or may not be appended to, or accompany, those financial statements.
5. Entities that are exempted in accordance with paragraph 10 of IAS 27 Consolidated and Separate Financial Statements from consolidation, paragraph 2 of IAS 31 Interests in Joint Ventures from applying proportionate consolidation or paragraph 13(c) of this Standard from applying the equity method may present separate financial statements as their only financial statements.

Significant Influence
6. If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.
7. The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about dividends or other distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
8. An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the entity additional voting power or reduce another party's voting power over the financial and operating policies of another entity (ie potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether an entity has significant influence. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.

9. In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential rights, except the intention of management and the financial ability to exercise or convert.
10. An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels. It could occur, for example, when an associate becomes subject to the control of a government, court, administrator or regulator. It could also occur as a result of a contractual agreement.

Equity Method
11. Under the equity method, the investment in an associate is initially recognised at cost and 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. The investor's share of the profit or loss of the investee is recognised in the investor's profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investee arising from changes in the investee's equity that have not been recognised in the investee's profit or loss. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. The investor's share of those changes is recognised directly in equity of the investor.
12. When potential voting rights exist, the investor's share of profit or loss of the investee and of changes in the investee's equity is determined on the basis of present ownership interests and does not reflect the possible exercise or conversion of potential voting rights.
Application of the Equity Method

14. Investments described in paragraph 13(a) shall be accounted for in accordance with IFRS 5.
Editorial note: Substituted by IFRS 5 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies the IFRS for a period beginning before 1 January 2005, it shall disclose that fact. Previously "Investments described in paragraph 13(a) shall be classified as held for trading and accounted for in accordance with IAS 39.".
15. When an investment in an associate previously classified as held for sale no longer meets the criteria to be so classified, it shall be accounted for using the equity method as from the date of its classification as held for sale. Financial statements for the periods since classification as held for sale shall be amended accordingly.
Editorial note: Reference to IAS 22 deleted by IFRS 3 with effect for business combinations for which the agreement date is on or after 31 March 2004, subject to further transitional provisions.

Substituted by IFRS 5 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies the IFRS for a period beginning before 1 January 2005, it shall disclose that fact. Previously "When an investment in an associate previously accounted for in accordance with IAS 39 is not disposed of within twelve months, it shall be accounted for using the equity method as from the date of acquisition. Financial statements for the periods since acquisition shall be restated.".

16. [...]
Editorial note: Deleted by IFRS 5 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies the IFRS for a period beginning before 1 January 2005, it shall disclose that fact. Previously "Exceptionally, an entity may have found a buyer for an associate described in paragraph 13(a), but may not have completed the sale within twelve months because of the need for approval by regulators or others. The entity is not required to apply the equity method to an investment in such an associate if the sale is in process at the balance sheet date and there is no reason to believe that it will not be completed shortly after the balance sheet date.".
17. The recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate because the distributions received may bear little relation to the performance of the associate. Because the investor has significant influence over the associate, the investor has an interest in the associate's performance and, as a result, the return on its investment. The investor accounts for this interest by extending the scope of its financial statements to include its share of profits or losses of such an associate. As a result, application of the equity method provides more informative reporting of the net assets and profit or loss of the investor.
18. An investor shall discontinue the use of the equity method from the date that it ceases to have significant influence over an associate and shall account for the investment in accordance with IAS 39 from that date, provided the associate does not become a subsidiary or a joint venture as defined in IAS 31.