IAS 28
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IAS 28, titled Investments in Associates and Joint Ventures, is an International Accounting Standard issued by the International Accounting Standards Board (IASB). It prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.[1]
Scope and definitions
The standard applies to all entities that are investors with joint control of, or significant influence over, an investee.[2]
- Associate: An entity over which the investor has significant influence.[3]
- Significant influence: The power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies.[4]
- Joint venture: A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.[5]
Determining significant influence
Significant influence is generally presumed to exist if an investor holds, directly or indirectly, 20% or more of the voting power of the investee, unless it can be clearly demonstrated otherwise.[6] Conversely, if the investor holds less than 20%, it is presumed the investor does not have significant influence unless such influence can be clearly demonstrated.
The equity method
Under the equity method, an investment is initially recognized at cost. The carrying amount is subsequently increased or decreased to recognize the investor's share of the profit or loss of the investee after the date of acquisition.[7]
Key mechanics
- Distributions: Dividends received from an investee reduce the carrying amount of the investment (as they represent a return of the investment).[8]
- Other Comprehensive Income (OCI): The investor’s share of the investee’s OCI is recognized in the investor’s OCI.[9]
- Upstream and downstream transactions: Profits and losses resulting from transactions between an investor and its associate/joint venture are recognized in the investor’s financial statements only to the extent of unrelated investors’ interests in the associate or joint venture.[10]
| Investment Type | Control Level | Accounting Method |
|---|---|---|
| Financial Asset | No influence (<20%) | IFRS 9 (Fair Value) |
| Associate / Joint Venture | Significant influence (20%–50%) | IAS 28 (Equity Method) |
| Subsidiary | Control (>50%) | IFRS 10 (Consolidation) |
Impairment losses
After applying the equity method, including recognizing the associate's or joint venture's losses, the investor applies the requirements of IAS 36 Impairment of Assets to determine whether it is necessary to recognize any additional impairment loss with respect to its net investment.[11]
The entire carrying amount of the investment is tested for impairment as a single asset by comparing its recoverable amount with its carrying amount.[12]
Exemptions from the equity method
An entity does not need to apply the equity method if it is a parent that is exempt from preparing consolidated financial statements by the scope exception in IFRS 10, or if the investment is held by a venture capital organization, mutual fund, or unit trust that elects to measure such investments at fair value through profit or loss in accordance with IFRS 9.[13]
Disclosure Requirements (IAS 28)
IAS 28 outlines how to account for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.[14]
| Paragraph | Category | Disclosure Requirement | Description / Examples |
|---|---|---|---|
| IAS 28.20 | Measurement Basis | Equity Method Application | Disclosure of the fact that investments in associates or joint ventures are accounted for using the equity method. |
| IAS 28.22 | Fair Value | Public Price Quotations | For investments in associates or joint ventures accounted for using the equity method, the fair value of the investment must be disclosed if there is a quoted market price. |
| IAS 28.37 | Financial Information | Summarized Data | Summarized financial information of the associate or joint venture (e.g., total assets, total liabilities, revenues, and profit/loss). |
| IAS 28.38 | Reconciliation of Info | A reconciliation of the summarized financial information to the carrying amount of the investment in the consolidated financial statements. | |
| IAS 28.39 | Reporting Dates | The end of the reporting period of an associate or joint venture when its financial statements are used in applying the equity method and are as of a different date. | |
| IAS 28.44 | Significant Influence | Judgments and Assumptions | Disclosure of the significant judgments and assumptions made in determining that it has significant influence (usually 20–50% voting power) or joint control. |
| IAS 28.45 | Restrictions | Ability to Transfer Funds | Any significant restrictions (e.g., resulting from borrowing arrangements or regulatory requirements) on the ability of associates to transfer funds to the entity in the form of cash dividends. |
References
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