Chapter 4
Investment in
associates and
joint ventures
(IAS 28)
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Chapter’s objectives
• Explain and apply equity method in recording of investment in
associates and joint venture.
• Describe disclosure requirements for investment in associates
and joint venture.
2
• Topic 4.1: Definitions regarding investment
in associates and joint ventures
• Topic 4.2: Reporting for investment in
associates and joint ventures.
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Topic 4.1
Definitions regarding
investment in associates
and joint ventures
Objectives
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Content
Associate
Equity
and Joint method
Venture
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Investing Strategies, Ownership Levels and the Impact
on Financial Reporting
Continuum of intercorporate ownership (under previous accounting standards such as IAS 27,
IFRS 12, IAS 28, IFRS 13 and IAS 31)
Zero 20% 50% 100%
Ownership Ownership Ownership Ownership
Significant
Passive Control
Influence
Quantitative
Active thresholds do NOT
Passive Active apply in IFRS 10,
Investment Investment Investment
but they are often
used as a rule of
• Trading securities • Associated thumb measure in
• Partially-owned subsidiary
• Available- for-sale company straight forward
• Fully-owned subsidiary
securities • Joint-arrangements situations
p
u 1. Exert significant
r 1. Gain entry intro a new market
1. Earn dividend influence or
p 2. Achieve synergistic benefits
2. Make capital control over
o from complementary strengths
gain investee’s
s 3. Gain market dominance
operation
e
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Types of investments
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Associate
Associate: An entity over which the investor has significant
influence.
Significant influence: The power to participate (not to control) in
the financial and operating policy decisions of the investee but
is not control or joint control of those policies
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Associates and Joint Venture
• IAS 28 (para. 5-6), significant influence exists when an investor
company owns (directly or indirectly) at least 20% of the
voting power of an investee company.
• This is usually evidenced by the following:
1. Representation on the board of directors in investee.
2. Participation in policy-making process.
3. Material transactions between investor and investee.
4. Interchange of managerial personnel.
5. Provision of essential technical information.
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Associate and Joint Venture
• Investor company losses
significant influence when:
➢No longer owns at least 20%
of the investee’s voting power.
➢Investee became subject to
government or court control.
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Example 1_MCQ
For each of the following statements, state whether there is evidence of significant
influence.
1. Goodwill arises on the acquisition of the investment.
2. There is a non-controlling interest (NCI) in the investment.
3. The investor holds 10% of equity shares in the investment.
4. The investor has the power to participate in the operating policy decisions of the investee.
5. The investor assigns one of its directors to the senior management team of the investee.
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Joint arrangement
• Joint control: 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.
• Joint arrangement: An arrangement of which two or more
parties have joint control.
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Joint Arrangement
• Joint arrangement is either joint operation or joint venture.
• Joint operation: joint arrangement whereby the parties that
have joint control of the arrangement have rights to the
assets, and obligations for the liabilities, relating to the
arrangement.
• Joint venture: joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net
assets of the arrangement.
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Equity Accounting
The method used to account for associates is called equity accounting.
IAS 28 Investment in Associates requires that the equity method of
accounting be used to incorporate the results of the associate into
consolidated financial statements.
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The is a method of accounting
whereby the investment is initially
recognized at cost and adjusted
Equity method thereafter for the post-acquisition
change in the investor’s share of
the investee’s net assets.
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Equity method – associate and
joint venture
- Initially at cost
- Recognise share of Profit or loss
of associate (investee)
Equity method
- Distribution received reduce
carrying amount
- Recognise share of OCI of
associate (investee)
- Classified as non-current asset
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Equity method
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Topic 4.2
Report for investment in
associates and joint ventures
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Content
Disclosure for
Procedure in
investment in
applying
associates
equity
and joint
method
venture
20
Procedure in
applying Initial Subsequent
recording recording
equity
method
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Equity method
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Equity Accounting
Associates in the Financial Statements
• Investor SFP
The investor includes a single line item, ‘Investment in the Associate’, in
the non-current assets section at cost in its SOFP, the same way an
investment in a subsidiary would be accounted for.
• Investor SPL&OCI
Any dividends received from the associate are included in the investor’s
SPLOCI as Other Income.
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Equity Accounting
Associates in the Financial Statements
• Consolidated SFP
The CSFP includes a single line item, ‘Investment in Associate’, in the
non-current assets section at cost plus the investor's share of post-
acquisition profits.
The change each year will be the investor's share of post-tax profit
minus dividends. Dividends are deducted because they are an
appropriation of profits. Bank and cash will increase by dividends
received.
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Equity Accounting
Associates in the Financial Statements
• Consolidated SPL
The investor's share of profit for the year is included in the CSPL as a
single item, ‘Share of profit of the associate’ above profit before tax.
• Consolidated OCI
Include the “Share of OCI of associate/ JV” net of tax
• Consolidated SOCIE
Opening RE – share of profits in prior years since acquisition
Opening Revenue reserve – share of OCI in prior years since acquisition
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Calculating Investment in Associates
Consolidated Statement of financial position
Non-current assets
Investment in Associates (working) X
Working
Cost of associate X
+ gain on bargain purchase X
Retained earnings (op RE – at acquisition RE) * % X
Share of profit for the year (Profit * %) X
Share of OCI-revaluation surplus (OCI * %) X
Less Dividends received (total dividends * %) (X)
Less Impairment loss (X)
Investment in associate X
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Example 2
Portslade Co acquired a 30% share of the equity share capital of
Aldrington Co on 1 January 20X5 for $450,000.
Aldrington Co's profits were $150,000 for the year to 31 December 20X5
and $180,000 for the year to 31 December 20X6. Portslade Co did not
receive any dividends from Aldrington Co in 20X5 but received a
dividend from Aldrington Co of $20,000 on 31 August 20X6.
Portslade Co also has two subsidiaries and therefore prepares
consolidated financial statements.
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Example 2
Portslade’s financial statement is as follows:
Portslade Co's own financial statements
DR CR
$000 $000
Statement of financial position
Non-current assets
Investment in associate 450
Statement of profit or loss and
other comprehensive income
Other income 20
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Example 2
The associate will be reflected in the consolidated financial statement as
follows:
Portslade Group's consolidated SFP
DR CR
$000 $000
Statement of financial position
Investment in associate 529
Workings:
Cost of investment 450
Share of 20X5 profits (30% × $150,000) 45
Investment in associate at 31 December 20X5 495
Share of 20X6 profits (30% × $180,000) 54
Less: Dividend received from associate (20)
Investment in associate at 31 December 20X6 529
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Example 2
Portslade Group's consolidated SPL&OCI
DR CR
$000 $000
Statement of profit or loss and other
comprehensive income
Share of profit of associate 54
Workings:
Effectively the double entries are:
DR Investment in associate (SOFP) 54
CR Share of profit of associate (SPLOCI) with share of 54
associate's profit for the year
DR Bank and cash 20
CR Investment in associate (SOFP) with dividend 20
received from associate in year
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Procedure in applying equity method
• Initial recording
❖Recording at cost.
❖If investment cost > investor’s share of the fair value of the
investee’s identifiable net asset → Good will → Including in
carrying value of investment in associate or joint venture.
❖If investment cost < investor’s share of the fair value of the
investee’s identifiable net asset → Negative Good will →
Investor records an income.
Dr. Investment
Cr. Share of the profit or loss of associates
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Procedure in applying equity method
• Subsequent recording
❖The carrying amount is increased or decreased to
recognise the investor’s share of the profit or loss of the
investee after the date of acquisition.
❖The investor’s share of the investee’s profit or loss is
recognised in the investor’s profit or loss.
❖Distributions received from an investee reduce the
carrying amount of the investment.
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Procedure in applying equity method
Upstream and
Downstream transactions
• Sales from an associate or a
Upstream transactions joint venture to the investor.
• Sales from the investor to its
Downstream transactions associate or its joint venture.
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Procedure in applying equity method
Upstream transactions:
• Unrealised profit is subtracted from the investor’s share of profit from associate and reduce the
amount of investment on associate or joint venture.
Dr. Share of profit or loss of Associate
Cr. Investment in Associate
Downstream transactions:
• Unrealised profit is subtracted from the investor’s gross profit (usually by increasing cost of
goods sold) and reduce the amount of investment on associate or joint venture.
Dr. Profit (from the sale of the asset)
Cr. Investment in Associate
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Exercise 3
Porchfield Co owns 30% of the equity share capital of another company,
Alverstone Co. Porchfield Co prepares consolidated financial statements,
and Alverstone Co is classified as Porchfield Co's associate.
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Exercise 3
For each statement about the above scenario, determine
whether it is True or False.
1. Dividends received from Alverstone Co are included in Porchfield Co’s
statement of profit or loss and other comprehensive income.
2. Alverstone Co's revenues and costs are added to the consolidated SPL
on a line-by-line basis.
3. The consolidated SOFP includes an amount for 'Investment in
Associate', which is the original cost of investment plus Porchfield Co's
share of Alverstone Co's profits.
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Exercise 3 _ answer
1. True. Dividends are included in Porchfield Co's SPLOCI; share of
profits are included in the consolidated financial statements.
2. False. Porchfield Co's share of Alverstone Co's profits is included in a
single line in the consolidated SPL.
3. True. The amount shown in the consolidated SOFP would be adjusted
each year by Porchfield Co's share of profits for that year.
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Disclosure for investment in associates and joint
venture
• IFRS 12 - Disclosure of Interests in Other Entities:
✓The nature, extent and financial effects of its interests in
associates and joint ventures.
✓The nature of, and changes in, the risks associated with its
interests in associates and joint ventures.
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The end of Chapter 4
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