Objective: IAS 28 prescribes the accounting for investments in associates and joint ventures, requiring the use of the equity method to account for such investments.
- Applies to all investments in associates and joint ventures
- Does not apply to investments held by venture capital organizations or mutual funds measured at fair value through profit or loss
- Key principle: equity method of accounting
Associate: An entity over which the investor has significant influence, but not control or joint control.
Joint Venture: A joint arrangement whereby the parties that have joint control have rights to the net assets of the arrangement.
Significant Influence: The power to participate in the financial and operating policy decisions but not control them.
- Presumption of Significant Influence: Generally presumed if investor holds 20% or more of voting power
- Joint Control: Contractually agreed sharing of control
The equity method is applied for investments in associates and joint ventures:
| Step | Description |
|---|---|
| Initial Recognition | Investment recognized at cost |
| Subsequent Measurement | Cost adjusted for investor's share of post-acquisition profits/losses and other comprehensive income |
| Dividends Received | Reduce carrying amount of investment |
Note: The investor's share of profits/losses and other comprehensive income is recognized in the investor's statement of comprehensive income.
Fair Value Option: When an investment in an associate or joint venture is held by a venture capital organization, it may be measured at fair value through profit or loss.
- If an associate or joint venture has different reporting dates, adjustments are made for significant transactions
- Uniform accounting policies should be used
- Potential voting rights should be considered when assessing significant influence
Company A invests $1,000,000 in Associate B (30% ownership)
Associate B reports profit of $200,000 → Company A recognizes $60,000
Carrying amount becomes $1,060,000
If impairment indicators exist, Company A tests for impairment
- If investor's share of losses equals or exceeds carrying amount of investment, investor discontinues recognizing further losses
- Investment is reported at nil value
- Additional losses are recognized only to the extent that investor has incurred legal or constructive obligations
- If associate/joint venture subsequently reports profits, investor resumes recognizing its share only after its share of profits equals unrecognized losses
| Requirement | Description |
|---|---|
| Fair Value | Fair value of investments in associates/joint ventures if practicable |
| Summarized Financial Information | For material associates/joint ventures |
| Nature & Extent of Restrictions | On ability of associates/joint ventures to transfer funds to investor |
| Contingent Liabilities | Related to interests in associates/joint ventures |
- Joint ventures are now accounted for using the equity method (previously proportionate consolidation)
- Clarification on accounting for potential voting rights
- Enhanced disclosure requirements
- Alignment with IFRS 10, 11, and 12