IAS 28- Investments in Associates

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IAS 28 - Broad outline

• Scope

• Significant influence

• Equity accounting

•Separate financial statements

•Presentation and Disclosure

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•Presentation and Disclosure

• IAS 28 – Applies to investments in associates

• An associate is an entity, including unincorporatedentity such as partnership, over which the investor hassignificant influence, and which is neither a subsidiarynor an interest in a joint venture.

IAS 28 Scope

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• IAS 28 excludes:

investments in associates held by:

• venture capital organizations, or

• mutual funds, unit trusts and similar entitiesincluding investment-linked insurance funds

• The power to participate in the financial and operating policy

decisions of the investee, but is not control or joint control

over those policies.

• General rule:

Significant influence presumed to exists when an investor

holds, directly or indirectly through subsidiaries, 20 per cent

or more of the voting power of the investee.

IAS 28 Significant influence

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or more of the voting power of the investee.

• Indicators:

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.

• Potential voting rights

Can arise through share warrants, call options, debt or equity

instruments that are convertible into ordinary shares, etc.

• Currently exercisable or currently convertible are to be

considered for the assessment.

• Potential voting rights are not currently exercisable when , for

example, they can not be exercised or converted until a

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example, they can not be exercised or converted until a

future date or until the occurrence of a future event.

• Potential voting rights held by other investors also need to

be considered for evaluation.

• Intention and the financial ability to exercise or convert to be

ignored.

• Ceasing to have significant influence

• The equity method is 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 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.

• Exemptions from applying equity accounting when:

a) Investment is classified as held for sale in accordance with

IAS 28 Equity accounting

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a) Investment is classified as held for sale in accordance with

IFRS 5

b) Investor is exempt from preparing consolidated financial

statements

c) Other specific circumstances

Initially recorded at cost and thereafter adjusted for:

•Investor’s share of post acquisition profit or loss;•Distributions from the investee•Changes in the investor’s proportionate interest inthe investee recorded in other comprehensiveincome

•Fair value adjustments, if any.

IAS 28 Equity accounting

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•Fair value adjustments, if any.

When potential voting rights exist only presentownership interests are considered

Outstanding cumulative preference shares that areheld by parties other than the investor and classifiedas equity, the investor computes its share of profits orlosses after adjusting for the dividends on suchshares, whether or not the dividends have beendeclared.

Date of commencing the use of the equity methodFrom the date when the investment falls within thedefinition of an associate.

Recording the initial investment:Cost – net fair value of the identifiable assets andliabilities = Goodwill (not presented separately)/ incomerecognized in the income statement in the period in

IAS 28 Equity accounting

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liabilities = Goodwill (not presented separately)/ incomerecognized in the income statement in the period inwhich the investment is acquired.

Goodwill neither amortized nor tested separately forimpairment . Instead, entire carrying amount ofinvestment is tested for impairment under IAS 36 as asingle asset whenever there is an indication as givenunder IAS 39.

•Reporting periods of associates•Uniform accounting policies•Transactions with associates: Unrealized profit orlosses should be eliminated to the extent ofinvestor’s interest in associates

• Upstream: Investor purchases from associate-adjust the income from associates

•Downstream: Investor sells goods to associate –

IAS 28 Equity accounting

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adjust the income from associates•Downstream: Investor sells goods to associate –adjust cost of sales

•Associates with net asset deficiencies•If an investor's share of losses of an associate equalsor exceeds its interest in the associate, the investordiscontinues recognising its share of further losses.The interest in an associate is the carrying amount ofthe investment in the associate under the equitymethod together with any long-term interests that,in substance, form part of the investor's netinvestment in the associate.

•Associates with net asset deficienciesIf an investor's share of losses of an associate equalsor exceeds its interest in the associate, the investordiscontinues recognizing its share of further losses.The interest in an associate is the carrying amount ofthe investment in the associate under the equitymethod together with any long-term interests that,

IAS 28 Equity accounting

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the investment in the associate under the equitymethod together with any long-term interests that,in substance, form part of the investor's netinvestment in the associate.

•Losses recognized under the equity method in excessof the investor's investment in ordinary shares areapplied to the other components of the investor'sinterest in an associate in the reverse order of theirseniority (i.e., priority in liquidation).

•After the investor's interest is reduced to zero,additional losses are provided for, and a liability isrecognized, only to the extent that the investor hasincurred legal or constructive obligations or madepayments on behalf of the associate.

• If the associate subsequently reports profits, the

IAS 28 Equity accounting

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•If the associate subsequently reports profits, theinvestor resumes recognizing its share of thoseprofits only after its share of the profits equals theshare of losses not recognized.

•Discontinuing the use of equity method:When the investor ceases to have significant influenceApply IAS 39 from that date provided the associatehas not become subsidiary or joint venture

Discontinue when the investment is classified as heldfor sale under IFRS 5.

IAS 28 Equity accounting

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Discontinue when the investment is classified as heldfor sale under IFRS 5.

Measurement as at the date of discontinuing the useof equity method:

Measure at fair value. Fair value of the retainedinterest and proceeds from the disposal of the partinterest – carrying amount of investment =Recognized in profit or loss.

Amount recognize din other comprehensive incomeshould be recycled to income statement

Impairment

Time of testing: End of each reporting period

Indicators- IAS 39

Measurement- IAS 36

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Measurement- IAS 36

Unit of measurement: Each investment separately

At cost or in accordance with IAS 39 (for other thanthose held for sale under IFRS 5)

Should be applied consistently for all investments inassociates

IAS 28Separate financial statements

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Presentation:Investments presented as a separate line item in thebalance sheet

Share of profit or loss presented as a separate lineitem in the statement of comprehensive income

Classified as non current assets

IAS 28Presentation and disclosure

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Classified as non current assets

Disclosure:

Refer IAS 28. 37 to IAS 28.40

THANK YOU

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THANK YOU