IAS 28 Investments in Associates & Joint Ventures - Summary

IAS 28 Investments in Associates and Joint Ventures

IFRS Summaries by Imad Uddin, FRM

Objective

Prescribe the accounting for investments in associates and joint ventures.

Provide guidance on the application of the equity method when accounting for these investments.

Scope

Applies to all entities that are investors with joint control of, or significant influence over, an investee (associates or joint ventures).

Mandates the application of the equity method for these investments, unless specific exemptions apply.

Does NOT apply to interests in associates or joint ventures held by:

Venture capital organizations, 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 (FVTPL) or are classified as held for trading and accounted for in accordance with IFRS 9.

An entity may elect to measure such investments at FVTPL per IFRS 9 even if it doesn't meet the criteria above, if it meets specific conditions.

Key Definitions

Term	Meaning
Associate	An entity over which the investor has significant influence.
Joint Venture	A joint arrangement whereby the parties that have joint control of the arrangement (joint venturers) have rights to the net assets of the arrangement (defined in IFRS 11).
Significant Influence	The power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
Equity Method	A method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets. The investor's profit or loss includes its share of the investee's profit or loss, and the investor's OCI includes its share of the investee's OCI.

Determining Significant Influence

Significant influence is the power to participate, not control.

Presumption: If an investor holds, directly or indirectly (e.g., through subsidiaries), 20% or more of the voting power of the investee, it is presumed to have significant influence, unless it can be clearly demonstrated otherwise.

Conversely, if the investor holds less than 20%, it is presumed not to 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.

Indicators of Significant Influence (Existence of one or more usually indicates SI):

Representation on the board of directors or equivalent governing body of the investee.

Participation in policy-making processes, including decisions about dividends or other distributions.

Material transactions between the investor and the investee.

Interchange of managerial personnel.

Provision of essential technical information.

Potential voting rights (e.g., options, convertibles) are considered only if they are currently exercisable or convertible.

Accounting Treatment – Equity Method

Initial Recognition:

On initial recognition, the investment in an associate or joint venture is recognized at cost.

Any difference between the cost of the investment and the investor's share of the net fair value of the investee's identifiable assets and liabilities at the date of acquisition is accounted for as follows:

Goodwill (Cost > Share of Net FV) is included in the carrying amount of the investment. Amortization is not permitted.

Any excess of the investor's share of net FV over cost ('bargain purchase') is included as income in determining the investor's share of the associate/JV's profit or loss in the period of acquisition.

Subsequent Measurement:

The carrying amount is increased or decreased to recognize the investor's share of the profit or loss of the investee after the date of acquisition.

The investor's share of the investee's profit or loss is recognized in the investor's profit or loss.

Distributions (e.g., dividends) received from an investee reduce the carrying amount of the investment.

Adjustments are also made for changes in the investor's proportionate interest arising from changes in the investee's Other Comprehensive Income (OCI). The investor recognizes its share of these changes in its own OCI.

Use the investee's most recent available financial statements, adjusted for significant transactions/events up to the investor's reporting date. Uniform accounting policies should be used.

Impairment

After applying the equity method, the entity applies IAS 36 *Impairment of Assets* to determine whether there is objective evidence that the investment in the associate or joint venture is impaired.

Because goodwill forms part of the investment's carrying amount, it is not tested separately. The entire carrying amount of the investment is tested for impairment as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount.

Any impairment loss recognized is allocated first against any goodwill included in the carrying amount. Reversal of impairment is recognized per IAS 36 to the extent recoverable amount subsequently increases.

Discontinuation of Equity Method

An entity shall discontinue the use of the equity method from the date when its investment ceases to be an associate or a joint venture. This occurs when the investor loses significant influence or joint control.

On loss of significant influence/joint control:

Measure any retained interest at fair value. Recognize any difference between carrying amount at cessation and fair value (+ disposal proceeds) in P&L.

Reclassify to P&L (or directly to retained earnings if required by other IFRS) any amounts previously recognized in OCI in relation to that investment.

If a retained interest remains, it is subsequently accounted for as a financial asset under IFRS 9 (unless it becomes a subsidiary or remains a JV/Associate under different terms).

Transactions with Associates or Joint Ventures

Downstream Transactions: Sale of assets from investor to associate/JV.

Upstream Transactions: Sale of assets from associate/JV to investor.

Profits and losses resulting from upstream and downstream transactions are recognized in the investor's financial statements only to the extent of unrelated investors' interests in the associate or joint venture.

The investor's share in the associate's/JV's profits/losses resulting from these transactions is eliminated against the carrying amount of the investment.

Losses are also eliminated unless the transaction provides evidence of impairment.

Disclosures Required

Disclosure Requirement	Explanation / Detail
Significant Investments	Fair value of investments in associates/JVs for which there are published price quotations.
Summarized Financial Information	For associates and JVs (individually material or aggregated): Summarized info about assets, liabilities, revenues, profit/loss. Reconciliation of summarized info to carrying amount of investment.
Significant Restrictions	Nature and extent of any significant restrictions on the ability of associates/JVs to transfer funds to the entity (e.g., dividends, loan repayments).
Unrecognized Share of Losses	When equity method discontinued due to losses reducing investment to zero: The share of losses not recognized, both for the period and cumulatively.
Reporting Dates	Fact that associate/JV uses different reporting date, and if financials used are adjusted for significant transactions up to investor's reporting date.
Contingent Liabilities	Investor's share of contingent liabilities incurred jointly with other investors; Contingent liabilities arising because investor is severally liable for all/part of associate/JV's liabilities.

Also refer to IFRS 12 *Disclosure of Interests in Other Entities* for comprehensive disclosure requirements related to associates and joint ventures.

Summary Table - Equity Method Treatment

Aspect	Treatment under IAS 28 (Equity Method)
Initial Recognition	At cost. Goodwill included in carrying amount. Bargain purchase to P&L.
Subsequent Measurement	Carrying amount adjusted for investor's share of investee's P&L and OCI. Reduced by distributions received.
Impairment	Apply IAS 36 to the entire investment carrying amount as a single asset.
Discontinuation	Stop equity method when significant influence / joint control lost. Remeasure retained interest to FV. Reclassify OCI to P&L.
Transactions with Investee	Eliminate investor's share of unrealised profits/losses arising from upstream/downstream transactions.

Key Judgments and Estimates

Assessing whether significant influence exists (considering 20% threshold and qualitative factors).

Determining the fair value of identifiable assets and liabilities of the investee at the date of acquisition for calculating goodwill or bargain purchase gain.

Evaluating impairment indicators for the investment.

Calculating the recoverable amount (value in use or fair value less costs to sell) if impairment is indicated.

Ensuring uniform accounting policies are applied between investor and investee financials used for equity method (or making adjustments).

_{Disclaimer: These IFRS summaries are provided for educational purposes only.}

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