An associate is an entity over which the investor has Significant influence. 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. These IAS 28 Investments in Associates and Joint venture summary notes are prepared by mindmaplab team and covering IAS 28 equity method, significant influence with examples and the IFRS 28 key terms definitions. This is the IAS 28 full text; we have also prepared IAS 28 pdf version download.
IAS 2 Inventories
IAS 7 Statement of cash flows – Revisited
IAS 33 Earnings per share – Revisited
IAS 28 Definitions
Associate – An associate is an entity over which the investor has Significant influence.
Joint ventures – 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.
- 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.
- Holding 20% to 50% of the equity of another entity therefore means as a general rule that significant influence exists, but not control; therefore, the investment is treated as an associate, provided that it is not a joint venture.
- The ‘20% or more’ rule is a general guideline, however, and IAS 28 states more specifically how significant influence arises. The existence of significant influence is usually evidenced in one or more of the following ways:
- Representation on the board of directors;
- Participation in policy-making processes, including participation in decisions about distributions (dividends);
- Material transactions between the two entities;
- An interchange of management personnel between the two entities; or
- The provision of essential technical information by one entity to the other.
Therefore, an entity loses significant influence when it loses the ability to participate in financial and operating policy decisions of the entity in which it has invested (the ‘investee’ entity).
IAS 28 Accounting for associates and joint ventures
IAS 28 Investments in Associates and Joint venture states that associates and joint ventures must be accounted for using the equity method.
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 (associates or joint ventures) 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.
*There is no goodwill recognised for an investment in an associate.
Also, Account for;
- any impairment in the value of the investment since acquisition
- post-acquisition movement in the reserve as other reserve of the reporting entity
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,
At initial recognition of the associate or joint venture the entity may elect to measure that investment at fair value through profit or loss in accordance with IFRS 9.
The same goes with a portion which is held indirectly. 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.
Trading with an associate or joint venture
There might be trading between a parent and an associate (or JV). If in addition to the associate (or JV) the parent holds investments in subsidiaries there might also be trading between other members of the group and the associate (or JV).
There might be:
- Inter-company balances
- Unrealised profit on inter-company transactions.
The accounting rules for dealing with these items for associate (or JVs) are different from the rules for subsidiaries.
Inter-company balances between the members of a group (parent and subsidiaries) and associates (or JVs) are not cancelled out on consolidation. An associate (or JV) is not a member of the group but is rather an investment made by the group.
This is also the case if a parent has an associate (or JV) and no subsidiaries.
Unrealised inter-group profit
For unrealised profit arising on trade between a parent and associate (or JV) only the parent’s share of the unrealised profit is eliminated.
The double entry to achieve this would be:
Parent sells to associate (or JV) –
Cost of sales Dr.
Investment in associate Cr.
Associate (or JV) sells to parent –
Share of profit of associate Dr.
*In both cases, there will also be a reduction in the post-acquisition profits of the associate (or JV), and the investor entity’s share of those profits (as reported in profit or loss). This will reduce the accumulated profits in the statement of financial position.