Scope

IAS 28 applies to all investments in which an investor has significant influence but not control or joint control except for investments held by a venture capital organisation, mutual fund, unit trust, and similar entity that (by election or requirement) are accounted for as under IAS 39 at fair value with fair value changes recognised in profit or loss. [IAS 28.1]

Key Definitions [IAS 28.2]

Associate: An enterprise in which an investor has significant influence but not control or joint control.

Significant influence: Power to participate in the financial and operating policy decisions but not control them.

Equity method: A method of accounting by which an equity investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the net profit or loss of the associate (investee).

Identification of Associates

A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influence unless it can be clearly demonstrated otherwise. If the holding is less than 20%, the investor will be presumed not to have significant influence unless such influence can be clearly demonstrated. [IAS 28.6]

The existence of significant influence by an investor is usually evidenced in one or more of the following ways: [IAS 28.7]

• representation on the board of directors or equivalent governing body of the investee;
• participation in the policy-making process;
• material transactions between the investor and the investee;
• interchange of managerial personnel; or
• provision of essential technical information.

Potential voting rights are a factor to be considered in deciding whether significant influence exists. [IAS 28.9]

Accounting for Associates

In its consolidated financial statements, an investor should use the equity method of accounting for investments in associates, other than in the following three exceptional circumstances:

• An investment in an associate that is acquired and held exclusively with a view to its disposal within 12 months from acquisition should be accounted for as held for trading under IAS 39. Under IAS 39, those investments are measured at fair value with fair value changes recognised in profit or loss. [IAS 28.13(a)]
• A parent that is exempted from preparing consolidated financial statements by paragraph 10 of IAS 27 may prepare separate financial statements as its primary financial statements. In those separate statements, the investment in the associate may be accounted for by the cost method or under IAS 39. [IAS 28.13(b)]
• An investor need not use the equity method if all of the following four conditions are met: [IAS 28.13(c)]
  • 1. the investor is itself 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 investor not applying the equity method;
  • 2. the investor's debt or equity instruments are not traded in a public market;
  • 3. the investor 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; and
  • 4. the ultimate or any intermediate parent of the investor produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

Applying the Equity Method of Accounting

Basic principle. Under the equity method of accounting, an equity investment is initially recorded at cost and is subsequently adjusted to reflect the investor's share of the net profit or loss of the associate. [IAS 28.11]

Distributions and other adjustments to carrying amount. Distributions received from the investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be required arising from changes in the investee's equity that have not been included in the income statement (for example, revaluations). [IAS 28.11]

Potential voting rights. Although potential voting rights are considered in deciding whether significant influence exists, the investor's share of profit or loss of the investee and of changes in the investee's equity is determined on the basis of present ownership interests. It should not reflect the possible exercise or conversion of potential voting rights. [IAS 28.12]

Implicit goodwill and fair value adjustments. On acquisition of the investment in an associate, any difference (whether positive or negative) between the cost of acquisition and the investor's share of the fair values of the net identifiable assets of the associate is accounted for like goodwill in accordance with IFRS 3, Business Combinations. Appropriate adjustments to the investor's share of the profits or losses after acquisition are made to account for additional depreciation or amortisation of the associate's depreciable or amortisable assets based on the excess of their fair values over their carrying amounts at the time the investment was acquired. Any goodwill shown as part of the carrying amount of the investment in the associate is no longer amortised but instead tested annually for impairment in accordance with IFRS 3. [IAS 28.23]

Discontinuing the equity method. Use of the equity method should cease from the date that significant influence ceases. The carrying amount of the investment at that date should be regarded as a new cost basis. [IAS 28.18-19]

Transactions with associates. If an associate is accounted for using the equity method, unrealised profits and losses resulting from upstream (associate to investor) and downstream (investor to associate) transactions should be eliminated to the extent of the investor's interest in the associate. However, unrealised losses should not be eliminated to the extent that the transaction provides evidence of an impairment of the asset transferred. [IAS 28.22]

Date of associate's financial statements. In applying the equity method, the investor should use the financial statements of the associate as of the same date as the financial statements of the investor unless it is impracticable to do so. [IAS 28.24] If it impracticable, the most recent available financial statements of the associate should be used, with adjustments made for the effects of any significant transactions or events occurring between the accounting period ends. However, the difference between the reporting date of the associate and that of the investor cannot be longer than three months. [IAS 28.25]

Associate's accounting policies. If the associate uses accounting policies that differ from those of the investor, the associate's financial statements should be adjusted to reflect the investor's accounting policies for the purpose of applying the equity method. [IAS 28.27]

Losses in excess of investment. If an investor's share of losses of an associate equals or exceeds its "interest in the associate", the investor discontinues recognising its share of further losses. The "interest in an associate" is the carrying amount of the investment in the associate under the equity method together with any long-term interests that, in substance, form part of the investor's net investment in the associate. [IAS 28.29] After the investor's interest is reduced to zero, additional losses are recognised by a provision (liability) only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the investor resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised. [IAS 28.30]

Impairment. The impairment indicators in IAS 39, Financial Instruments: Recognition and Measurement, apply to investments in associates. [IAS 28.31] If impairment is indicated, the amount is calculated by reference to IAS 36, Impairment of Assets. [IAS 28.33] The recoverable amount of an investment in an associate is assessed for each individual associate, unless the associate does not generate cash flows independently. [IAS 28.34]

Separate Financial Statements of the Investor

Equity accounting is required in the separate financial statements of the investor even if consolidated accounts are not required, for example, because the investor has no subsidiaries. But equity accounting is not required where the investor would be exempt from preparing consolidated financial statements under IAS 27. In that circumstance, instead of equity accounting, the parent would account for the investment either (a) at cost or (b) in accordance with IAS 39.

Disclosure

The following disclosures are required: [IAS 28.37]

• fair value of investments in associates for which there are published price quotations;
• summarised financial information of associates, including the aggregated amounts of assets, liabilities, revenues, and profit or loss;
• explanations when investments of less than 20% are accounted for by the equity method or when investments of more than 20% are not accounted for by the equity method;
• use of a reporting date of the financial statements of an associate that is different from that of the investor;
• nature and extent of any significant restrictions on the ability of associates to transfer funds to the investor in the form of cash dividends, or repayment of loans or advances;
• unrecognised share of losses of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate;
• explanation of any associate is not accounted for using the equity method; and
• summarised financial information of associates, either individually or in groups, that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues, and profit or loss.

The following disclosures relating to contingent liabilities are also required: [IAS 28.40]

• Investor's share of the contingent liabilities of an associate incurred jointly with other investors; and
• Contingent liabilities that arise because the investor is severally liable for all or part of the liabilities of the associate.

Presentation

• Equity method investments must be classified as non-current assets. [IAS 28.38]
• The investor's share of the profit or loss of equity method investments, and the carrying amount of those investments, must be separately disclosed. [IAS 28.38]
• The investor's share of any discontinuing operations of such associates is also separately disclosed. [IAS 28.38]
• The investor's share of changes recognised directly in the associate's equity are also recognised directly in equity by the investor, with disclosure in the statement of changes in equity as required by IAS 1 Presentation of Financial Statements. [IAS 28.39]