Investments in Associates 1st and best read – Just as a starter, two definitions!
Associate: An entity, including an unincorporated entity such as a partnership, over which an investor has significant influence and which is neither a subsidiary nor an interest in a joint venture. Investments in Associates 1st and best read
Significant influence: The power to participate in the financial and operating policy decisions of the investee but it is not control or joint control over those policies. Investments in Associates 1st and best read
What are investments in 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. Investments in Associates 1st and best read
The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
- representation on the board of directors or equivalent governing body of the investee;
- participation in the policy-making process;
- material transactions between the investor and the investee;
- interchange of managerial personnel;
- provision of essential technical information.
Potential voting rights are a factor to be considered in deciding whether significant influence exists.
A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.
Equity method for associates
- An investment in an associate held by a venture capital organisation or a mutual fund (or similar entity) and that upon initial recognition is designated 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. Investments in Associates 1st and best read
- An investment classified as held for sale in accordance with IFRS 5.
- A parent that is exempted from preparing consolidated financial statements 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. Investments in Associates 1st and best read
- An investor need not use the equity method if all of the following four conditions are met:
- 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;
- the investor’s debt or equity instruments are not traded in a public market;
- 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
- the ultimate or any intermediate parent of the investor produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.
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. Investments in Associates 1st and best read
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 other comprehensive income that have not been included in profit or loss (for example, revaluations).
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.
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. Investments in Associates 1st and best read
The impairment indicators in IFRS 9 Financial Instruments, apply to investments in associates. If impairment is indicated, the amount is calculated by reference to IAS 36 Impairment of Assets. The entire carrying amount of the investment is tested for impairment as a single asset, that is, goodwill is not tested separately. The recoverable amount of an investment in an associate is assessed for each individual associate, unless the associate does not generate cash flows independently.
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.
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.
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. If it is 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. Investments in Associates – Highlights
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. Investments in Associates – Highlights
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. 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. Investments in Associates – Highlights
Partial disposals of associates
If an investor loses significant influence over an associate, it derecognises that associate and recognises in profit or loss the difference between the sum of the proceeds received and any retained interest, and the carrying amount of the investment in the associate at the date significant influence is lost. Investments in Associates 1st and best read
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. Investments in Associates – Highlights
The following disclosures are required: Investments in Associates 1st and best read
- fair value of investments in associates for which there are published price quotations Investments in Associates – Highlights
- 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 Investments in Associates – Highlights
- 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: Investments in Associates – Highlights
- investor’s share of the contingent liabilities of an associate incurred jointly with other investors
- contingent liabilities that arise because the investor is severally liable for all or part of the liabilities of the associate
Venture capital organisations, mutual funds, and other similar entities must provide disclosures about nature and extent of any significant restrictions on transfer of funds by associates.
- Equity method investments must be classified as non-current assets.
- The investor’s share of the profit or loss of equity method investments, and the carrying amount of those investments, must be separately disclosed.
- The investor’s share of any discontinuing operations of such associates is also separately disclosed.
- The investor’s share of changes recognised directly in the associate’s other comprehensive income are also recognised in other comprehensive income by the investor, with disclosure in the statement of changes in equity as required by IAS 1 Presentation of Financial Statements.
See also: The IFRS Foundation