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.

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Table of Concordance
This table shows how the contents of the superseded version of IAS 28 and the current version of IAS 28 correspond. Paragraphs are treated as corresponding if they broadly address the same matter even though the guidance may differ.
The table also shows how the requirements of SIC Interpretations SIC-3, SIC-20 and SIC-33 have been incorporated into the current version of IAS 28.
Superseded IAS 28 paragraph    Current IAS 28 paragraph    Superseded IAS 28 paragraph or Interpretation    Current IAS 28 paragraph
1    1    22    29
2    None    23    33
3    2    24    34
4    6    25    None
5    7    26    40
6    11    27    None
7    None    28    38
8    13    29    41
9    17    30    None
11    18    31    None
12    None    SIC-3    21, 22
13    None    SIC-20    30-32
14    None    SIC-33    8, 9, 12
15    None    None    3-5
16    20    None    10
17    23    None    14-16
18    24    None    19
19    25    None    35-37
20    26, 27    None    39
21    28    None    42, 43

BC20. In widening the base against which losses are to be recognised, the Board also clarified the application of the impairment provisions of IAS 39 to the financial assets that form part of the net investment.

Recognition of Losses
BC17. The previous version of IAS 28 and SIC-20 Equity Accounting Method-Recognition of Losses restricted application of the equity method when, in accounting for the investor's share of losses, the carrying amount of the investment is reduced to zero.
BC18. The Board decided that the base to be reduced to zero should be broader than residual equity interests and should also include other non-equity interests that are in substance part of the net investment in the associate, such as long-term receivables. Therefore, the Board decided to withdraw SIC-20.
BC19. The Board also noted that if non-equity investments are not included in the base to be reduced to zero, an investor could restructure its investment to fund the majority in non-equity investments to avoid recognising the losses of the associate under the equity method.

BC15. The Board decided to remove the exemption from applying the equity method for an associate that previously applied when severe long-term restrictions impaired an associate's ability to transfer funds to the investor. It did so because such circumstances may not preclude the investor's significant influence over the associate. The Board decided that an investor should, when assessing its ability to exercise significant influence over an entity, consider restrictions on the transfer of funds from the associate to the investor. In themselves, such restrictions do not preclude the existence of significant influence.
Non-Coterminous Year-Ends
BC16. The Exposure Draft of May 2002 proposed to limit to three months any difference between the reporting dates of the investor and the associate when applying the equity method. Some respondents to that Exposure Draft believed that it could be impracticable for the investor to prepare financial statements as of the same date when the date of the investor's and the associate's financial statements differ by more than three months. The Board noted that a three-month limit operates in several jurisdictions and it was concerned that a longer period, such as six months, would lead to the recognition of stale information. Therefore, it decided to retain the three-month limit.

Application of the Equity Method
Temporary Significant Influence
BC14. The Board considered whether to remove the exemption from applying the equity method when significant influence over an associate is intended to be temporary. The Board decided to consider this issue as part of a comprehensive standard dealing with asset disposals. It decided to retain an exemption from applying the equity method when there is evidence that an associate is acquired with the intention to dispose of it within twelve months and that management is actively seeking a buyer. The Board's Exposure Draft ED 4 Disposal of Non-current Assets and Presentation of Discontinued Operations proposes to measure and present assets held for sale in a consistent manner irrespective of whether they are held by an investor in an associate or in a subsidiary.*
* In March 2004, the Board issued IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. IFRS 5 removes this scope exclusion and now eliminates the exemption from applying the equity method when significant influence over an associate is intended to be temporary. See IFRS 5 Basis for Conclusions for further discussion.
Editorial note: Footnote inserted by IFRS 5 (as amended by IASB Corrections List 9, May 2004) 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.
Severe Long-Term Restrictions Impairing Ability to Transfer Funds to the Investor

Reference to 'Well-Established' Industry Practices
BC10. The Exposure Draft proposed to limit the availability of the scope exclusion to situations in which well-established industry practice existed. Some respondents noted that the development of industry practice to measure such investments at fair value would have been precluded in industries established in countries already applying IFRSs. The Board confirmed that the main purpose of the reference to 'well-established' practice in the Exposure Draft was to emphasise that the exclusion would apply generally to those investments for which fair value is already available.
BC11. Therefore, the Board decided that the availability of the exclusion should be based only on the nature of an entity's activities and to delete the reference to 'well-established' practices. The Board understands that measurement of these investments at fair value is 'well-established' practice in these industries.
Definition of 'Venture Capital Organisations'
BC12. The Board decided not to define further those 'venture capital organisations and similar entities' excluded from the scope of the Standard. Apart from recognising the difficulties of arriving at a universally applicable definition, the Board did not want inadvertently to make it difficult for entities to measure investments at fair value. However, the Board decided to clarify that the reference to 'similar entities' in the scope exclusion includes investment-linked insurance funds.
BC13. The Board decided, however, that if an investee is a subsidiary in accordance with IAS 27, it should be consolidated. The Board concluded that if an investor controls an investee, the investee is part of a group and part of the structure through which the group operates its business and thus consolidation of the investee is appropriate.

Measurement at Fair Value in Accordance with IAS 39
BC7. Accordingly, the Board decided that investments held by venture capital organisations, mutual funds, unit trusts and similar entities including investment-linked insurance funds should be excluded from the scope of IAS 28 and IAS 31 when they are measured at fair value in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The Board understands that fair value information is often readily available because fair value measurement is a well-established practice in these industries including for investments in entities in the early stages of their development or in non-listed entities.
Treatment of Changes in Fair Value
BC8. The Board decided that if venture capital organisations, mutual funds, unit trusts and similar entities are to be excluded from the scope of IAS 28, it should be only when they recognise changes in the fair value of their investments in associates in profit or loss in the period in which those changes occur. This is to achieve the same treatment as for investments in subsidiaries or associates that are not consolidated or accounted for using the equity method because control or significant influence is intended to be temporary. The Board's approach distinguishes between accounting for the investment and accounting for the economic entity. In relation to the former, the Board decided that there should be consistency in the treatment of all investments, including changes in the fair value of these investments.
BC9. The Board noted that if such investments were classified in accordance with IAS 39, they would not always meet the definition of investments classified as held for trading because venture capital organisations may hold an investment for a period of 3-5 years. In accordance with IAS 39 such an investment is classified as available for sale (unless the entity elects to designate the investment on initial recognition at fair value through profit or loss). Classification as available for sale would not result in recognising changes in fair value in profit or loss. To achieve a similar effect on income to that of applying the equity method, the Board decided to exempt investments held by venture capital organisations, mutual funds, unit trusts and similar entities from this Standard only when they are measured at fair value through profit or loss (either by designation or because they meet the definition in IAS 39 of held for trading).

Scope Exclusion: Investments in Associates Held by Venture Capital Organisations, Mutual Funds, Unit Trusts and Similar Entities
BC4. There are no specific requirements that address accounting for investments by venture capital organisations, mutual funds, unit trusts and similar entities. As a result, depending on whether an entity has control, joint control or significant influence over an investee, one of the following Standards is applied:
(a) IAS 27 Consolidated and Separate Financial Statements,
(b) IAS 28 Investments in Associates, or
(c) IAS 31 Interests in Joint Ventures.
BC5. The Board considered whether another approach is appropriate for these investors when they have joint control or significant influence over their investees. The Board noted that use of the equity or proportionate consolidation methods for investments held by venture capital organisations, mutual funds, unit trusts and similar entities often produces information that is not relevant to their management and investors and that fair value measurement produces more relevant information.
BC6. In addition, the Board noted that there may be frequent changes in the level of ownership in these investments and that financial statements are less useful if there are frequent changes in the method of accounting for an investment.