National Board of Accountants and Auditors IAS 28 Investments in Associates and Joint Ventures By Yona Killagane 23RD AUGUST TO FRIDAY 25TH AUGUST 2017, AT TREASURY SQUARE DODOMA
Outline Historical perspective of the standard Objectives & Scope of the standard Definitions Equity method procedures Impairment Disclosures Sample financial statements
Historical perspective In April 2001 the IASB adopted IAS 28 Accounting for Investments in Associates, which had originally been issued by the IASC in April 1989. In December 2003 the IASB revised IAS 28 with a new title Investments in Associates. In May 2011 the Board issued a revised IAS 28 with a new title Investments in Associates and Joint Ventures. In September 2014 IAS 28 was amended by Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28). In December 2014 IAS 28 was amended by Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28). In December 2015 the mandatory effective date of the 2014 amendments were indefinitely deferred by the Effective Date of Amendments to IFRS 10 and IAS 28. Other Standards have made minor consequential amendments to IAS 28. They include IFRS 9 Financial Instruments (issued July 2014) and Equity Method in Separate Financial Statements (Amendments to IAS 27) (issued August 2014).
Objective & Scope Objective: prescribes the accounting for investments in associates and joint ventures; and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. Investor Associates Joint ventures SCOPE: Investee applies to all entities that are investors with joint control of, or significant influence over, to an investee.
Definitions An associate is an entity over which the investor has significant influence. Shareholding >20%<50%. Consolidated financial statements: are the financial statements of a group in which assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. The equity method: is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets. A joint arrangement: is an arrangement of which two or more parties have joint control.
Definitions Joint control: is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. A joint venture: is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. A joint venturer: is a party to a joint venture that has joint control of that joint venture. Significant influence: is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.
Significant influence Entity holds, directly or indirectly 20 per cent or more of the voting power of the investee and can influence financial and operational policy decisions. Instances of existence of significant influence: i. Representation on the board of directors of the ii. investee; Participation in policy-making processes, and decisions about dividends or other distributions; iii. Material transactions between the entity and its investee; iv. Interchange of managerial personnel; or v. Provision of essential technical information.
Equity method No individual asset or liability will be incorporated in investor s FS. Cost of investment will be determined after making following adjustments Cost of investment Price paid for investment Share of post-acquisition profit Share of post-acquisition OCI e.g. revaluation of PPE Impairment loss Distributions to investor
Price Paid for Investments Represents the percentage share of fair value of net assets of investee.[assets liabilities] At acquisition date: Determine overpayment or under payment based on the fair value of net assets. Where price paid > net assets it means overpayment = goodwill. Where price paid < net assets it means it is a gain. In case of goodwill: It should not be shown separately and not amortised. It will be indirectly included in the cost of investment (price paid for investments) through DR: Cost of investment; CR: Bank. If it is a gain: Carry out a reassessment of identifiable assets and liabilities of investee. It should be recognized as an income in profit or loss in the period when the investment is acquired; through DR: Identifiable assets/liabilities/cost of investments DR: Cost of investments CR: Bank payments effected CR: P & L. - gain
Exemption to Equity method General rule: An entity with joint control of, or significant influence over, an investee must account for its investment in an associate or a joint venture using the equity method. Exceptions: i. If the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in paragraph 4(a) of IFRS 10 meeting all four ii. iii. iv. conditions; All of the conditions set out in next slide apply; Investment in an associate or a joint venture is held by a venture capital organization, or a mutual fund, unit trust and investment-linked insurance funds, in case they opt to measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS 9; Investment, or a portion of an investment, in an associate or a joint venture that meets the criteria to be classified as held for sale under IFRS 5.(see next).
All of the Conditions for exemption to use equity method 1. The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not applying the equity method. 2. The entity's debt or equity instruments are not traded in a public market. 3. The entity did not file, nor it is in the process of filing, its financial statements with a securities commission or other regulatory organisation, for the purpose of issuing any class of instruments in a public market. 4. The ultimate or any intermediate parent of the entity produces consolidated financial statements available for public use
Investee Classified as held for sale Investment in associates or Joint venture Account on equity method Held for sale - portion Account according to IFRS 5 must meet conditions for IFRS 5 Held for sale Fails Use equity method retrospectively Remaining portion Significant influence No Significant influence Use equity method Use IFRS 9
Application of the Equity method Investments in investee is initially recognised at cost. Purchase price; plus Related transactions costs. Proportionate share of the investor is based on existing ownership interest that is: exercisable at reporting date; options should not be included unless they are immediately exercisable. Adjust for goodwill or gain as earlier Adjustments for post-acquisition profits; OCI items and distributions: Profits Losses Distributions
When Post acquisition profit arises When investee realizes profits; a proportionate share due to investor should be accrued and the cost of investments to the investee increased as follows: DR: Cost of investment CR: P & L - with the proportionate share due to the investor Illustration: A holds 25% shares in B the shares were acquired on 1/1/2016 for Shs. 100 billion; where the fair value of net assets of B were Shs. 360 billion. During year ended 31/12/2016, B realized a profit of Shs. 80 billion. Cost of investment as of 31/12/2016: As at 1/1/2016 100 billion Proportion of profit earned 25% x 80 Total 20 billion 120 billion =======
When Post acquisition losses arises Losses realized by the investee should reduce cost of investment of the investor DR: P & L CR: Cost of investment with the share of the loss When share of the loss to the investor exceeds the cost of investment; no further losses should continue to be recognised in investors books unless: the investor has legal or constructive obligations or made payments on behalf of the associate or joint venture. In which case a liability will have to be recognised as follows: DR: P & L; CR: Liability for the excess of cost of investment If investee 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 recognised.
Illustration losses no legal obligation A held 25% of shares of B on 1/1/2014 and the cost investment (COI) of A in B then was Shs.150 million. B makes a loss of Shs.1,000 million during the year ended 31/12/ 2014. B realizes the following results during the ended: 2015 loss Shs.80million 2016 profit Shs. 1,500 million Show appropriate adjustments to cost of investments where (a) No legal obligation (b) with legal obligation. 2014: Share of loss to B = Shs.250million DR: P & L CR: COI with Shs.150 million. Excess loss of Shs.100 million is ignored (250-150). Thus: No COI in A books. 2015: Share of loss to B = 20 million [not recognised by A. 2016: Share of Profit to B = Shs. 375 mill (25%x1500). Maximum profit to be recognised limited to earlier losses = Shs.225 million [375-100 -20] DR: COI CR: P & L
Illustration losses with legal obligation A held 25% of shares of B on 1/1/2014 and the cost investment (COI) of A in B then was Shs.150 million. B makes a loss of Shs.1,000 million during the year ended 31/12/ 2014. B realizes the following results during the ended: 2015 loss Shs.80million 2016 profit Shs. 1,500 million Show appropriate adjustments to cost of investments where (a) No legal obligation (b) with legal obligation. 2014: Share of loss to B = Shs.250million DR: P & L with 250 CR: COI with Shs.150 million. CR: Liability with Shs.100 million Thus: No COI in A books. Liability created. 2015: Share of loss to B = 20 million. DR: P & L ; CR: Liability with Shs.20 million 2016: Share of Profit to B = Shs. 375 mill (25%x1500). DR:Liability with 120 mill. DR: COI with Shs.255 mill. CR: P & L with Shs.375 mill.
Basis of sharing Proportionate basis i.e. existing ownership interest on voting rights. Potential voting rights should be only those which are immediately exercisable. A group's share in an investee is the aggregate of the holdings in that associate or joint venture by the parent and its subsidiaries. The holdings of the group's other associates or joint ventures are ignored for this purpose. When an investee has subsidiaries, associates or joint ventures, the FS taken into account in applying the equity method are those recognised in the investee's financial statements after adjustments.[see illustration] Provide for cumulative preference shares even if not yet declared before proportionate share.
Deal separately Investee 2 Illustration Investor Investee 1 = Parent Investor Partner JV (IFRS 11) Deal separately Subsidiary Associate Joint venture When dealing with investee 1 ignore investee 2 & JV (IFRS 11) Deal with consolidated position of investee 1 not directly to those below.
Illustration cumulative preference shares A held 25% of shares of B on 1/1/2014 and the cost investment (COI) of A in B then was Shs.150 million. In the statement of financial position B has 10% cumulative preference of shares worth Shs. 150 million. B makes a profit of Shs.635 million during the year ended 31/12/ 2014. What will be investment in associate by year end? Reported profit 635m Less: Prefer. Dividend 10% x 150m 15m Balance 620m 25% share = Shs.155 m DR: COI CR: P & L with Shs. 155 m. Balance of COI at year end = Shs.305 million (Shs.150 +Shs.155)
Effect on Distributions from investee Distributions reduces the value of investment of the investor to the investee as flollows: DR: Bank; CR: COI with amount of distribution/dividend. When distribution exceed the balance in the carrying amount of COI: Reduce the COI balance to zero; Remaining balance recognise as income; if the investor has no legal or constructive obligation to payment on behalf of the associate i.e. DR: Bank amount of distribution received. CR: COI to reduce it to zero. CR: P & L balance of distribution remaining ( Bank COI)
Effect on Distributions from investee If the investor is obligated leally or constructively to payment the adjustment is: DR: Bank - amount of distribution received. CR: COI - to reduce it to zero. CR: Liability - balance of distribution remaining ( Bank COI) In subsequent years when associates makes profits; two options exist: Option 1 Recognise investor s share of profit to the carrying value of investment (COI) and carry out an assessment of impairment i.e. DR: COI ; CR: P & L with proportionate share. Option 2 The investor does not recognise its share until the earlier profit taken credit when COI was zero is all clawed back.
Effect on Distributions from investee Illustration A holds 20% interest in associate B with carrying amount of investment of Shs. 20 million. During the year ended 31 December: 2014 B pays dividend of Shs.150 million. 2015 B earns profit of Shs.225 million. Show appropriate adjustments in A. A has no legal obligations to payments of B. 2014 Dividend received by A = 30 m (20% x 150m) DR: Bank with 30 million CR: COI with Shs.20m (balance in the account) CR: P & L with Shs.10m (30-20) 2015: Profit due to A = Shs.45m (20% x 225m) Alternative 1: recognise COI DR: COI with Shs.45m. CR: P & L with Shs.45m. Alternative 2: after claw back of excess earlier profit of Shs.10m DR: COI with Shs.35m (45-10) CR: P & with Shs.35m
Transactions with Investee Gains and losses resulting from 'upstream' and 'downstream' transactions between an investor and its investee are recognised in the investor s FS only to the extent of unrelated investors' interests in the investee. i.e. the investor's share in the investee's gains or losses resulting from these transactions is eliminated. 'Upstream' transactions are: sales of assets from an investee to the investor. 'Downstream' transactions are: sales or contributions of assets from the investor to investee. When downstream transactions provide evidence of a reduction in the net realizable value of the assets to be sold or contributed, or of an impairment loss of those assets, those losses should be recognised in full by the investor. When upstream transactions provide evidence of a reduction in the net realizable value of the assets to be purchased or of an impairment loss of those assets, the investor should recognize its share in those losses.
Transactions with Investee -Illustration a) An investor has a 20% interest in an investee. Investee sales inventory to the investor for Shs.200 million. The cost of inventory was Shs.150million. The inventory was still in stock at year end. b) An investor has a 20% interest in an investee. Investor sales inventory to the investee for Shs.200 million. The cost of inventory was Shs.150million. The inventory was still in stock at year end. Show adjustments a) Upstream transaction: Share of unrealized profit = (20% x (200-150)) = Shs.10m DR: P & L CR: COI or Inventory with Shs.10m b) Downstream transaction: Share of unrealized profit = (20% x (200-150)) = Shs.10m DR: P & L CR: COI with Shs.10m
Non-monetary contribution of investor in exchange with Investee s equity The gain or loss resulting from the contribution of non-monetary assets that do not constitute a business, as defined in IFRS 3, to an investee in exchange for an equity interest in the investee: shall be accounted for above If contribution lacks commercial substance, as per IAS 16 Property, Plant and Equipment, the gain or loss is not recognised, such unrealized gains and losses shall be eliminated against the investment accounted for using the equity method.
Transactions with Investee constituting transfer of business The gain or loss resulting from a downstream transaction involving assets that constitute a business, as defined in IFRS 3, between the investor (including its consolidated subsidiaries) and its investee should be recognised in full in the investor's financial statements.
Intercompany trading transactions Associates and joint ventures are not part of the group. The procedures for elimination of intra-group balances, transactions, income and expenses are not appropeiate with equity method. What appears in the FS are two figures: In the SFPosition Investment in Associates/Joint ventures (COI) In the SCOI share of investor s P & L or comprehensive income in the investee. Investor s trading balance or loan would be classified as financial assets or liability. A owns 20% of B s equity. Also A owns 60% of cumulative preference shares of B. B sold goods at cost to A on credit and the same has not be sold by year end. A would show: It share of profit (20%) of B after deducting preference dividend. payable to B for goods not paid. account preference shares under IFRS 9 as financial asset.
Discontinuance of Equity method Acquires more stake 1 Subsidiary Apply IFRS 3 Business Combination Apply IFRS 10 Consolidation Cost of investment of Associates/JV Instances of discontinuance 3 From Associate to JV vice versa Use equity method Disposes some stake 2 Retained Associate or JV is financial asset 1. Measure at fair value retained portion. 2. Gain on sold portion = selling proceeds carrying amount 3. Retained portion gain/loss = fair value carrying amount. All to P & L
Implication of Discontinuing the use of the equity method When an entity discontinues the use of the equity method, account for all amounts previously recognised in other comprehensive income in relation to that investment on the same basis as would have been required if the investee had directly disposed of the related assets or liabilities i.e. transfer from OCI to profit and loss either can be reclassified or not classified to P&L.: Revaluation reserve not reclassifiable thus to remain in reserves but should be shifted from revaluation reserve to retained reserves. Cumulative exchange difference reclassified to P & L
Change from Associates to Joint venture or vice versa If an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate, the entity should continue to apply the equity method and does not remeasure the retained interest. Associate Joint Venture Apply equity method Associate Joint Venture
Changes in ownership interest If an entity's interest in an associate or joint venture is reduced, but the equity method is continued to be applied, the entity should: reclassify to profit or loss the proportion of the gain or loss previously recognized in other comprehensive income relative to that reduction in ownership interest. i.e. Whether amount reduced is capable of being reclassified or not to P & L. Original interest Equity method Reduction in interest Reclassify OCI for reduction New interest Equity method
Equity method other procedures Procedures for equity accounting are similar to consolidation procedures and concepts underlying for accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate or a joint venture. The most recent available financial statements of the investee are used by the investor in applying the equity method. If date are different: adjustments should be made for transactions between that date and the date of the investor's financial statements. The difference in period shall not be more than three months. The financial statements shall be prepared using uniform accounting policies. If an investor is not itself an investment entity has an interest in an investee that is an investment entity, the investor may, when applying the equity method, retain the fair value measurement applied by that investment entity investee (despite different accounting policy
Impairment losses After application of the equity method, including recognizing losses, the entity should assess evidence for impairment. The entity shall apply the impairment requirements in IFRS 9. Evidence for impairment, include: significant financial difficulty of the associate or joint venture; a breach of contract, such as a default or delinquency in payments by the associate or joint venture; the entity, for economic or legal reasons relating to its associate's or joint venture's financial difficulty, granting to the associate or joint venture a concession that the entity would not otherwise consider; it becoming probable that the associate or joint venture will enter bankruptcy or other financial reorganisation; or the disappearance of an active market for the net investment because of financial difficulties of the associate or joint venture. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the net investment subsequently increases.
Separate financial statements An investment in an associate or a joint venture shall be accounted for in the entity's separate financial statements in accordance with paragraph 10 of IAS 27 (as amended in 2011) using equity method. When an investor prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures and associates either: (a) (b) (c) at cost; in accordance with IFRS 9; or using the equity method.]
Disclosures There are no disclosures specified in IAS 28. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required for entities with joint control of, or significant influence over, an investee. Interests in joint arrangements and associates An entity shall disclose information that enables users of its financial statements to evaluate: the nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates the nature of, and changes in, the risks associated with its interests in joint ventures and associates.
XYZ Group Statement of financial position as at 31 December 20X7 (in thousands of currency units) 31 Dec 20X7 31 Dec 20X6 Non-current assets Property, plant and equipment 350,700 360,020 Goodwill 80,800 91,200 Other intangible assets 227,470 227,470 Investments in associates 100,150 110,770 Investments in equity instruments 142,500 156,000 901,620 945,460 Current assets Inventories 135,230 132,500 Trade receivables 91,600 110,800 Other current assets 25,650 12,540 Cash and cash equivalents 312,400 322,900 564,880 578,740 Total assets 1,466,500 1,524,200 EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital 650,000 600,000 Retained earnings 243,500 161,700 Other components of equity 10,200 21,200 903,700 782,900 Non-controlling interests 70,050 48,600 Total equity 973,750 831,500 Non-current liabilities Long-term borrowings 120,000 160,000 Deferred tax 28,800 26,040 Long-term provisions 28,850 52,240 Total non-current liabilities 177,650 238,280 Current liabilities Trade and other payables 115,100 187,620 Short-term borrowings 150,000 200,000 Current portion of long-term borrowings 10,000 20,000 Current tax payable 35,000 42,000 Short-term provisions 5,000 4,800 Total current liabilities 315,100 454,420 Total liabilities 492,750 692,700 Total equity and liabilities 1,466,500 1,524,200
XYZ Group Statement of profit or loss and other comprehensive income for the year ended 31 December 20X7 20X7 20X6 Revenue 390,000 355,000 Cost of sales (245,000) (230,000) Gross profit 145,000 125,000 Other income 20,667 11,300 Distribution costs (9,000) (8,700) Administrative expenses (20,000) (21,000) Other expenses (2,100) (1,200) Finance costs (8,000) (7,500) Share of profit of associates 1 35,100 30,100 Profit before tax 161,667 128,000 Income tax expense (40,417) (32,000) Profit for the year from continuing operations 121,250 96,000 Loss for the year from discontinued operations (30,500) PROFIT FOR THE YEAR 121,250 65,500 Other comprehensive income: Items that will not be reclassified to profit or loss: Gains on property revaluation 933 3,367 Remeasurements of defined benefit pension plans (667) 1,333 Share of other comprehensive income of associates 2 400 (700) Income tax relating to items that will not be reclassified (166) (1,000) 500 3,000 Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations 5,334 10,667 Available-for-sale financial assets(d) (24,000) 26,667 Cash flow hedges(d) (667) (4,000) Income tax relating to items that may be reclassified(c) 4,833 (8,334) (14,500) 25,000 Other comprehensive income for the year, net of tax (14,000) 28,000 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 107,250 93,500
y,killagane@yahoo.com/killagane@raha.com