1. E-14 Advanced Accounting and Financial Reporting
Lecture-07
17-Sep-18
E-14 Advanced Accounting and Financial Reporting
Lecture 07
IAS 28 Investments in Associates
IAS 31 Interests in Joint Ventures
Sajid Shafiq, ACA
IAS 28 & 31 E

2. SFS E-14 2nd Session Group Accounts II D09
IAS 28- Overview
Objectives, Scope and Definitions of IAS 28
Consolidation of Associate
Some special issues
Investor's Separate Financial Statements (as per IAS 27)
Class Practice Questions
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

3. Objectives, Scope and Definitions
Sets out the accounting requirements when an entity has an investment in an associate. The standard does not apply where the investor is a venture capital organization or where the investment is owned by a mutual fund or unit trust (or similarly structured entity) and such investments have been accounted for using a fair value approach under IAS 39 .
Definitions
Scope
An associate is defined as an entity over which the investor has significant influence. For an investment to meet the definition of an associate, it should not be a subsidiary, where the investor has control, or a joint venture, where the investor has joint control.
Significant influence is defined as the power to participate in the financial and operating policy decisions of the investee without having control or joint control over those policies.
There are exceptions from compliance with IAS 28. Where the investment is classified as ‘held for sale’ in accordance with IFRS 5, it should be treated in accordance with that standard.
IAS 28 does not apply if the investor is not required to prepare consolidated FS under IAS 27.
In addition, an exception applies where the investor is a wholly owned subsidiary (or partially owned but the minority interest shareholders have been notified of the intention not to apply the requirements of IAS 28 and they have not objected) and the investor does not have debt or equity instruments traded in a public market (nor is in the process of issuing debt or equity in a public market) and the investor’s parent prepares consolidated financial statements that are publicly available and are prepared in accordance with IFRS.
IAS 28 Associates and IAS 31 Joint Ventures

4. Significant Influence
The assessment of significant influence is a matter of judgement. IAS 28 includes practical guidance to assist management in making that assessment.
Where an investor has at least 20% of the voting power in another entity, IAS 28 presumes that this size of holding is enough to give rise to significant influence over that entity. Conversely, where less than 20% of the voting rights are held, the investor is presumed not to have significant influence over the investee.
However, the nature of each investment should be carefully assessed as both of these presumptions may be overruled. It is important to consider not only an investor’s current shareholding but also any potential holding which could result from share options or warrants that are immediately exercisable (i.e. the right to acquire shares immediately).
IAS 28 provides a list of factors that normally indicate that significant influence is present. These factors include:
where the investor has a representative on the board of directors or on an equivalent body;
where the investor actively participates in the policy-making processes of the entity, including the level of dividends to be paid;
where a number of significant transactions take place between the investor and the investee;
where members of management move between the two entities; or
where the investor provides essential technical information to the entity.
IAS 28 Associates and IAS 31 Joint Ventures

5. Consolidation of Associate
Equity Accounting
Companies may have substantial investments in entities without actually having control. If the investing company can exert significant influence over the operating and financial policies of the investee company, it will have an active interest in net assets and results
The nature of relationship differs from that of a simple investment. Its not passive. Therefore, including such investment at cost would not fairly present the investing interest.
In order that the investing company properly reflects the nature of interest in such investee entities, the investor’s interest in net assets and results needs to be reflected in consolidated accounts. This is achieved through equity accounting.
Unlike Subsidiary, no line by line addition is made in case of Associate’s consolidation. Therefore, there is no elimination of intra-group balances or transactions.
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

6. Consolidation of Associate
Consolidated Statement of Financial Position
The carrying amount is:
Cost + Share in Post Acquisition profits OR
Share in Net assets at BS date + Goodwill
LESS
Goodwill impairment
Elimination of URP for sale from Parent to Associate(to the extent of SH in Associate)
Dividend by associate to parent
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

7. Consolidation of Associate
Consolidated Statement of Financial Position Example 1 P acquired 30% shares of A on 1 January 2010 for 10,000. The net assets of the Associate are 31-Dec Jan-10 Share Capital 20,000 20,000 Retained Earnings 15,000 10,000 35,000 30,000 Further information: During the year, Parent sold goods to Associate. The unrealized profit on unsold stock is 1,000. The Associate’s management proposes a dividend of 500, yet to be accounted for. The impairment test indicated an impairment of 100 of Associate’s goodwill.
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

8. Consolidation of Associate
Consolidated Income Statement
Include group share of the associate’s profits after tax in CIS. (naturally, the dividend from associate needs not be recorded as income now)
Time apportionment is made in case of mid-year acquisition
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

9. IAS 28 Associates and IAS 31 Joint Ventures
Some special issues
Loss of Control On the date on which an entity loses significant influence, any retained interest in the investment should be measured at fair value. At this date, the investor should also recognize in profit or loss the difference between the carrying amount of the investment held prior to the significant influence being lost and the fair value of any retained investment plus any proceeds received. Share of losses If an investor’s share of losses of an associate equals or exceeds its interest in the associate, the investor discontinues recognising its share of further losses. The interest in an associate is the carrying amount of the investment in the associate under the equity method together with any long-term interests that, in substance, form part of the investor’s net investment in the associate. For example, an item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity’s investment in that associate. Such items may include preference shares and long-term receivables or loans but do not include trade receivables, trade payables or any long-term receivables for which adequate collateral exists, such as secured loans. Losses recognised under the equity method in excess of the investor’s investment in ordinary shares are applied to the other components of the investor’s interest in an associate in the reverse order of their seniority (ie priority in liquidation). After the investor’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the investor resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.
IAS 28 Associates and IAS 31 Joint Ventures

10. Consolidation of Associate- Example 2
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

11. Consolidation of Associate-Solution 2
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

12. Class Practice Questions
IAS 28 Associates and IAS 31 Joint Ventures

13. IAS 28 Associates and IAS 31 Joint Ventures

14. IAS 28 Associates and IAS 31 Joint Ventures

15. IAS 28 Associates and IAS 31 Joint Ventures

16. SFS E-14 2nd Session Group Accounts II D09
IAS-31 Overview
Objectives, scope and definitions
Jointly Controlled Operations
Jointly Controlled Assets
Jointly Controlled Entities
Equity method (as in case of associate)
Proportionate Consolidation
Other Issues
Investor’s separate financial statements (as in IAS 27)
Transactions between a venturer and a joint venture
Operators of joint ventures
Investors of a joint venture
Non-monetary Contributions by Venturers
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

17. Objectives, Scope and Definitions
Sets out the accounting requirements in relation to interests in joint ventures and the appropriate recognition of JV assets, liabilities, income and expenses in the FS of investors.
Does not apply where the venturer is a venture capital organization or where the joint venture interest is owned by a mutual fund or unit trust (or similarly structured entity) and such investments have been accounted for under IAS 39.
Other exceptions as per IAS 28
Definitions
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.
Proportionate consolidation is a method of accounting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s FS.
A venturer is a party to a joint venture and has joint control over that joint venture.
IAS 28 Associates and IAS 31 Joint Ventures

18. Understand Joint Venture arrangement
Illustration 1
An entity is set up to build a bridge over a river. Once the bridge is built, the entity will be wound up.
Ten contractors invest in the equity of the entity. Contractors 1 to 6 own 13% each and contractors 7 to 10 own 5.5% each. There exists a contractual arrangement whereby all the strategic financial and operating decisions relating to the bridge building project have to be taken unanimously by contractors 1 to 3 and 7 to 9.
Contractors 1 to 3 and 7 to 9 have joint control over the joint venture entity. Each of them is therefore a venturer in the bridge building entity. Contractors 4 to 6 and 10 are not involved in the contractual arrangement and are therefore only investors in the joint venture.
IAS 28 Associates and IAS 31 Joint Ventures

19. Jointly Controlled Operations
In a JCO a separate entity is not set up, but the parties to the transaction share the activities that are to be carried out. Effectively, the venturers pool resources and provide expertise to the overall operations.
Each venturer will use its own PPE in carrying out the activities and will incur its own expenses and liabilities. Each venturer will also be responsible for raising its own finance. The contractual arrangements between the entities which create this form of JV investment will normally set out how the revenues and expenses will be shared.
The substance of such an arrangement is that each venturer is carrying on its own activities as essentially a separate part of its own business, since there is no separate entity. The accounting for the JV should therefore reflect the economic substance of this arrangement by recognising the assets that the venturer controls. The venturer’s own PPE that it uses to carry out activities of the JCO, any liabilities that it retains obligation for and the expenses that it incurs should be recognised by the entity. Each venturer should also recognise its share of income generated by the JCO.
Illustration 2
An example of a JCO is the construction of a new housing estate by a number of independent builders and specialist tradesmen, such as carpenters and plumbers.
Each party provides a predetermined amount of labour to the construction and is required to provide the relevant materials and equipment needed to perform the work. Under an agreed contract, each party will receive a specified percentage of the revenue from the sale of the houses. This is an extension of each party’s normal operating activities and should therefore be recorded in their individual books and records as such.
IAS 28 Associates and IAS 31 Joint Ventures

20. SFS E-14 2nd Session Group Accounts II D09
JCO- A Worked Example
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

21. SFS E-14 2nd Session Group Accounts II D09
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

22. SFS E-14 2nd Session Group Accounts II D09
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

23. Jointly controlled assets
A JV relationship may be established through the use of JCA which are used to generate benefits to be shared by each of the venturers. Such arrangements do not involve the creation of a separate entity and the assets may be jointly owned, although the important attribute of such an arrangement is that the assets in question are jointly controlled.
Typically each venturer receives an agreed share of the benefits generated by the operation of the assets and bears an agreed share of the expenses incurred.
Each venturer in such an arrangement is again essentially using the assets as part of its normal operating activities and should therefore report them as part of those activities in its individual financial statements. In particular, a venturer should recognise its share of the JCA, any liabilities that the entity has an obligation to meet and a share of the liabilities that are jointly incurred. Jointly incurred expenses and a share of the relevant income and expenses that are earned or incurred jointly should also be recognised by each venturer.
Illustration 3
A common use of JCA is by entities in the oil production industry.
Typically, they jointly control and operate an oil pipeline. The benefit of such an arrangement is that only one pipeline is needed, with each venturer using the pipeline to transport its own supply of oil and in return paying a proportion of the running costs of the pipeline (i.e. the
jointly controlled asset).
IAS 28 Associates and IAS 31 Joint Ventures

24. Jointly controlled entities
The identifying factor in this arrangement is that a separate legal entity is set up with ownership being shared by the venturers.
The separate entity may take a number of forms. It may be an incorporated entity, a corporation or a partnership. The importance of the establishment of a separate entity is that it is able to enter into contracts and raise finance in its own right. As a separate legal entity it will also have to maintain its own accounting records and prepare and present its own financial statements.
A jointly controlled entity controls its own assets, incurs its own expenses and liabilities and generates its own income. Each venturer will typically be entitled to a predetermined proportion of the profits made by the joint venture entity.
Illustration 4
Joint venture entities are often set up to pool resources where operations are very similar in a separate line of business. Assets are combined and operated jointly from the joint venture entity. Such entities are particularly common in the telecommunications industry.
IAS 28 Associates and IAS 31 Joint Ventures

25. Proportionate consolidation
Proportionate consolidation is where the venturer’s share of the joint venture’s assets, liabilities, income and expenditure is combined line by line with the venturer’s own items.
Proportionate consolidation uses the principles used in the full consolidation process required by IAS 27 for the reporting of subsidiaries. The different proportions that are consolidated in respect of a subsidiary and a joint venture represents the different levels of control held by the parent entity. In a subsidiary, the parent has ultimate control and therefore 100% of a subsidiary’s net assets and results are consolidated, whereas control is shared in a joint venture, so only the venturer’s share is consolidated.
The venturer may present the effects of proportionate consolidation in one of two ways.
The first is by combining the proportion of the joint venture results and financial position on a line by line basis with that of the venturer’s financial statements. This method results in single figures being presented for each line item.
The alternative method is to split each line item between that which relates to the venturer and that which represents the proportion of the joint venture entity.
IAS 28 Associates and IAS 31 Joint Ventures

26. IAS 28 Associates and IAS 31 Joint Ventures

27. IAS 28 Associates and IAS 31 Joint Ventures

28. IAS 28 Associates and IAS 31 Joint Ventures

29. SFS E-14 2nd Session Group Accounts II D09
JCE– Another Example
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

30. SFS E-14 2nd Session Group Accounts II D09
17-Sep-18
SFS E-14 2nd Session Group Accounts II D09

31. Other Issues Transactions between a venturer and a joint venture
Where the venturer sells or contributes assets to a JV or purchases assets from a JV , an adjustment should be made for the amount of any profit generated that reflects a transaction internal to the entity.
For example, if a venturer sells an asset to the JV for a profit and the asset continues to be held by the JV, the proportion ofthat asset that is consolidated includes an element of profit that was recorded by the venturer.
In such circumstances only the profit that relates to the share of the asset that belongs to the other venturers should be retained.
A similar approach should be adopted for the purchase of assets from the JV; its share of any profit that has been recognised by the JV should not be recognised by the venturer until the assets are sold to an external party.
These adjustments are required for all transactions between a venturer and a JV regardless of the form that the JV arrangement takes; it is not limited to the creation of a separate joint venture entity.
Operators of joint ventures
Investors of a joint venture
A common feature in the contractual arrangements for a joint venture is to appoint a manager of the joint venture to act on behalf of all the venturers. Such a manager is usually paid a fee.
Where such a fee is received, it should be treated in accordance with IAS 18 Revenue.
If one of the venturers acts as manager, this fee should be treated separately from its share of the joint venture profit or loss.
An investor in a joint venture arrangement does not share joint control over the joint venture.
The investment should be recognised in accordance with IAS 39 as a financial asset or, if the investor has ‘significant influence’ over the policy decisions of the joint venture, as an associate under IAS 28.
IAS 28 Associates and IAS 31 Joint Ventures

32. Non-monetary Contributions by Venturers
IAS 31 requires that an adjustment is made where transactions take place between the venturer and a joint venture, profit has been recognised and the asset is still held by one of the parties.
However, IAS 31 does not specifically mention the treatment required where a venturer contributes a non-cash asset, such as a piece of machinery, to a joint venture entity in return for equity in that joint venture. The Standing Interpretations Committee issued SIC 13 Jointly controlled entities – non-monetary contributions by venturers to address this particular issue.
The same principle as described above for the adjustment of transactions between the venturer and the joint venture should be applied in such circumstances. The venturer should only recognise the gain or loss that relates to the other venturer’s share. The excluded part represents a transaction by the venturer with itself. Additionally, no part of the gain or loss should be recognised where the significant risks and rewards associated with the non-cash asset have not been transferred to the joint venture entity, where the amount cannot be measured reliably or where the non-cash asset transferred is similar, in its nature, to that contributed by the other venturers.
IAS 28 Associates and IAS 31 Joint Ventures

33. IAS 28 Associates and IAS 31 Joint Ventures

34. IAS 28 Associates and IAS 31 Joint Ventures

35. IAS 28 Associates and IAS 31 Joint Ventures

36. IAS 28 Associates and IAS 31 Joint Ventures