Class 4 & 5

Associates and joint ventures

Rafiqul Islam FCMA, CIMA (UK)
 Investment in Associates
• Associates are those on which the parent has
significant influence (20% to 50% ownership)
• A holding company of 20% or more of the voting
power but less than 51%
• It possible for an investee to be the associate of one
investor and subsidiary of another
• IAS 27 separate financial statements is to be applied in
accounting for investments in associates in the
investor’s own financial statements as an individual
company
• IAS 28 is applied for consolidated financial statements
 Significant Influence
Significant influence is evidenced in number of ways:
• Representation on the board of directors
• Participation in policy making decisions
• Material transactions between investor and investee
• Interchange of managerial personnel
• Provision of essential technical information

The significant influence the investor holds by making the

investor answerable for the associate’s overall
performance, nor just for the distributions received.
 Equity Method of Accounting
• The equity method should be used in relation
to associate.
• Under the equity method, the investment in
the associate is initially recognized at cost, but
the carrying amount is then increased or
decreased by the investor’s share in the post-
acquisition change in the associate’s net
assets.
 Equity Method of Accounting
• Share of post acquisition profit/losses should be
recognized in the investor’s consolidated
statement of profit or loss
• If it is decided to sell within 12 months, then it
will cease to apply equity method for associate. It
will be treated under IFRS 5: Non current assets
for held sale and discontinued operations
• Once significant influence lost, the investee is no
longer Associate
 Application of the equity method:
consolidated accounts
The equity method should be applied in the consolidated accounts as
follows:
1) Statement of financial position includes investment in associate
at cost plus (or minus) the group’s share of the associate’s post-
acquisition profits (or losses) minus any impairments in the
investment to date.
2) Profit or loss (statement of profit or loss and other
comprehensive income): group share of associate’s profit after
tax.
3) Other comprehensive income (statement of profit or loss and
other comprehensive income): group share of associate's other
comprehensive income after tax.

The investment in the associate will also include any other long-term
interests in the associate, for example preference shares or long-term
receivables or loans.
 Consolidated procedures
• Profit and losses on transactions between the investor and
associate should be eliminated to the extent of the
investor’s share
• There is no cancellation of investment against share of the
associate’s net assets
• There is no goodwill calculation
• The whole of interest is subjected to an impairment review
• The Investor’s interest in the associate’s post tax profits less
any impairment loss is recognized in its consolidated
statement of profit or loss
• Once the carrying amount of the investment in the
associate has been reduced to zero, no further losses
should be recognized by the group.
 Transaction between a group and its associate
Unlike for subsidiaries, trading transactions are not cancelled
out. However, any unrealised profits on these transactions
should be eliminated, but only to the extent of the group's
share.
Where the associate sells to the parent/subsidiary the double
entry is as follows, where A% is the parent's holding in the
associate, and PURP is the provision for unrealised profit:

DEBIT Retained earnings of parent/subsidiary PURP A%

CREDIT Group inventories/PPE PURP A%

Where the parent/subsidiary sells to the associate:

DEBIT Retained earnings of parent/subsidiary PURP A%
CREDIT Investment in associate PURP A%
 Investor’s separate financial
statements
• Under IAS 27, the investment in the associate
is carried at cost in the investor’s statement of
financial position
• The knock-on effect is that the only income
included in the investor’s statement of profit
or loss are the distributions received
• As associate is not part of the group as a
group comprises parent and subsidiary only
 Carrying amount
Original cost (in P’s books) – xxx
Add: Share of post-acquisition change in net
assets (Retained earnings)
Less: Impairment losses to date
 Separate Income Statement
Dividend Income…………………….
 Separate Statement of Financial
Position
Investment in Associates---------------
(at original cost)
 Consolidated Statement of Profit or
Loss
Share of Profit/Loss from Associate………………
(Total post acquisition profit X % of ownership)
Less: Adjustment of depreciation for fair value
increase (if any)
Less: Impairment Loss (if any)………………
 Statement of Consolidated Financial
Position
Original cost (in P’s books) – xxx
Add: Share of post-acquisition change in net
assets (Retained earnings)
Less: Impairment losses to date
Example-1: Investment in Associate
P ltd acquired 30% of the ordinary share capital of A Ltd on 1 January
2008 for CU 275,000. At that date A Ltd had retained earnings of CU
468,000. The fair value of its net assets was the same as the carrying
value apart from a building with a fair value of CU 725,000 and
carrying value of CU 500,000. The building had a 30 years of remaining
useful life at 1 Jan 2008. No fair value adjustment has been carried out
the books of A ltd.

At 31 December 2009 A Ltd had retained earnings of CU 521,000. This

was substantially below expectations and P Ltd intends to recognize an
impairment loss of CU 50000 against value of its investment in A Ltd.

Requirement: what should be shown as Investment in Associate in the

consolidated financial statements of P Ltd at 31 December 2009?
 Consolidated statement of profit or loss

Share of post acquisition profit = 15900

(521000-468000) = 53000 x30%
Less: deprecation on fair value uplifting of building (225000/30*30%*2)
(4500)
Less: Impairment Loss (50000)
To be shown in P/L (38600)
 Alternative Calculation
• Adjusted profit
• Profit shown in the associate book =
• 521000- 468000 = 53000
• Less: deprecation
(225000/30*2) (15000)
Adjusted profit = 38000
Parent’s share = 38000*30% = 11400
Less: Impairment Loss (50000)
To be shown in P/L (38600)
 Consolidated statement of financial Position

Investment in Associate - 2,75000

Less: Loss (38600)
To be shown in CSFP 236400
 Equity method: consolidated
statement of profit or loss
The associate should be accounted for as follows:
• The group’s share of the associate’s profit after tax should
be recognized in the consolidated statement of profit or
loss as a single line entry
• This should be disclosed immediately before the group
profit before tax as “Share of Profit of associates”
• If the associate is acquired mid-year its result should be
time apportioned.
• If there is impairment loss, which should be deducted from
parent’s share of profit after tax of the associates
• Dividend income from associate should not be recorded in
the consolidated statement of profit or loss.
 Transactions between group and its
associates
• Trading transactions should not be cancelled
on consolidation
• At adjustment is required for unrealized profit
• Only investor’s share of the unrealized profit
should be eliminated
• Inter-company receivables and payables are
not cancelled
 Investor (parent) sells goods to the
Associate
Consolidated statement of financial position
Reduce P’s retained earnings by its share of the
unrealized profit;
Reduce the carrying amount of the investment
in A by P’s share of the unrealized profit
Consolidated statement of profit or Loss
Increase P’s cost of sale by its share of the
unrealized profit
 Associate sells goods to the investor
Consolidated statement of financial position
• Reduce P’s share of retained earnings by its
share of the unrealized profit
• Reduce P’s inventory on consolidation by its
share of the unrealized profit
Consolidated statement of Profit and Loss
Reduce P’s share of A’s profits after tax by its
share of unrealized profit
 IFRS 11 Joint Arrangements
A joint arrangement is a contractual
arrangement whereby two or more parties
undertake an economic activity that is subject to
joint control

Joint operations
Joint venture
 Definitions
Joint arrangement. An arrangement of which two or more
parties have joint control.
Joint control. 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.
Joint operation. A joint arrangement whereby the parties that
have joint control of the arrangement have rights to the assets
and obligations for the liabilities relating to the arrangement.
Joint venture. A joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net
assets of the arrangement.
 Joint Venture or Joint operation
IFRS 11 classes joint arrangements as either joint operations or joint ventures.
The classification of a joint arrangement as a joint operation or a joint venture
depends on the rights and obligations of the parties to the arrangement.
A joint operation is a joint arrangement whereby the parties that have joint
control (the joint operators) have rights to the assets, and obligations for the
liabilities, of that joint arrangement. A joint arrangement that is not
structured through a separate entity is always a joint operation.
A joint venture is a joint arrangement whereby the parties that have joint
control (the joint venturers) of the arrangement have rights to the net assets
of the arrangement.
A joint arrangement that is structured through a separate entity may be
either a joint operation or a joint venture. In order to ascertain the
classification, the parties to the arrangement should assess the terms of the
contractual arrangement together with any other facts or circumstances to
assess whether they have:
• Rights to the assets, and obligations for the liabilities, in relation to the
arrangement (indicating a joint operation)
• Rights to the net assets of the arrangement (indicating a joint venture)
 Joint venture or Joint operation
Structure of joint arrangement

Not Structured through a Structured through a separate

separate vehicle vehicle

An entity shall consider:

The legal form of separate
vehicle
The terms of the contractual
arrangements
Where relevant, other facts and
circumstances

Joint Operation Joint Venture

 Joint Venture: Equity method of
accounting
• The investment in the joint venture is initially recorded
at cost
• There are adjustments each period for the venturer’s
share of the post-acquisition reserves of the joint
venture, less any impairment losses. Profit are added
to the investment and losses are deducted
• In the venturer’s consolidated statement of financial
position the investment in the joint venture is shown
as a single line figure as part of non-current assets
• In the venturer’s consolidated statement of profit or
loss there is a single line for the share of the joint
venture’s results
 Transactions between venture and
joint venture
Unrealized profit will be eliminated for share of
venture in the joint venture
Receivables and payables are not cancelled out.
 Transactions between a joint venturer and a joint venture
Downstream transactions
A joint venturer may sell or contribute assets to a joint venture so making a
profit or loss. Any such gain or loss should, however, only be recognised to the
extent that it reflects the substance of the transaction. Therefore:
• Only the gain attributable to the interest of the other joint venturers
should be recognised in the financial statements.
• The full amount of any loss should be recognised when the transaction
shows evidence that the net realisable value of current assets is less than
cost, or that there is an impairment loss.

Upstream transactions
When a joint venturer purchases assets from a joint venture, the joint
venturer should not recognise its share of the profit made by the joint
venture on the transaction in question until it resells the assets to an
independent third party, ie until the profit is realised.
Losses should be treated in the same way, except losses should be recognised
immediately if they represent a reduction in the net realisable value of
current assets, or a permanent decline in the carrying amount of non-current
assets.
ACCOUNTING FOR JOINT OPERATIONS
IFRS 11 requires that a joint operator recognises line by line
the following in relation to its interest in a joint operation:
(a) Its assets, including its share of any jointly held assets
(b) Its liabilities, including its share of any jointly incurred
liabilities
(c) Its revenue from the sale of its share of the output arising
from the joint operation
(d) Its share of the revenue from the sale of the output by the
joint operation
(e) Its expenses, including its share of any expenses incurred
jointly
This treatment is applicable in both the separate and
consolidated financial statements of the joint operator.