International Accounting Standard 28
Investments in Associates and Joint
Ventures
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 28 Accounting for Investments in Associates, which had originally been issued by the International Accounting Standards Committee in April 1989. IAS 28 Accounting for Investments in Associates replaced those parts of IAS 3 Consolidated Financial Statements (issued in June 1976) that dealt with accounting for investment in associates.
In December 2003, the IASB issued a revised IAS 28 with a new title—Investments in Associates.
This revised IAS 28 was part of the IASB's initial agenda of technical projects and also
incorporated the guidance contained in three related Interpretations (SIC-3 Elimination of Unrealised Profits and Losses on Transactions with Associates, SIC-20 Equity Accounting Method—Recognition of Losses and SIC-33 Consolidation and Equity Method—Potential Voting Rights and Allocation of Ownership Interests).
In May 2011 the IASB issued a revised IAS 28 with a new title—Investments in Associates and
Joint Ventures.
Other IFRSs have made minor consequential amendments to IAS 28, including Investment
Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012).
CONTENTS
INTRODUCTION
INTERNATIONAL ACCOUNTING STANDARD 28
INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
OBJECTIVE
SCOPE
DEFINITIONS
SIGNIFICANT INFLUENCE
EQUITY METHOD
APPLICATION OF THE EQUITY METHOD
Exemptions from applying the equity method
Classification as held for sale
Discontinuing the use of the equity method
Changes in ownership interest
Equity method procedures
Impairment losses
SEPARATE FINANCIAL STATEMENTS
EFFECTIVE DATE AND TRANSITION
References to IFRS 9
WITHDRAWAL OF IAS 28 (2003)
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IAS 28 ISSUED IN DECEMBER 2003
BASIS FOR CONCLUSIONS
DISSENTING OPINION
TABLE OF CONCORDANCE
International Accounting Standard 28 Investments in Associates and Joint Ventures (IAS 28) is set out in paragraphs 1-47. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 28 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
International Accounting Standard 28 Investments in Associates and Joint Ventures (IAS 28) 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.
The Standard is effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted.
Main features of the Standard
IAS 28 (as amended in 2011) is to be applied by all entities that are investors with joint control of, or significant influence over, an investee.
The Standard defines significant influence as the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.
IFRS 11 Joint Arrangements establishes principles for the financial reporting of parties to joint arrangements. It defines joint control as 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.
An entity applies IFRS 11 to determine the type of joint arrangement in which it is involved. Once it has determined that it has an interest in a joint venture, the entity recognises an investment and accounts for it using the equity method in accordance with IAS 28 (as amended in 2011), unless the entity is exempted from applying the equity method as specified in the Standard.
Equity method
The Standard defines the equity method as 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 net assets of the investee. The profit or loss of the investor includes its share of the profit or loss of the investee and the other comprehensive income of the investor includes its share of other comprehensive income of the investee.
An entity uses the equity method to account for its investments in associates or joint ventures in its consolidated financial statements. An entity that does not have any subsidiaries also uses the equity method to account for its investments in associates or joint ventures in its financial statements even though those are
not described as consolidated financial statements. The only financial
statements to which an entity does not apply the equity method are separate financial statements it presents in accordance with IAS 27 Separate Financial Statements.
Exemptions from applying the equity method
The Standard provides exemptions from applying the equity method similar to
those provided in IFRS 10 Consolidated Financial Statements for parents not to
prepare consolidated financial statements.
The Standard also provides exemptions from applying the equity method when the investment in the associate or joint venture is held by, or is held indirectly through, venture capital organisations, or mutual funds, unit trusts and similar entities including investment-linked insurance funds. Those investments in associates and joint ventures may be measured at fair value through profit or loss in accordance with IFRS 9 Financial Instruments.
Disclosure
The disclosure requirements for entities with joint control of, or significant
influence over, an investee are specified in IFRS 12 Disclosure of Interests in Other Entities.
International Accounting Standard 28
Investments in Associates and Joint Ventures
Objective
Scope
The objective of this Standard is to prescribe the accounting for investments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.
This Standard shall be applied by all entities that are investors with joint control of, or significant influence over, an investee.
Definitions
The following terms are used in this Standard with the meanings
specified:
An associate is an entity over which the investor has significant influence. 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. The investor's profit or loss includes its share of the investee's profit or loss and the investor's other comprehensive income includes its share of the investee's other comprehensive income.
A joint arrangement is an arrangement of which two or more parties
have joint control.
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.
The following terms are defined in paragraph 4 of IAS 27 Separate Financial
Statements and in Appendix A of IFRS 10 Consolidated Financial Statements and are used in this Standard with the meanings specified in the IFRSs in which they are
defined:
control of an investee
group
parent
separate financial statements
subsidiary.
Significant influence
If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent or
more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the entity holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the entity does not have significant influence, unless suchinfluence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.
The existence of significant influence by an entity is usually evidenced in one or
more of the following ways:
representation on the board of directors or equivalent governing body of
the investee;
participation in policy-making processes, including participation in
decisions about dividends or other distributions;
material transactions between the entity and its investee;
interchange of managerial personnel; or
provision of essential technical information.
An entity may own share warrants, share call options, debt or equity
instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the entity additional voting power or to reduce another party's voting power over the financial and operating policies of another entity (ie potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether an entity has significant influence. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.
In assessing whether potential voting rights contribute to significant influence,
the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether
considered individually or in combination) that affect potential rights, except the intentions of management and the financial ability to exercise or convert those potential rights.
An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels. It could occur, for example, when an associate becomes subject to the control of a government, court, administrator or
regulator. It could also occur as a result of a contractual arrangement.
Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and 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. Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investee arising from changes in the investee's other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. The investor's share of those changes is recognised in the investor's other comprehensive income (see IAS 1 Presentation of Financial Statements).
The recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate or a joint venture because the distributions received may bear little relation to the performance of the associate or joint venture. Because the investor has joint control of, or significant influence over, the investee, the investor has an interest in the associate's or joint venture's performance and, as a result, the return on its investment. The investor accounts for this interest by extending the scope of its financial statements to include its share of the profit or loss of such an investee. As a result, application of the equity method provides more informative reporting of the investor's net assets and profit or loss.
When potential voting rights or other derivatives containing potential voting rights exist, an entity's interest in an associate or a joint venture is determined solely on the basis of existing ownership interests and does not reflect the possible exercise or conversion of potential voting rights and other derivative instruments, unless paragraph 13 applies.
In some circumstances, an entity has, in substance, an existing ownership as a result of a transaction that currently gives it access to the returns associated with an ownership interest. In such circumstances, the proportion allocated to the entity is determined by taking into account the eventual exercise of those potential voting rights and other derivative instruments that currently give the entity access to the returns.
IFRS 9 Financial Instruments does not apply to interests in associates and joint ventures that are accounted for using the equity method. When instruments containing potential voting rights in substance currently give access to the returns associated with an ownership interest in an associate or a joint venture, the instruments are not subject to IFRS 9. In all other cases, instruments containing potential voting rights in an associate or a joint venture are accounted for in accordance with IFRS 9.
Unless an investment, or a portion of an investment, in an associate or a joint venture is classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, the investment, or any retained interest in the investment not classified as held for sale, shall be classified as a non-current asset.
Application of the equity method
An entity with joint control of, or significant influence over, an investee shall account for its investment in an associate or a joint venture using the equity method except when that investment qualifies for exemption in accordance with paragraphs 17-19.
Exemptions from applying the equity method
An entity need not apply the equity method to its investment in an associate or
a joint venture 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 or if all the following apply:
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.
The entity's debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets).
The entity did not file, nor is it 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.
The ultimate or any intermediate parent of the entity produces
consolidated financial statements available for public use that comply with IFRSs.
When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS 9.
When an entity has an investment in an associate, a portion of which is held indirectly through a venture capital organisation, or a mutual fund, unit trust
and similar entities including investment-linked insurance funds, the entity may elect to measure that portion of the investment in the associate at fair value through profit or loss in accordance with IFRS 9 regardless of whether the venture capital organisation, or the mutual fund, unit trust and similar entities including investment-linked insurance funds, has significant influence over that portion of the investment. If the entity makes that election, the entity shall apply the equity method to any remaining portion of its investment in an associate that is not held through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds.
Classification as held for sale
An entity shall apply IFRS 5 to an 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. Any retained portion of an investment in an associate or a joint venture that has not been classified as held for sale shall be accounted for using the equity method until disposal of the portion that is classified as held for sale takes place. After the disposal takes place, an entity shall account for any retained interest in the associate or joint venture in accordance with IFRS 9 unless the retained interest continues to be an associate or a joint venture, in which case the entity uses the equity method.
When an investment, or a portion of an investment, in an associate or a joint venture previously classified as held for sale no longer meets the criteria to be so classified, it shall be accounted for using the equity method retrospectively as from the date of its classification as held for sale. Financial statements for the periods since classification as held for sale shall be amended accordingly.
Discontinuing the use of the equity method
An entity shall discontinue the use of the equity method from the date
when its investment ceases to be an associate or a joint venture as
follows:
If the investment becomes a subsidiary, the entity shall account for
its investment in accordance with IFRS 3 Business Combinations and
IFRS 10.
If the retained interest in the former associate or joint venture is a
financial asset, the entity shall measure the retained interest at fair value. The fair value of the retained interest shall be regarded as its fair value on initial recognition as a financial asset in accordance with IFRS 9. The entity shall recognise in profit or loss
any difference between:
the fair value of any retained interest and any proceeds
from disposing of a part interest in the associate or joint
venture; and
the carrying amount of the investment at the date the
equity method was discontinued.
When an entity discontinues the use of the equity method, the
entity shall 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.
Therefore, if a gain or loss previously recognised in other comprehensive income by the investee would be reclassified to profit or loss on the disposal of the related assets or liabilities, the entity reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued. For example, if an associate or a joint venture has cumulative exchange differences relating to a foreign operation and the entity discontinues the use of the equity method, the entity shall reclassify to profit or loss the gain or loss that had previously been recognised in other comprehensive income in relation to the foreign operation.
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