Accounting for investments in associated and joint companies according to IFRS. Investments in associates and joint ventures Investments in associates IFRS 28
Introduction
IAS 28 Investments in Associates and Joint Ventures
establishes principles for accounting for investments in associated companies;
describes the equity accounting requirements for investments in associates and joint ventures.
However, it is not used to account for investments that belong to:
venture funds; or
mutual funds, unit trusts and similar entities, including insurance investment funds.
Investments in associates and joint ventures by such entities may be accounted for at fair value through profit or loss in accordance with IFRS 9 Financial Instruments.
Definitions
Associated company (associate)is a company in which the investor has significant influence.
Significant Impact (significant influence)– this is the opportunity to participate in decision-making regarding the financial and operating policies of the company, but not to control or jointly control it.
Equity method (equity method)is an accounting method under which investments are initially recognized at actual acquisition costs and then adjusted for post-acquisition changes in the investor's share of the investee's net assets. An investor's financial result includes its share of the investee company's profits and losses, and the investor's other comprehensive income includes its share of the investee company's other comprehensive income.
Significant Impact
Significant influence is typically characterized by ownership of between 20% and 50% of the voting shares of the investee.
However, these limits of influence are not considered absolute. An investor can have significant influence without having such a share of shares. At the same time, the presence of a large block of shares does not always indicate the ability to significantly influence the activities of the invested company.
The standard describes additional factors that indicate the presence of significant influence:
representation on the board of directors or similar management body of the investee;
participation in the process of developing the policy of the investment object, including participation in decision-making regarding the payment of dividends;
major transactions between the investor and the investee company;
exchange of management personnel;
providing important technical information.
It is also necessary to consider the availability of convertible financial instruments, which, if converted, could provide the investor with significant leverage.
An entity loses significant influence when it loses the ability to participate in decisions regarding the financial and operating policies of an investee, although the loss of significant influence is not necessarily accompanied by a change in voting share ownership.
Equity method
An investor reports as a separate line item in the statement of financial position the investment in the associate or joint venture and as a single line item in the statement of profit or loss and other comprehensive income for its share of the profits or losses and other comprehensive income of the associate or joint venture.
According to the equity method:
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When the reporting dates of an investor and its associate or joint venture are different, the associate or joint venture must prepare financial statements as of the same date as the investor's reporting date, if possible.
If the reporting dates are not the same, adjustments must be made for significant transactions or events between them.
The difference between reporting dates should not exceed three months and should remain the same from period to period.
If the associate or joint venture uses accounting policies that differ from those of the investor, adjustments must be made to bring them closer together.
The previous example of using the equity method did not contain the difficulties associated with the difference between the amount of the investor's actual costs for acquiring shares and the book value of the share of the net assets of the investee company. This difference must first be broken down into two components:
investments are initially recorded at cost;
their carrying amount increases or decreases by the investor's recognized share of the investee's profits or losses after the acquisition date;
income received from the investee in the form of dividends reduces the book value of the investment;
adjustments to the carrying amount may also be necessary to reflect changes in the investor's share of the investee's other comprehensive income (for example, income arising from the revaluation of property, plant and equipment). The investor's share of changes in other comprehensive income is reflected as a single line item in the investor's other comprehensive income.
If an investor's share of losses in an associate or joint venture exceeds its share of the investment in it, it ceases to recognize further losses.
If the associate or joint venture subsequently shows income, the investor resumes recognition of its share of income only after its share of income is compared with its share of unrecognized losses.
In investor's separate reporting, investments in subsidiaries, associates and jointly controlled entities that were not classified as assets held for sale and were not part of disposal groups are accounted for:
or at cost;
or in accordance with IFRS 9 Financial Instruments.
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Accounting for transactions between an investor and an associate or an investor and a joint venture
the difference between the book value and fair value of the investee company's share of net assets;
the difference between the actual costs of an investment and the fair value of the corresponding share of net assets. It is this difference that is goodwill.
The investee's assets used to calculate goodwill should not include goodwill recognized in the separate financial statements of the associate or joint venture. An investor recognizes an individual intangible asset of an investee company only if it meets the definition of intangible assets in accordance with
IAS 38 Intangible Assets.
The standard requires that positive goodwill arising on the acquisition of an associate or joint venture be included in the carrying amount of the investment and subsequently tested for impairment.
The excess of the investor's interest in the identifiable assets, liabilities and contingent liabilities of the associate or joint venture over the amount invested must be recognized as income in the period in which the associate or joint venture is acquired. Gain on an acquisition is included on the same income statement line as the investor's share of the associate or joint venture's post-acquisition net income.
$10,000,000. Company D's retained earnings at that date were
$2,000,000. Below is the fair value of Company D at the date of acquisition.
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Book value |
fair value |
Comments |
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Service life at date of purchase 4 years |
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The fair value of Company D's remaining net assets at the acquisition date approximated their carrying amount.
The goodwill impairment test performed on December 31, 2013 indicated that it should be impaired by $200,000.
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Investment in D |
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Other net assets |
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Share capital |
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retained earnings |
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Consolidated statement of financial position
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Investment in an associated company (P3) |
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Other net assets |
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Share capital |
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Retained earnings (P4) |
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P1. AK's net assets |
As of the date of acquisition As of the reporting date
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Share capital 6,000 |
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Retained earnings 2,000 |
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Building cost adjustment 4,000 |
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Land value adjustment (500) |
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P2. Goodwill |
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Investment |
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- Share of net assets at the date of purchase (40% x 11,500) |
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Goodwill at date of purchase |
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Loss from impairment of goodwill |
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Goodwill at the reporting date |
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P3: Investment in an associated company |
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Initial investment |
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Loss from impairment of goodwill |
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Investment in associate at the reporting date |
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P4. Retained group earnings |
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Retained earnings M |
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M's share in the change in net assets (40% x (17,500 – 11,500)) |
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Loss from impairment of goodwill |
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Retained group earnings |
In some cases, transactions between an investor and an associate or joint venture require certain adjustments to the financial results in accounting for the investor's share of the investee's earnings.
In accordance with the general concept of accounting for sales, profits can only be recognized when they arise from transactions with unrelated parties on arm's length terms. In any case, the problem does not arise if the purchase and sale transactions between the investor and the associate or joint venture occur at book value, without recognizing any financial results.
In the event that the transaction price differs from the book value, appropriate adjustments must be made. Whereas when fully consolidating the financial statements of a subsidiary and an investor, all internal turnover and, accordingly, profits and losses are eliminated in full, when applying the equity method, only the profit component of the transaction between the investor and the associated company or joint venture is eliminated.
There is no need to exclude income and expenses from transactions, since the equity method does not imply the inclusion of the turnover of the investee company in the investor’s reporting.
However, it is necessary to exclude profits from such transactions to the extent of the investor's percentage of ownership in the capital of the associate or joint venture. This applies to both sales from an investor to an associate or joint venture and, conversely, sales from an associate or joint venture to an investor.
The process of eliminating profits in transactions involving the transfer of fixed assets is similar to the example discussed above, however, the recognition of financial results for such transactions occurs simultaneously with the calculation of depreciation on the transferred fixed assets.
Elimination of profit in transactions related to fixed assets.
Let's say that Ant, which owns 25% of Ex, sells a building with a remaining useful life of five years to Ex for a profit of $100,000. The sale took place at the end of 2010. Ax uses the straight-line depreciation method and plans to write off the cost of this building evenly over 2011–2015.
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Ant company postings |
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Dr Share in profit Ex Kt Investments in Ex (100,000 x 25%) Ant company postings, 2011–2015: |
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Dr Investments in Ex (25,000 / 5) Kt Share in Ex profits |
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Impairment losses
Goodwill represents part of the carrying amount of the investment in an associate or joint venture and is not recognized separately in the financial statements, so a separate test for impairment of goodwill in accordance with the requirements of IAS 36 Impairment of Assets is not performed.
Instead of testing for impairment of goodwill, testing for impairment of the carrying value of the investment as a single asset is performed by comparing the carrying amount and the recoverable amount (the greater of value in use and fair value less costs to sell).
Impairment testing is carried out if there is an indication of impairment in accordance with IAS 36.
Let's look at the IAS 28 standard and the features of accounting for investments in associates and joint ventures, as well as what constitutes significant influence and the equity method.
Another very common type of investment is an associate over which the investing company has significant influence.
The rules for accounting for such investments are determined IAS 28 Investments in Associates and Joint Ventures. Let's consider the main provisions of this standard.
What is the purpose of IAS 28?
The purpose of IAS 28 Investments in Associates and Joint Ventures is to define:
- rules for accounting for investments in associated companies;
- requirements for the use of the equity method when accounting for investments in associates and joint ventures.
Let's remember what these terms mean:
Associated organization ("associate") is a company over which the investor has significant influence.
Joint venture is a joint arrangement in which the parties have joint control of the company and have rights to the net assets of the company.
What is significant influence and how to identify it?
IAS 28 defines significant influence as the right to participate in decision-making related to the financial and operational (economic) policies of the company, without having full or joint control over the adoption of these decisions.
Sometimes it can be difficult to determine whether we are dealing with control or significant influence - and yet the accountant cannot be mistaken in this matter, since all further accounting and financial reporting depends on this classification.
How to confirm the presence of significant influence?
The main indicator of significant influence is (directly or indirectly) ownership of more than 20% of the voting shares of the investee.
This is not a strict rule and it often happens that such a share does not actually correspond to a significant influence.
It sometimes happens that when an investor owns more than 20% of the voting rights (but less than 50), he gains control over the investee.
Let's say Company ABC owns 40% of Company XYZ. The remaining 60% is distributed among a large number of small investors, each of whom holds a share of no more than 1%.
In this case, ABC does not hold a controlling majority of the votes (more than 50%), and its share exceeds 20%, which may indicate significant influence.
But since other investors own a maximum of 1% each, the likelihood of ABC's vote being overruled in major decisions is very low, so ABC Company may actually have control over XYZ Company rather than significant influence. Of course, this situation should be studied in more detail.
Other ways to prove significant impact are as follows:
- The investor sits on the board of directors (or other equivalent governing body) of the company.
- The investor is involved in the process of developing company policies (including decisions on dividend payments).
- There are significant transactions between the investor and the company.
- There is an exchange of management personnel between the investor and the company.
- The company provides the investor with the necessary technical and management information.
When you evaluate whether you have significant influence, you should always examine potential voting rights (in the form of stock options, convertible debt instruments, etc.).
How to apply the equity method?
Once an investor obtains significant influence or joint control over a joint venture, it must account for equity method.
The main principles of the equity method are:
Upon initial recognition:
1. Investments in an associate or joint venture are recognized at cost. Wiring:
- Debit.
- Credit. Cash (bank account, etc.).
2. If there is a difference between the cost of an investment and the investor's interest in the company (measured at the net fair value of identifiable assets and liabilities), then accounting depends on whether the difference is positive or negative:
- If the difference is positive (cost is higher than the investor's share), then there is goodwill that is not recognized separately. It is included in the cost of the investment and is not depreciated.
- When the difference is negative (cost less than the investor's share), it is recognized as income in profit or loss in the period the investment is acquired.
Subsequent accounting after initial recognition:
1. The carrying amount of an investment increases or decreases by the investor's share of the investment's net gain or loss after the date of acquisition. Wiring:
- Debit. Investments in the statement of financial position and
- Credit. Income of an associate in profit or loss.
Or, conversely, in the event of a loss of an associated company.
When an associate or joint venture incurs losses and those losses exceed the carrying amount of the investment, the investor cannot reduce the carrying amount of the investment below zero. The investor simply stops incurring further losses.
2. When a company distributes dividends to an investor, the distribution reduces the carrying amount of the investment. Wiring:
- Debit. Cash (or whatever is applicable) and
- Credit. Investments in the statement of financial position.
Equity method procedures.
The equity method procedures are very similar to the consolidation procedures described in IFRS 10 Consolidated Financial Statements:
- Both the investor and the investee must apply uniform accounting policies for similar transactions.
- The same reporting date is used unless this is impracticable.
- Investor's share of profit or loss from mutual transactions "bottom-up" ("upstream") and "top-down" ("downstream") excluded. Thus, you do not eliminate the account balances (receivables or payables) at the end of the accounting period, but you do eliminate the investor's share of the profits.
In what cases is the equity method not applicable?
An investor does not need to use the equity method in the following circumstances:
1. The investor is a parent company that is not required to prepare consolidated financial statements in accordance with the exceptions provided in paragraph IFRS 10:4(a), which is as follows:
- The Company is a subsidiary wholly or partially controlled by another investor and the owners of that other investor are informed of and do not object to the subsidiary's failure to use the equity method;
- The entity's debt or equity instruments are not traded on the open market;
- The entity does not file its financial statements with the Securities Commission or other similar body for the purpose of issuing financial instruments of any class on the open market;
- The ultimate parent or any intermediate parent of the investee prepares consolidated financial statements in accordance with IFRS that are available for public use.
2. When an investment in an associate or joint venture is held in an entity that is a venture capital entity, mutual fund or similar entity, then the investor may measure the investment at fair value through profit or loss in accordance with IFRS 9 (and thus do not use the equity method). The same applies to the situation where the investor has made an investment in an associated company, part of which is owned by such organizations.
It should be added here that if an investment meets the criteria of IFRS 5 and is classified as held for sale, the investor should apply IFRS 5 to it rather than the equity method (if this applies to only part of the investment, then IFRS applies to that part). (IFRS) 5).
When should you stop using the equity method?
An investor ceases to use the equity method when its investee ceases to be an associate or joint venture.
The method of termination depends on the specific circumstances. For example, if the investee becomes a subsidiary, then the investor ceases to apply the equity method and begins to apply full consolidation in accordance with IFRS 10/IFRS 3.
| Document's name: | |
| Document Number: | 28 |
| Document type: | IFRS |
| Receiving authority: | |
| Status: | Active |
| Published: | |
| Acceptance date: | December 28, 2015 |
| Start date: | 09 February 2016 |
| Revision date: | March 27, 2018 |
This document is amended based on the order of the Ministry of Finance of Russia dated 06/04/2018 N 125n from January 1, 2021.
International Accounting Standard (IAS) 28 Investments in Associates and Joint Ventures
Document with changes made:
( );
(Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n) (Official website of the Ministry of Finance of the Russian Federation www.minfin.ru, July 28, 2016) (for the procedure for entry into force, see paragraph 2 of Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n) ;
(Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n) (Official website of the Ministry of Finance of the Russian Federation www.minfin.ru, July 28, 2016) (for the procedure for entry into force, see paragraph 2 of Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n) ;
(Order of the Ministry of Finance of Russia dated July 20, 2017 N 117n) (Official website of the Ministry of Finance of the Russian Federation www.minfin.ru, 08/18/2017) (for the procedure for entry into force, see paragraph 2 of Order of the Ministry of Finance of Russia dated July 20, 2017 N 117n) ;
(order of the Ministry of Finance of the Russian Federation dated March 27, 2018 N 56n) (Official Internet portal of legal information www.pravo.gov.ru, 04/17/2018, N 0001201804170023) (for the procedure for entry into force, see paragraph 2 by order of the Ministry of Finance of Russia dated March 27, 2018 N 56n).
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Target
1. The purpose of this standard is to define the rules for accounting for investments in associates and the requirements for applying the equity method when accounting for investments in associates and joint ventures.
Scope of application
2. This Standard should be applied by all entities that are investors with joint control or significant influence over an investee.
Definitions
3. The following terms are used in this standard with the meanings specified:
Associated organization - an organization over whose activities the investor has significant influence.
Consolidated financial statements - Group financial statements in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as being attributable to a single economic entity.
Equity method - an accounting method in which investments are initially recognized at cost and then their cost is adjusted to reflect changes in the investor's share of the investee's net assets after acquisition. An investor's profit or loss includes the investor's share of the investee's profit or loss, and an investor's other comprehensive income includes the investor's share of the investee's other comprehensive income.
Joint venture - a business activity that is controlled jointly by two or more parties.
Joint control - A contractual separation of control of an activity that occurs only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
Joint venture - A joint venture, which involves the parties with joint control of the activity having rights to the net assets of the activity.
Joint venture participant - The party to a joint venture that has joint control over such joint venture.
Significant influence - The power to participate in decisions about the financial and operating policies of the investee, but not to control or share control over those policies.
4. The following terms are defined in paragraph 4 of IAS 27 Separate Financial Statements and 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 over the investment object;
- group;
- parent organization;
- separate financial statements;
- subsidiary organization.
Significant influence
5. If an entity owns, directly or indirectly (for example, through subsidiaries), 20 percent or more of the voting rights of an investee, the entity is considered to have significant influence unless there is compelling evidence to the contrary. However, if an entity directly or indirectly (for example, through subsidiaries) holds less than 20 percent of the voting rights of an investee, the entity is not considered to have significant influence unless there is compelling evidence to the contrary. The presence of a significant or controlling interest in another investor does not necessarily preclude the entity from having significant influence.
6. An organization's significant influence is usually demonstrated by one or more of the following:
(a) representation on the board of directors or similar governing body of the investee;
(b) participation in the policy-making process, including participation in decisions on the payment of dividends or other distribution of profits;
(c) the existence of significant transactions between the entity and its investee;
(d) exchange of management personnel; or
(e) providing important technical information.
7. An entity may own stock warrants, stock options, debt or equity instruments that are convertible into common stock, or other similar instruments that, if exercised or converted, could provide the entity with additional voting rights or reduce the voting rights of another party. regarding the financial and operating policies of another organization (i.e. potential voting rights). The existence and influence of potential voting rights that are currently exercisable or convertible, including the potential voting rights of other entities, are factors that should be considered in assessing whether an entity has significant influence. Potential voting rights are not currently exercisable or convertible if, for example, they are not exercisable or convertible until a specified future date or the occurrence of a specified event.
8. In assessing whether potential voting rights give rise to significant influence, an entity shall consider all facts and circumstances (including the terms of the potential voting rights and other agreements, individually and collectively) that affect the potential rights. , other than management's intentions and financial ability to exercise or convert these potential rights.
9. An organization loses significant influence over the activities of an investee when it loses the right to participate in decision-making regarding the financial and operating policies of that investee. The loss of significant influence may or may not be accompanied by a change in absolute or relative holdings. For example, this may occur if the associated entity becomes subject to government, judicial, administrative or regulatory control. This can also happen as a result of a contract.
Equity method
10. Under the equity method, an investment in an associate or joint venture is recognized at initial cost and then its carrying amount is increased or decreased by recognizing the investor's share of the investee's profit or loss after the acquisition date. The investor's share of the investee's profit or loss is recognized in the investor's profit or loss. Funds received from the investee as a result of distributions of profits reduce the carrying amount of the investment. Adjustments to the carrying amount of an investment may also be necessary to reflect changes in the investor's proportionate interest in the investee that arise from changes in the investee's other comprehensive income. Such changes arise, in particular, in connection with the revaluation of fixed assets and in connection with exchange rate differences from currency translation. The investor's share of these changes is recognized in the investor's other comprehensive income (see IAS 1 Presentation of Financial Statements). ).
11. Recognition of income based on the resulting distribution of profits may not be an adequate basis for estimating an investor's return on an investment in an associate or joint venture because the funds received from a distribution of profits may only be a small reflection of the performance of the associate or joint venture. Because the investor has joint control or significant influence over the investee, the investor has an interest in the performance of the associate or joint venture and, therefore, in the return on its investment. An investor reflects its interest by including in the financial statements its share of the investee's profit or loss. The use of the equity method increases the information content of the financial statements in terms of net assets and the investor's profit or loss.
12. If there are potential voting rights or other derivatives containing potential voting rights, the entity's interest in the associate or 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 derivatives unless applicable paragraph 13.
13. In some circumstances, an entity may have effective ownership in a transaction that gives it current access to the income associated with the ownership interest. In such circumstances, the share allocated to the entity is determined taking into account the possible exercise of potential voting rights and other derivative instruments that currently give the entity access to income.
14. IFRS 9 Financial Instruments does not apply to interests in associates and joint ventures that are accounted for using the equity method. If instruments containing potential voting rights currently substantially give access to the income associated with an ownership interest in an associate or joint venture, then those instruments are not within the scope of IFRS 9. In all other cases, instruments with potential voting rights in an associate or joint venture are accounted for in accordance with IFRS 9.
14A. An entity applies IFRS 9 also to other financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term investments that, in substance, form part of the entity's net investment in the associate or joint venture (see paragraph 38). An entity applies IFRS 9 to such long-term investments before it applies paragraph 38 and paragraphs 40–43 of this Standard. When applying IFRS 9, an entity does not take into account adjustments to the carrying amount of long-term investments that arise from applying this Standard.
IFRS Long-term investments in associates and joint ventures (Amendments to IAS 28) dated 27 March 2018)
15. If the investment, or any interest in an investment in an associate or joint venture, is not classified as held for sale in accordance with IFRS 5 Non-current assets held for sale and discontinued operations ,
then the investment, or any remaining interest in the investment, that is not classified as held for sale should be classified as a non-current asset.
Application of the equity method
16. An entity with joint control or significant influence over an investee shall account for its investment in an associate or joint venture using the equity method unless the entity is exempt from accounting for such investment under the equity method in accordance with paragraphs 17–19. .
Exemptions from using the equity method
(Name as amended, put into effect on August 18, 2017 IFRS “Annual improvements to IFRS, period 2014-2016.” dated July 20, 2017.
17 An entity may not apply the equity method in accounting for its investment in an associate or joint venture if the entity is a parent that is exempt from preparing consolidated financial statements pursuant to the exception in the scope of paragraph 4(a) of IFRS 10 , or if all of the following are true:
(a) The entity is a wholly or partly owned subsidiary of another entity and its other owners, including those that would not otherwise have voting rights, have been informed that the entity is not using the method equity participation and do not object to this.
(b) The entity's debt or equity instruments are not publicly traded (either a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets).
(c) The Entity has not filed its financial statements and is not in the process of filing its financial statements with a securities commission or other regulatory authority for the purpose of placing any type of instrument on the public market.
(d) The entity's ultimate or intermediate parent prepares consolidated financial statements that are publicly available in accordance with International Financial Reporting Standards and in which subsidiaries are consolidated or measured at fair value through profit or loss in accordance with IFRSs. 10 .
(Subclause (d) as effective from 28 July 2016 IFRS Investment Entities: Application of the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) dated June 27, 2016.
18. If an investment in an associate or joint venture is owned directly by, or through, an entity that specializes in venture capital investments or is a mutual fund, trust or similar entity, including investment-type insurance funds, the entity may elect measure such investments at fair value through profit or loss in accordance with IFRS 9. An entity must make this determination separately for each associate or joint venture upon initial recognition of that associate or joint venture.
(Clause as amended, put into effect on August 18, 2017 IFRS “Annual improvements to IFRS, period 2014-2016.” dated July 20, 2017.
19. If an entity has an investment in an associate in which a portion of the interest is held through a venture capital firm, mutual fund, unit trust, or similar entity, including investment-type 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 such entities (a venture capital entity, mutual fund, unit trust or similar entity, including investment-type insurance funds) exercise significant influence over that interest investments. If an entity makes this election, it must apply the equity method to any portion of the remaining interest of its investment in an associate that it owns other than through a venture capital investment vehicle, mutual fund, unit trust or similar entity, including investment-type insurance funds. .
Investments classified as held for sale
20 An entity shall apply IFRS 5 to an investment, or an interest in an investment in an associate or joint venture, that meets the held for sale criterion. Any remaining interest in an investment in an associate or joint venture that has not been classified as held for sale must be accounted for using the equity method until disposal of the interest that is classified as held for sale occurs. After disposal, an entity shall account for the retained interest in the associate or joint venture in accordance with IFRS 9, unless the retained interest continues to be recognized as an associate or joint venture, in which case the entity shall use the equity method.
21. If an investment, or an interest in an investment in an associate or joint venture, previously classified as held for sale no longer meets the criteria for such classification, it shall be accounted for using the equity method retrospectively from the date of classification as held for sale. The financial statements for all periods subsequent to the date an investment is classified as held for sale should be adjusted accordingly.
Discontinuing the Equity Method
22. An entity must cease using the equity method on the date its investment ceases to be an associate or joint venture:
(a) If an investment becomes a subsidiary, the entity shall account for its investment in accordance with IFRS 3 Business Combinations. And IFRS 10 .
(b) 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 measured as its fair value on initial recognition as a financial asset in accordance with IFRS 9 . An entity shall recognize in profit or loss any difference between:
(i) the fair value of the retained interest and proceeds from the disposal of part of the investment in the associate or joint venture; And
(ii) the carrying amount of the investment at the date when the equity method is discontinued.
(c) If an entity ceases to use the equity method, the entity shall account for all amounts previously recognized in other comprehensive income in respect of those investments as if the related assets and liabilities had been disposed of directly from the investee.
23. Consequently, if a gain or loss previously recognized by an investee in other comprehensive income is reclassified to gain or loss on the disposal of the related assets or liabilities, the entity reclassifies the gain or loss from equity to profit or loss (reclassification adjustment). when the equity method is discontinued. For example, if an associate or joint venture has accumulated foreign exchange differences attributable to foreign operations and the entity ceases to use the equity method, the entity must reclassify to profit or loss the gain or loss previously recognized in respect of those foreign operations in other comprehensive income. .
24 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 continues to use the equity method and does not remeasure the remaining interest.
Changes in ownership percentage
25 If an entity's ownership interest in an associate or joint venture is reduced but the investment continues to be classified as either an associate or a joint venture, respectively, the entity shall reclassify to profit or loss some portion of the income or loss previously recognized in other comprehensive income associated with that reduction in ownership if that gain or loss would have been required to be reclassified in profit or loss on disposal of the related assets or liabilities.
IFRS "Equity Method of Separate Financial Statements (Amendments to IAS 27)" dated 27 June 2016.
Procedures applied under the equity method
26. Many of the procedures involved in applying the equity method are similar to the consolidation procedures described in IFRS 10. In addition, the concepts underlying the procedures used in accounting for the acquisition of a subsidiary are also used in accounting for the acquisition of an investment in an associate or joint venture.
27. A group's interest in an associate or joint venture is the combined interest of the parent and its subsidiaries in the associate or joint venture. The interests of other associates or joint ventures of the group are not taken into account for these purposes. If an associate or joint venture has subsidiaries, associates or joint ventures, the profit or loss, other comprehensive income and net assets used in applying the equity method represent profit or loss, other comprehensive income and net assets recognized in the financial statements. statements of the associate or joint venture (including the associate's or joint venture's share of profit or loss, other comprehensive income and the net assets of its associates and joint ventures) after adjustments necessary to comply with uniform accounting policies (see paragraphs 35 and 36A).
(As amended on July 28, 2016 IFRS “Investment Entities: Application of the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28)” dated June 27, 2016 of the year .
28 Gains and losses arising from upstream and downstream transactions between an entity (including its consolidated subsidiaries) and its associate or joint venture are recognized in the entity’s financial statements to the extent they do not relate to to the investor's interest in that associate or joint venture. Bottom-up transactions, for example, involve the sale of assets to an investor by an associate or joint venture. An example of a top-down transaction is the sale or contribution of assets to an associate or joint venture by an investor. The investor's share of the associate or joint venture's profits and losses from these transactions is excludable.
29. If top-down transactions indicate a decrease in the net realizable price of the assets to be sold or invested, or an impairment loss on those assets, then these losses should be fully recognized by the investor. If upside transactions indicate a decrease in the net realizable price of the assets to be purchased or an impairment loss on those assets, the investor must recognize its share of the losses.
30. A contribution of a non-monetary asset to an associate or joint venture in exchange for an interest in the equity of the associate or joint venture shall be accounted for in accordance with paragraph 28 unless the contribution lacks commercial substance as that term is defined. in IAS 16 Property, Plant and Equipment .
If such contribution lacks commercial substance, the gain or loss is treated as unrealized and is not recognized unless paragraph 31 also applies. Such unrealized gain or loss shall be eliminated against the investment accounted for using the equity method and shall not be presented as deferred gains or losses in an entity's consolidated statement of financial position or in a statement of financial position in which investments are accounted for using the equity method.
31. If, in addition to receiving an interest in the capital of an associate or joint venture, the entity also receives monetary or non-monetary assets, the entity shall recognize in profit or loss in full the share of income or loss from the non-monetary contribution associated with the monetary or non-monetary assets received.
31A.
31B. [This paragraph concerns amendments that have not yet entered into force and is therefore not included in this edition.]
32. Investments are accounted for using the equity method from the date on which the entity becomes an associate or joint venture. When an investment is acquired, any difference between the cost of the investment and the entity's share of the net fair value of the investee's identifiable assets and liabilities is accounted for as follows:
(a) Goodwill attributable to an associate or joint venture is included in the carrying amount of the investment. Amortization of this goodwill is not permitted.
(b) The excess of the entity's share of the net fair value of the associate's identifiable assets and liabilities over the cost of the investment is recognized as income in determining the investor's share of profit or loss of the associate or joint venture for the period in which the investment is acquired.
In addition, necessary adjustments are made to the investor's share of the post-acquisition profit or loss of the associate or joint venture to reflect, for example, depreciation of depreciable assets based on their acquisition-date fair value. Similarly, appropriate adjustments are made to the investor's share of the post-acquisition profit or loss of the associate or joint venture to account for impairment losses, such as impairment of goodwill or property, plant and equipment.
33 When applying the equity method, an entity uses the most recent financial statements of the associate or joint venture. If the reporting period end dates of the entity and the associate or joint venture are different, the associate or joint venture prepares financial statements for the entity as of the same period end date as the entity's financial statements unless this is impracticable.
34. If in accordance with paragraph 33, the financial statements of an associate or joint venture used in applying the equity method are prepared as of a reporting date other than the entity's financial statements, adjustments must be made to reflect the effect of significant transactions or events occurring between that date and the reporting date. date of organization. In any case, the difference between the end of the reporting period of the associate or joint venture and the end of the reporting period of the entity must not exceed three months. The length of reporting periods and the differences in the end dates of reporting periods should be the same from period to period.
35. The financial statements of an organization should be prepared on the basis of the use of uniform accounting policies for similar transactions and events that occurred under similar circumstances.
36. Except as described in paragraph 36A, if an associate or joint venture has accounting policies that differ from those of the entity for similar transactions and events in similar circumstances, adjustments must be made to bring the accounting policies of the associate or joint venture into line. joint venture in accordance with the entity's accounting policies if the financial statements of the associate or joint venture are used by an entity using the equity method.
(As amended on July 28, 2016 IFRS “Investment Entities: Application of the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28)” dated June 27, 2016 of the year .
36A. Notwithstanding the requirement in paragraph 36, if an entity that is not itself an investment entity has an interest in an associate or joint venture that is an investment entity, when applying the equity method, that entity may elect to retain the fair value measurement used by its associate. or a joint venture that is an investment entity to its own interests in subsidiaries. This determination is made separately for each investment entity associate or joint venture on the later of: (a) the date of initial recognition of the investment entity associate or joint venture; (b) the date on which the associate or joint venture becomes an investment entity; and (c) the date on which the associate or joint venture that is an investment entity first becomes a parent.
IFRS "Investment entities: applying the exception to the consolidation requirement (Amendments to IFRS 10, IFRS 12 and IAS 28)" dated 27 June 2016; as amended, effective August 18, 2017, IFRS “Annual Improvements to IFRSs, 2014-2016.” dated July 20, 2017.
37 If an associate or joint venture has cumulative preference shares outstanding that are held by parties other than the entity and that are classified as equity, the entity calculates its share of profits or losses after adjusting for the amount of dividends on such shares, whether or not whether these dividends have been declared for payment.
38. When an entity's share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, the entity derecognises its share of further losses. The interest in an associate or joint venture corresponds to the carrying amount of the equity method investment in the associate or joint venture, together with long-term investments that, in substance, form part of the entity's net investment in the associate or joint venture. For example, an item that is not expected or probable to be settled in the foreseeable future essentially represents an additional investment by the entity in the associate or joint venture. Such items may include preference shares and long-term receivables or long-term loans, but do not include trade receivables, trade payables or long-term receivables for which adequate security has been provided, such as secured loans. Losses recognized under the equity method in excess of the entity's investment in common stock are allocated to other components of the entity's interest in the associate or joint venture in reverse order of seniority (ie, priority upon liquidation).
39. After an entity's interest is reduced to zero, additional losses and liabilities are recognized only to the extent that the entity has assumed legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently records profits, the entity resumes recognizing its share of those profits only after its share of the profits equals the unrecognized share of losses.
Impairment losses
40 After applying the equity method, including recognizing losses of the associate or joint venture in accordance with paragraph 38, the entity applies paragraphs 41A–41C to determine objective evidence that the net investment in the associate or joint venture is impaired.
IFRS dated June 27, 2016 N 9.
41. The paragraph was deleted from April 26, 2018 - IFRS “Long-term investments in associates and joint ventures” (Amendments to IAS 28) dated March 27, 2018..
41A. A net investment in an associate or joint venture is impaired and an impairment loss is incurred if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred since the initial recognition of the net investment (a “loss event”). and such loss event (or events) has an effect on the estimated future cash flows of the net investment, the amount of which can be reliably estimated. It may not be possible to identify one specific event that gives rise to impairment. Impairment may be caused by a combination of events. Losses expected to result from future events are not recognized, regardless of how likely they are to occur. Objective evidence of impairment of a net investment includes observable evidence of the following loss events that become known to the entity:
(a) significant financial difficulty experienced by the associate or joint venture;
(b) a breach of contract, such as default or non-payment by an associate or joint venture;
(c) the granting by an entity of a concession to its associate or joint venture for economic or legal reasons relating to its financial difficulties that would not otherwise have been granted;
(d) bankruptcy or other financial reorganization of the associate or joint venture becomes probable; or
(e) the disappearance of an active market for the net investment as a result of financial difficulty of the associate or joint venture.
41B. The disappearance of an active market as a result of the ceasing to be publicly traded in the equity or financial instruments of an associate or joint venture is not evidence of impairment. A decrease in the credit rating of an associate or joint venture or a decrease in the fair value of an associate or joint venture does not, in itself, indicate impairment, although it may indicate impairment when taken in conjunction with other available evidence.
(The paragraph was additionally included from January 1, 2018 IFRS dated June 27, 2016 N 9)
41C. In addition to the types of events described in paragraph 41A, objective evidence of impairment of the net investment in the equity instruments of an associate or joint venture includes information about significant changes with an adverse effect that have occurred in the technological, market, economic or legal environment in which the associate or joint venture the joint venture has activities that indicate that the initial cost of the investment in the equity instrument may not be recovered. A significant or prolonged decline in the fair value of an equity investment below its cost is also objective evidence of impairment.
(The paragraph was additionally included from January 1, 2018 IFRS dated June 27, 2016 N 9)
42 Because goodwill that forms part of the carrying amount of an investment in an associate or joint venture is not separately recognized, it is not subject to a separate impairment test using the goodwill impairment test requirements in IAS 36 Impairment of Assets. Instead, the entire carrying amount of the investment is tested for impairment under IAS 36 as a single asset by comparing its recoverable amount (which is the higher of value in use or fair value less costs to sell) to its carrying amount when when application of the requirements in paragraphs 41A–41C indicates that the investment may have been impaired. The impairment loss recognized in such circumstances is not allocated to any asset, including goodwill, included in the carrying amount of the investment in the associate or joint venture. Consequently, any reversal of such an impairment loss is recognized in accordance with IAS 36 if the recoverable amount of the net investment subsequently increases. When determining the value in use of a net investment, an organization evaluates:
(a) its share of the present value of estimated future cash flows expected to be generated by the associate or joint venture, including cash flows from operations of the associate or joint venture and proceeds from the final disposal of investments; or
(b) the present value of the estimated future dividend cash flows expected to be received from the investment and from the ultimate disposal of the investment.
Under the right assumptions, both methods produce the same result.
(Clause as amended, entered into force on January 1, 2018 IFRS dated June 27, 2016 N 9.
43. The recoverable amount of an investment in an associate or joint venture is measured on an individual basis unless the associate or joint venture does not generate cash inflows from continuing operations that are substantially independent of the cash inflows from continuing operations. other assets of the organization.
Separate financial statements
44 An investment in an associate or 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).
Effective date and transitional provisions
45. An entity shall apply this Standard for annual periods beginning on or after 1 January 2013. Early use is permitted. If an entity applies this Standard to an earlier period, it shall disclose that fact and apply the Standard at the same time as IFRS 10, IFRS 11 "Joint Enterprise" IFRS 12 "Disclosure of information about participation in other organizations" and IAS 27 (as amended in 2011).
45A. IFRS 9, issued in July 2014, amended paragraphs 40–42 and added paragraphs 41A–41C. An entity shall apply those amendments when it applies IFRS 9.
(The paragraph was additionally included from January 1, 2018 IFRS dated June 27, 2016 N 9)
45B. The Equity Method of Accounting in Separate Financial Statements (Amendments to IAS 27), issued in August 2014, amended paragraph 25. An entity shall apply that amendment for annual periods beginning on 1 January 2016. or after that date, retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Early use is permitted. If an entity applies the amendments to an earlier period, it must disclose that fact.
(Paragraph additionally included from 28 July 2016 IFRS “Equity Method of Separate Financial Statements (Amendments to IAS 27)” dated 27 June 2016)
45A-45C. [These paragraphs relate to amendments that have not yet entered into force and are therefore not included in this edition.]
45D. Investment Entities: Application of the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28), issued in December 2014, introduced changes to clauses 17, 27 and 36 and added clause 36A. An entity shall apply these changes for annual periods beginning on or after 1 January 2016. Early use is permitted. If an entity applies these amendments to an earlier period, it must disclose that fact.
(The paragraph was additionally included from 28 July 2016 IFRS “Investment Entities: Application of the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28)” dated 27 June 2016)
45E. The document "Annual Improvements to International Financial Reporting Standards, period 2014-2016." , issued in December 2016, amended paragraphs 18 and 36A. An entity shall apply those amendments retrospectively in accordance with IAS 8 for annual periods beginning on or after 1 January 2018. Early use is permitted. If an entity applies these amendments to an earlier period, it must disclose that fact.
(The paragraph was additionally included from August 18, 2017 IFRS “Annual Improvements to IFRSs, period 2014-2016.” dated July 20, 2017)
45G. Document " Long-term investments in associates and joint ventures", issued in October 2017, added paragraph 14A and deleted paragraph 41. An entity shall apply those amendments retrospectively in accordance with IAS 8 for annual periods beginning on or after 1 January 2019 unless: in paragraphs 45H to 45K. Early adoption is permitted. If an entity applies the amendments early, it must disclose that fact.
(The paragraph was additionally included from 26 April 2018 IFRS Long-term investments in associates and joint ventures (Amendments to IAS 28) dated 27 March 2018)
45H. An entity that first applies the amendments in paragraph 45G at the same time it first applies IFRS 9 IFRS 9 to the long-term investments specified in paragraph 14A.
(The paragraph was additionally included from 26 April 2018 IFRS Long-term investments in associates and joint ventures (Amendments to IAS 28) dated 27 March 2018)
45I. An entity that applies the amendments in paragraph 45G for the first time after initially applying IFRS 9 shall apply the transition provisions of IFRS 9 necessary to apply the requirements in paragraph 14A to long-term investments. For these purposes, statements as of the date of initial application of IFRS 9 should be treated as statements as of the beginning of the annual reporting period in which the entity first applies the amendments (the date of initial application of the amendments). An entity is not required to restate historical information to reflect the application of these amendments. An organization may restate information for previous periods only if such restatement is possible without the use of more recent information.
(The paragraph was additionally included from 26 April 2018 IFRS Long-term investments in associates and joint ventures (Amendments to IAS 28) dated 27 March 2018)
45J. When first applying the amendments in paragraph 45G, an entity that applies the temporary exemption from IFRS 9 in accordance with IFRS 4 Insurance Contracts is not required to restate prior periods to reflect the application of those amendments. An organization may restate information for previous periods only if such restatement is possible without the use of more recent information.
(The paragraph was additionally included from 26 April 2018 IFRS Long-term investments in associates and joint ventures (Amendments to IAS 28) dated 27 March 2018)
45K. If an entity does not restate prior periods in accordance with paragraph 45I or paragraph 45J, on the date of initial application of those amendments it shall recognize in the opening balance of retained earnings (or other component of equity, as applicable) the difference between:
(a) the previous carrying amount of the long-term investments specified in paragraph 14A at that date; And
(b) the carrying amount of those long-term investments at that date.
(The paragraph was additionally included from 26 April 2018 IFRS Long-term investments in associates and joint ventures (Amendments to IAS 28) dated 27 March 2018)
Links to IFRS 9
46 If an entity applies this Standard but does not yet apply IFRS 9, any reference to IFRS 9 should be read as a reference to IAS 39.
Discontinuation of IAS 28 (as revised in 2003)
47 This Standard replaces IAS 28 "Investments in associated organizations"(revised 2003).
Revision of the document taking into account
changes and additions prepared
JSC "Kodeks"
International Accounting Standard (IAS) 28 Investments in Associates and Joint Ventures (as amended 27 March 2018)
| Document's name: | International Accounting Standard (IAS) 28 Investments in Associates and Joint Ventures (as amended 27 March 2018) |
| Document Number: | 28 |
| Document type: | IFRS |
| Receiving authority: | International Financial Reporting Standards Foundation |
| Status: | Active |
| Published: | Official website of the Ministry of Finance of the Russian Federation www.minfin.ru, 02/09/2016 Official Internet portal of legal information www.pravo.gov.ru, 02/08/2016, N 0001201602080013 |
| Acceptance date: | December 28, 2015 |
| Start date: | 09 February 2016 |
| Revision date: | March 27, 2018 |
The article begins with a definition of what an associate and the equity method are. And the greatest attention is paid to the complications that the examiner Dipifr uses for an associated company in the consolidation issue.
Associated company - what kind of company is it?
The equity method is used to account for investments in associates (IFRS 28) and joint ventures (IFRS 28, IFRS 11). An associated company is a company where the investor has significant influence, which means participation in decision-making on financial and operating policies, but does not control or share control over those policies. If an investor owns, directly or indirectly, 20 percent or more of the voting shares in an investee company, then the investor is considered to have significant influence.
Besides:
IAS 28 paragraph 6“An entity's significant influence is usually demonstrated by one or more of the following facts:
- (a) representation on a board of directors or similar governing body;
- (b) participation in the policy-making process, including participation in decisions on the payment of dividends or other distribution of profits;
- (c) the existence of significant transactions between the enterprise and its investee;
- (d) exchange of management personnel; or
- (e) providing important technical information.
In the simplest case, the investor should have a share of ownership of the invested company from 20 to 50%, i.e. more than 20%, but less than a controlling stake. It should be understood that the presence of such a number of voting rights may indicate not only significant influence, but also control on the part of the investor, as is now clearly stated in the standard
Equity method (IFRS 28) - what is this method?
This is an accounting method in which an investment is measured at initial recognition at cost and then its carrying amount is increased or decreased by recognizing the investor's share of the investee's profit or loss after the acquisition date.
The simplest example
First you need to reflect the amount of the initial investment. And then, each reporting period, add our share (30%) to the profits of the associated company (AK) Lavender. For this example, the wiring would look like this:
- Dt Investment in AK Kt Cash - 20,000
- Dr Investment in AK Kt Profit from AK – 3,600 (= 12,000*30%)
The total balance under the item “Investment in an associated company” at the end of the year will be equal to $23,600. Other entries associated with recording an investment in an associate using the equity method will be discussed below.
Equity method on the Dipifra exam
In June 2011, the format of the Dipifr exam changed. Starting from this examination session, the examiner tried to complicate the condition of the consolidation problem with the associated company. Previously, it was sufficient to know how to record the unrealized gain adjustment in Gamma inventory and add the investor's share of the gain to the original investment. Since June 2011, the examiner has tried three new complications:
- 1) reflection of the impairment of the investment in the associated company
- 2) reversal of the revaluation of the investment in Gamma to fair value
- 3) other components of Gamma’s capital
It is difficult to predict what will happen in the future, but it is necessary to clearly understand what happened in the past. It is possible that Paul Robins will use one of these three complications again in the upcoming exam in December.
How to understand what Gamma is in a consolidation problem?
In the Dipifr exam, the first question tests knowledge of consolidation. Typically, in this matter, Beta is the subsidiary, and for Gamma there may be three options:
- A) child (if there is CONTROL over Gamma)
- B) associated (if there is a SIGNIFICANT INFLUENCE)
- C) joint activities (if there is JOINT CONTROL)
Gamma will be an associated company if the problem statement contains the following phrase:
“This acquisition gives Alpha the right to provide significant influence to Gamma, but not to control it.”
Gamma will be a joint activity if there is such a phrase:
“This purchase follows an agreement with other investors to establish general control over Gamma. All key operating and financial policies, including profit distribution, require the consent of all (maybe two, three, four) investors to be accepted unanimously".
In both cases B) and C) you will need to apply the equity method, or MLM for short.
Summary of postings in relation to MRL in the Dipifr exam
To reflect an investment in AK in the general physical transfer form, all 5 lines from the summary table above are needed. From this we can derive a simple rule for general physical fitness:
Table 1
Of course, profit or loss for a period cannot be at the same time. That is why they are located in the table on one line. During the reporting period, a joint stock company may report either a profit or a loss. The share of profit will need to be added to the cost of the investment, the share of loss will need to be subtracted. I would like to draw your attention to the fact that during the Dipif exam in the consolidation of general financial assets there has never been any depreciation or dividends.
For OSD, only the last three rows from the table with a summary of transactions are needed.
table 2
*I’ll explain the issue with unrealized profit for those who are preparing for the Dipifra exam on their own. The OSD allows an adjustment to be made for unrealized gains (multiplied by Gamma's ownership interest) by subtracting them from two places: a) from cost or b) from the profit/loss line from the associate. Points will be awarded in both cases, the examiner has repeatedly made a note to teachers about this in official answers. In training centers they usually teach how to deduct this adjustment from the cost price; in fact, in official answers the examiner follows the same tactics.
Therefore, the rule for calculating Gamma for OSD will be as follows:
Profit from AK for the period minus impairment of investment in Gamma
The main thing is not to forget to remove the adjustment for unrealized profit in Gamma inventories from the cost price.
The first complication. Impairment of investment in an associate
This complication of the consolidation task has already appeared twice: in June 2011 and in December 2012. Both times it was necessary to draw up a consolidated OSD.
June 2011, OSD
Note 3 - acquisition of shares in Gamma
On October 1, 2010, Alpha acquired a 40% stake in Gamma, paying $75 million for them. This acquisition gives Alpha the right to exercise significant influence over Gamma. As of the date of acquisition of the shares, the market value of Gamma's net assets did not differ significantly from their book value. Based on the results of the impairment test performed on March 31, 2011, the amount of impairment was $1.8 million.
Reporting date March 31, 2011. Gamma's net loss for the year ended 3/31/11 was $26,000.
In this case there was nothing complicated. For the year, Gamma had a loss of 26,000, the holding period was 6 months. Knowing this, you can calculate Alpha's share of Gamma's loss. All that remains is to subtract the amount of depreciation of the investment, which is given in the condition.
The task in December 2012 turned out to be much more difficult. Here the depreciation of the investment in Gamma had to be calculated. I would like to draw your attention to the fact that the balance sheet item “Investment in an associated company” is devalued. The difficulty in this case was that it was necessary to prepare a consolidated OSD. And to calculate impairment, it was necessary to calculate the carrying value of the investment in Gamma, i.e. remember how this is done in balance. In addition, the condition does not contain the word “impairment”, there is only the word “recoverable amount”.
December 2012, OSD
So, Gamma is a joint activity (the key word is joint control), the ownership share of Gamma is 50%, the holding period is 9 months, and is accounted for using the equity method. In the financial statements you can see that Gamma's profit for the period was 20,000.
The phrase "recoverable amount" indicates that an impairment test must be performed on the investment. To carry out this test, you need to compare the carrying amount with the recoverable amount. The recoverable amount is given in the condition - 50,000. The carrying value of an investment in Gamma can be calculated in the usual way:
Initial + profit - dividends = 50,000 + 7,500 - 5,000 = 52,500
where profit is 20,000*50%*9/12 = 7,500, dividends are 10,000*50% = 5,000
A note about the adjustment for unrealized gains in inventory. It seems that it also needs to be taken into account when calculating the book value of an investment in Gamma. But look at the official answer - the examiner does not do this. Indeed, for the purposes of calculating impairment (!) this is not necessary. It would be wrong to depreciate an investment just because there is an unrealized profit that will be realized in the near future.
If this were a consolidated general financial statement, the final cost of the Gamma investment (line item in the general financial statement) would be 50,000. And the impairment amount of 2,500 should have been included in the calculation of the Group’s retained earnings.
The second complication. Alpha incorrectly accounts for an associate under CC through OCI
The second type of complication was used twice by Paul Robins to consolidate general physical training. In June and December 2013, the following phrase appeared in the Gamma note:
Alpha treats the investment in Gamma as a financial asset and has elected to record it at fair value as other comprehensive income.
This is a fundamental accounting error. Accounting for the investment in Gamma as a financial asset means that Alpha will only report changes in the value of Gamma's shareholding. This could be done if Gamma were not an associated company. But Alpha has significant power over Gamma, and under the equity method Alpha must record its share of Gamma's profit or loss after the acquisition date. Therefore, all entries that Alpha made in relation to Gamma must be reversed.
June 2013
December 2013
What Alpha reflected in its reporting:
In both cases, the second entry must be reversed. That is, remove 2,000 and 4,500 from other capital components. Since both times it was a consolidated general physical training, i.e. In the balance sheet there was a line “Other components of capital”, then it was this that had to be adjusted. Please note that this adjustment in both cases “weighed” a full point.
June 2013 - response
December 2013 - answer
The calculation of the cost of investing in Gamma in 2013 will be a bit difficult, because one more complication needs to be considered.
The third complication. Gamma has other capital components
And one more complication. In June 2013, the examiner identified Gamma’s other components of capital for the first time.
This is at the reporting date, and at the date of acquisition the amounts were as follows:
- Gamma Retained Earnings: 76,000 – 66,000 = 10,000
- Other components of Gamma's capital: 2,000 – 1,200 = 800
In a calm environment, one can easily guess that the share of changes in other components of Gamma's capital should be reflected in other components of the Group's capital. In conditions of exam stress, this moment could have been missed.
Thus, we can slightly supplement the scheme for calculating the cost of investment in AK for general physical investment:
Initial + profit growth + increase in other capital components- unrealized gains in inventories - dividends - impairment of investment
For June 2013 (excluding dividends and impairment):
The most important thing is that 4,000 and 320 had to be separated according to different calculations:
4,000 is added to the calculation of “Group Retained Earnings”, and 320 to the calculation of “Other Components of Group Capital”. By the way, now it is better to do “Other components of capital” as a separate calculation, since Paul Robins practices many adjustments specifically for this line. The calculation of “Other components of capital” for June 2013 is given, and “Retained earnings of the Group” is calculated as follows:
In December 2013, Gamma's other components were equal, so it was a little simpler - you only needed to add a share in the increase in profit after the acquisition:
If in the OSD consolidation Gamma has other comprehensive income
What will need to be done in this case? This has never happened before, but it doesn't hurt to know.
IFRS 28 says the following:
IFRS 28 Definitions
Equity method — …an investor’s profit or loss includes the investor’s share of the investee’s profit or loss, and an investor’s other comprehensive income includes the investor’s share of the investee’s other comprehensive income.
This means that if in the task of consolidating OSD Gamma has other comprehensive income, then Alpha’s share in this income will need to be reflected as a separate line in other comprehensive income. That is, there will be two lines in Gamma: one - before income tax “Income/or loss from an associated company”, and the second - below net profit: “Other comprehensive income/loss from an associated company”.
Since there were two subsidiaries in the Dipif consolidation problem in June 2014, the likelihood of the equity method appearing in December 2014 became very high. Perhaps Paul Robins will use the complications that were already there. They are discussed in this article. I think this knowledge is enough to earn most of the points associated with the equity method.
VKontakte community
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35. Investments in associates – IAS 28
An associate is an entity over which the investor has significant influence but which is neither a subsidiary nor a joint venture.
“Significant influence” means the ability to participate in decisions regarding the financial and operating policies of the investee company without the ability to control those policies. ©
Such influence is assumed to exist in cases where the investor owns at least 20% of the voting rights of the investee, and is absent in cases where it owns less than 20%. These assumptions are rebuttable if the contrary can be demonstrated.
Associates are accounted for using the equity method unless they meet the criteria for recognition as assets held for sale in accordance with IFRS 5. Under the equity method, investments in associates are initially recognized at cost. In Consolidated and individual financial statements 40 Summary of IFRS 2012 their carrying amount is subsequently increased or decreased by the investor's share of profit or loss and other changes in the net assets of the associate for subsequent periods of acquisition. Investments in associates are classified as non-current assets and are presented as a single line item on the balance sheet (including any goodwill arising on acquisition). The investment in each individual associate, as a single asset, is tested for possible impairment in accordance with IAS 36 Impairment of Assets if there are indications of impairment as described in IAS 39. If the investor's share of the associate's losses exceeds the carrying amount the value of its investment, the carrying amount of the investment in the associate, is reduced to zero. Additional losses are not recognized by the investor unless the investor has an obligation to finance the associate or has provided security for the associate. In an investor's individual (unconsolidated) financial statements, investments in associates may be recorded at cost or as financial assets in accordance with IAS 39. IAS 28 has been amended to include requirements for joint ventures as well as for associates. enterprises that must be accounted for using the equity method.
36 Ias 29:
primary goal
The main purpose of the Standard is to establish specific standards for entities reporting in the currencies of countries with hyperinflationary economies, so that the financial information provided is comparable. The main reason for adopting this standard is the fact that a company's reporting in conditions of hyperinflation in local currency without translation has no value and is misleading to the user of the reporting.
Definition of hyperinflation
Characteristics of a country's economic environment that indicate the presence of hyperinflation include:
the bulk of the population prefers to keep their wealth in non-monetary assets or in relatively stable foreign currency;
The majority of the population views money not from the perspective of the local currency, but from the perspective of a relatively stable foreign currency. Prices may be set in foreign currencies;
for buying or selling on credit, prices are used that compensate for the expected loss of purchasing power over the credit period, even if it is short-term;Version 02
interest rates, wages and prices are linked to a price index;
the total inflation rate for 3 years approaches or reaches 100%.
Restatement of financial statements The basic principle of the standard is that the financial statements of an entity reporting in the currency of a hyperinflationary economy should be presented in units of measurement in effect at the reporting date. Comparative data for prior periods should also be shown in units of measurement in effect at the reporting date. The reporting is recalculated using the general price index.
Restatements are made only for non-monetary assets and liabilities (advances issued to suppliers, share capital, inventories, fixed assets, goodwill, reserves), which are recorded at historical cost. An asset or liability is non-monetary if there is no right to receive a fixed or determinable quantity of monetary units (advances to suppliers, share capital, inventories, property, plant and equipment, goodwill, reserves). Restatement is made starting from the date of acquisition of the non-monetary asset or liability. Non-monetary assets and liabilities carried at fair value at the reporting date are not restated. Monetary items are not recalculated, since at the reporting date these items already take into account changes in purchasing power. Gain or loss on the translation of non-monetary assets is included in the income statement. When an economy emerges from a period of hyperinflation and an entity ceases to prepare and present financial statements in accordance with this standard, it must use amounts expressed in units of measurement valid at the end of the previous reporting period as the basis for carrying amounts in future reporting.
Disclosures Key disclosures required by the standard:
Profit or loss on monetary items.
A statement that the financial statements and related amounts for prior periods have been restated to reflect changes in the general purchasing power of the reporting currency.
Whether the financial statements are prepared on a cost or replacement cost basis.
The name and level of the price index at the reporting date and changes in the index during the current and previous reporting periods. A sample disclosure according to IAS 29 is given in Appendix No. 2.