Summary .1INVESTMENT IN ASSOCIATES AND INTERESTS IN JOINT VENTURES ASSOCIATES
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.1INVESTMENT IN ASSOCIATES AND INTERESTS IN JOINT
.1INVESTMENT IN ASSOCIATES AND INTERESTS IN JOINT VENTURES,
.1INVESTMENT IN ASSOCIATES AND INTERESTS IN JOINT VENTURES
ASSOCIATES,
.1INVESTMENT IN ASSOCIATES AND INTERESTS IN JOINT VENTURES
ASSOCIATES,
.1INVESTMENT IN ASSOCIATES AND INTERESTS IN JOINT VENTURES
ASSOCIATES,
ASSOCIATES.
.1IN...
1.1 INVESTMENT IN ASSOCIATES AND INTERESTS IN JOINT VENTURES
ASSOCIATES
Definitions:
❖ Associate: An entity in which an investor has significant influence but not control or joint
control.
❖ Significant influence: Power to participate in the financial and operating policy decisions
but not to control them.
❖ Equity method: A method of accounting by which an equity investment is initially
recorded at cost and subsequently adjusted to reflect the investor’s share of the net profit
or loss of the associate (investee).
Identification of Associates.
There may be a case where the investment of an entity in another entity is not enough to give it
control, but such is the amount of voting power acquired that the investor exercises significant
influence over the investee. In this case, the entity in which such an investment is held is called an
“associate” company.
IAS 28 states that if the investor has 20% or more of the voting power of the investee, then there
is a presumption of significant influence. An investor with less than 20% is presumed not to have
significant influence, unless such influence can be clearly demonstrated. The point to note is that,
though a shareholding of between 20% and 50% will normally constitute an investment in an
associate, the investor must actually exercise its significant influence. This is usually evidenced
by:
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 entity and its investee;
d) interchange of managerial personnel; or
e) provision of essential technical information
Equity Method of Accounting
Associates are accounted for using the equity method of accounting. Under this method, an equity
investment is initially recorded at cost and is subsequently adjusted to reflect the investor’s share
of the net profit or loss of the associate 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 account. Distributions (such
as dividends) received from the Associate reduce the carrying amount of the investment. Other
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, adjustments to the carrying amount of the investment may arise from changes in the investee’s
equity that have not been included in the income statement (such as revaluations).
The investment in an associate must be accounted for using the equity method, except in the
following circumstances:
(a) The investment is classified as held for sale in accordance with IFRS 5.
(b) If a parent also has an investment in an associate, but that parent is itself a subsidiary, then it
does not have to present consolidated financial statements.
(c) The debt or equity instrument are not traded in a public market
Use of the equity method must cease if the investor loses significant influence over an associate.
Differing Accounting Dates
Where the accounting dates differ, the associate should produce financial statements at the same
date as the investor, and in case this is impracticable, the financial statements with a different date
may be used subject to adjustment for significant events and transactions.
Differing Accounting Policies
If the associate uses different accounting policies from the investor, adjustments must be made to
bring the associates policies into line with the investors, when the equity method is being applied
Implicit Goodwill
At the time of acquisition of investment in an associate, any difference (positive or negative)
between the cost of acquisition and the investor’s share of the fair values of the net identifiable
assets of the associate is accounted for as goodwill. The investor’s share of the profits or losses
after acquisition are adjusted with any impairment recorded on the goodwill.
Losses in Excess of Investment
In case an entity’s share of losses of an associate equals or exceeds its “interest in the associate”,
the investor discontinues recognizing its share of further losses. Once the investor’s interest is
reduced to zero, additional losses are recognized by a provision (liability) only to the extent that
the investor has incurred legal or constructive obligations or made payments on behalf of the
associate. Once the Associate returns to profitability subsequently, the investor resumes
recognizing its share of those profits only after its share of the profits equals the share of losses
not recognized previously.
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