IAS 28- Investments in Associates

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1 - Investments in Associates 1 1

2 - Broad outline Scope Significant influence Equity accounting Separate financial statements Presentation and Disclosure 2

3 Scope IAS 28 Applies to investments in associates An associate is an entity, including unincorporated entity such as partnership, over which the investor has significant influence, and which is neither a subsidiary nor an interest in a joint venture. IAS 28 excludes: investments in associates held by: venture capital organizations, or mutual funds, unit trusts and similar entities including investment-linked insurance funds 3 3

4 Significant influence 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. 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. 4 4

5 Significant influence 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 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 5 5

6 Equity accounting 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 IFRS 5 b) Investor is exempt from preparing consolidated financial statements c) Other specific circumstances 6 6

7 Equity accounting 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 in the investee recorded in other comprehensive income Fair value adjustments, if any. When potential voting rights exist only present ownership interests are considered Outstanding cumulative preference shares that are held by parties other than the investor and classified as equity, the investor computes its share of profits or losses after adjusting for the dividends on such shares, whether or not the dividends have been declared. 7 7

8 Equity accounting Date of commencing the use of the equity method From the date when the investment falls within the definition of an associate. Recording the initial investment: Cost net fair value of the identifiable assets and liabilities = Goodwill (not presented separately)/ income recognized in the income statement in the period in which the investment is acquired. Goodwill neither amortized nor tested separately for impairment. Instead, entire carrying amount of investment is tested for impairment under IAS 36 as a single asset whenever there is an indication as given under IAS

9 Equity accounting Reporting periods of associates Uniform accounting policies Transactions with associates: Unrealized profit or losses should be eliminated to the extent of investor s interest in associates Upstream: Investor purchases from associateadjust 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 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 9 9

10 Equity accounting Associates with net asset deficiencies If an investor's share of losses of an associate equals or exceeds its interest in the associate, the investor discontinues recognizing 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. Losses recognized 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 (i.e., priority in liquidation)

11 Equity accounting After the investor's interest is reduced to zero, additional losses are provided for, and a liability is recognized, 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 recognizing its share of those profits only after its share of the profits equals the share of losses not recognized

12 Equity accounting Discontinuing the use of equity method: When the investor ceases to have significant influence Apply IAS 39 from that date provided the associate has not become subsidiary or joint venture Discontinue when the investment is classified as held for sale under IFRS 5. Measurement as at the date of discontinuing the use of equity method: Measure at fair value. Fair value of the retained interest and proceeds from the disposal of the part interest carrying amount of investment = Recognized in profit or loss. Amount recognize din other comprehensive income should be recycled to income statement 12 12

13 Equity accounting Impairment Time of testing: End of each reporting period Indicators- IAS 39 Measurement- IAS 36 Unit of measurement: Each investment separately 13 13

14 Separate financial statements At cost or in accordance with IAS 39 (for other than those held for sale under IFRS 5) Should be applied consistently for all investments in associates 14 14

15 Presentation and disclosure Presentation: Investments presented as a separate line item in the balance sheet Share of profit or loss presented as a separate line item in the statement of comprehensive income Classified as non current assets Disclosure: Refer IAS to IAS

16 THANK YOU 16 16

EN Official Journal of the European Union L 320/161

29.11.2008 EN Official Journal of the European Union L 320/161 INTERNATIONAL ACCOUNTING STANDARD 28 Investments in associates SCOPE 1 This standard shall be applied in accounting for investments in associates.