1 Defined terms
An associate is an entity over which the investor has significant influence.
Consolidated financial statements are the financial statements of a group in which assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.
The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income.
A joint arrangement is an arrangement of which two or more parties have joint control.
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. IAS 28 Investments in Associates and Joint Ventures 2017 – 07 2
A joint venturer is a party to a joint venture that has joint control of that joint venture.
Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.
2 Significant influence
If an entity holds, directly or indirectly (e.g. through subsidiaries), twenty per cent (20%) or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case.
Conversely, if the entity holds, directly or indirectly (e.g. through subsidiaries), less than twenty per cent (20%) of the voting power of the investee, it is presumed that the entity does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.
The existence of significant influence by an entity is usually evidenced in one or more of the following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about dividends or other distributions;
(c) material transactions between the entity and its investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels. It could occur, for example, when an associate becomes subject to the control of a government, court, administrator or regulator. It could also occur as a result of a contractual arrangement.
3 Equity method
The investor accounts for this interest by extending the scope of its financial statements to include its share of the profit or loss of such an investee. As a result, application of the equity method provides more informative reporting of the investor’s net assets and profit or loss.
Under the equity method,
- On initial recognition, the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition and the investor’s share of the investee’s profit or loss is recognised in the investor’s profit or loss.
- Distributions received from an investee reduce the carrying amount of the investment.• adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other comprehensive income such as changes arising from the revaluation of property, plant and equipment and from foreign exchange translation differences and the investor’s share of those changes is recognised in the investor’s other comprehensive income.
Potential voting rights
When potential voting rights or other derivatives containing possible exercise or conversion of potential voting rights exist, an entity’s interest in an associate or a joint venture is determined solely on the basis of existing ownership IAS 28 Investments in Associates and Joint Ventures 2017 – 07 3
interests and does not reflect the possible exercise or conversion of potential voting rights and other derivative instruments, an entity has, in substance, an existing ownership as a result of a transaction that currently gives it access to the returns associated with an ownership interest. In such circumstances, the proportion allocated to the entity is determined by taking into account the eventual exercise of those potential voting rights and other derivative instruments that currently give the entity access to the returns.
4 Application of the equity method
A group’s share in an associate or a joint venture is the aggregate of the holdings in that associate or joint venture by the parent and its subsidiaries. The holdings of the group’s other associates or joint ventures are ignored for this purpose.
When an associate or a joint venture has subsidiaries, associates or joint ventures, the profit or loss, other comprehensive income and net assets taken into account in applying the equity method are those recognised in the associate’s or joint venture’s financial statements after any adjustments necessary to give effect to uniform accounting policies.