1. Investments in Associates: IAS 28
Wiecek and Young
IFRS Primer
Chapter 30

2. Investments in Associates
Related standards
IAS 28
Current GAAP comparisons
Looking ahead
End-of-chapter practice

3. Related Standards
APB 18 The Equity Method of Accounting for Investments in Common Stock
FAS 159 The Fair Value Option for Financial Assets and Financial Liabilities

4. Related Standards
IAS 27 Consolidated and Separate Financial Statements
IAS 36 Impairment of Assets
IAS 39 Financial Instruments: Recognition and Measurement

5. IAS 28 – Overview Objective and scope Application of the equity method
Disclosure

6. IAS 28 – Objective and Scope
Accounting requirements for investments in associates unless entity is preparing separate financial statements under IAS 27
Associates
an entity over which an investor has significant influence, but which is not a subsidiary or an interest in a joint venture
may be an unincorporated organization such as a partnership
Exclusions from complying with IFRS:
investments in associates held by venture capital organizations, mutual funds, unit trusts, similar organizations
These investments are accounted for at FVTPL under IAS 39

7. IAS 28 – Objective and Scope
Significant Influence
power to take part in the financial and operating policy decisions of the investee but not to the extent of having control or joint control
usually when holding, directly or indirectly, 20% to 50% of the voting power of another entity
equity method of accounting required for investments in associates
Control
a higher level of power
exists when an investor can govern the financial and operating policies of an investee and through this obtain benefits from its activities

8. IAS 28 – Objective and Scope
Significant influence over strategic decisions of another entity without control:
(a) through representation on its board or governing body
(b) participation in policy-making including decisions about distributions
(c) entering into significant inter-company transactions
(d) exchanging managerial personnel
(e) providing necessary technical information
Changes in significant influence
lost when an entity no longer has the power to participate in the financial and operating decisions of the investee
may be lost or obtained by factors other than a change in share ownership

9. IAS 28 – Objective and Scope
Equity Method of accounting for investments
investment originally recognized at cost
adjusted after acquisition for the investor’s share of the post-acquisition changes in the investee’s book value or net assets
investor’s share of investee’s profit or loss is recognized in the profit or loss of the investor
distributions from the investee reduce the carrying amount of the investment
Benefits of the equity method
better information in the statement of comprehensive income about the investor’s (and associate’s) performance than recognizing the dividend received
if investor exercises influence that is beneficial to the investee, it recognizes the positive effect on the investee’s profit in its own profit and loss

10. IAS 28 – Application of the Equity Method
Exceptions to applying the equity method for investments in associates
1. the investment is classified as held for sale
2. the investor’s parent company is exempt from preparing consolidated financial
statements
3. the investor itself meets all the same criteria in 2 above that exempt a parent
from preparing consolidated statements
The equity method is often called one-line consolidation
procedures are similar to those used to account for acquisition of a subsidiary and for subsequent consolidation procedures in IAS 27
both methods are concerned with accounting for the investments as part of the reporting entity rather than as passive holdings

11. IAS 28 – Application of the Equity Method
At Acquisition
investor prepares an analysis of the purchase cost
investor identifies any difference between the investor’s cost and its share of the fair value of the associate’s identifiable net assets at acquisition as goodwill
Goodwill
not recognized separately from the investment itself
represents a portion of the investment’s carrying amount
is not amortized
if negative, is recognized in the investor’s profit or loss in the year of acquisition
Associate's Fair Value Differences
difference between fair values and carrying amounts on the investee’s books
explains another portion of the purchase cost of the investment
investor’s share of these differences are amortized as the underlying assets are realized and liabilities are settled by the associate

12. IAS 28 – Application of the Equity Method

13. IAS 28 – Application of the Equity Method
After Acquisition
As associate earns a profit -- its net assets increase
the investor recognizes its share of the profit and increases the carrying amount of the investment for its share of the increase in the associate’s net assets
Fair value differences
not recognized in the associate’s records
not amortized in the profit or loss that the associate reports
are amortized by the investor as they are included in the investment account balance
usually has the effect of reducing the investment income reported

14. IAS 28 – Application of the Equity Method
Dividends
as associate declares/pays dividends, its net assets decrease
investor recognizes its share of the reduction as the dividend is received
This entry reflects the conversion of the investment into cash by the investor
Adjustments needed each period
elimination of profits and losses on intercompany transactions between the investor and the associate
for upstream (associate to investor) and downstream (investor to associate) transactions
the investor’s share of any unrealized profits and losses are eliminated with adjustments to the investment and the investment income accounts

15. IAS 28 – Application of the Equity Method
Other Adjustments
investor adjusts investment account and its OCI or other equity account for its share of associate’s OCI and changes in other equity accounts
investor’s share of associate’s losses is more than the carrying amount of the investment
continue to recognize losses and resulting liability to extent investor has legal or constructive obligations to make payments on behalf of associate
Other Issues
associate’s accounting policies are required to be the same as those of the investor, otherwise they are conformed before its financial statements are used in the equity method
associate’s financials must be dated no more than three months from the investor’s reporting date, adjusted for significant transactions and events that occurred in the intervening period

16. IAS 28 – Application of the Equity Method
Impairment Losses
investment account reduced by investor’s share of losses reported by associate
investor applies IAS 39 to determine whether an impairment loss
carrying amount of investment as a whole is compared with its recoverable amount
the higher of value in use and fair value less selling costs
impairment loss is not allocated to specific assets underlying the investment
investment tested for impairment as a single asset
impairment loss may be reversed in the future

17. IAS 28 – Application of the Equity Method
Loss of Significant Influence
When investor ceases to have significant influence over an associate
Unless associate becomes a subsidiary or joint venture, the investment is accounted for under IAS 39
investment that remains is remeasured at its fair value
proceeds on disposal are recognized
difference between total of these two amounts and carrying value of investment when significant influence is lost is recognized in profit or loss
Amounts remaining in entity’s OCI attributable to the associate
account for as if associate had disposed of the related assets/liabilities
Amounts are reclassified to profit or loss if that is what associate would have done on disposal

18. IAS 28 – Disclosure
Investments in associates under equity method reported as non-current assets
Disclose
(a) carrying amount of investments
(b) investor’s share of profit or loss for the period
(c) investor’s share of any discontinued operations of associates, report separately in discontinued operations
(d) investor’s share of changes recognized in OCI by associate, report in OCI
(e) information about any related contingent liabilities

19. IAS 28 – Disclosure Other information required
info that provides reader with a better understanding of circumstances and financial position of associates
Examples
• summarized financial information about associates
• reasons supporting use of equity method with holdings of < 20%
• reasons why any associates not accounted for using equity method

20. Current GAAP Comparisons
Page 64 of 164 of

21. Looking Ahead
Early 2008
minor amendments made to IAS 28 to reduce choice and exemptions – no change to major concepts and how equity method is applied
Topic not listed on current IASB project agenda
no significant changes expected in foreseeable future
work on IAS 27 may have implications for IAS 28
New term being considered = significant involvement
Not yet determined how this term is related to “significant influence”

22. End-of-Chapter Practice

23. End-of-Chapter Practice

24. End-of-Chapter Practice

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