IAS 28 - Equity accounting

Publication date: 09 Jan 2018

Resources (This includes links to the latest standards, drafts, PwC interpretations, tools and practice aids for this topic)

Latest developments

In October 2017, the IASB published an amendment to IAS 28 on ‘Long-term interests in associates and joint ventures’. This clarifies that an entity should apply IFRS 9 to long-term interests in an associate or joint venture to which it does not apply the equity method. It is effective for annual periods beginning on or after 1 January 2019. The IASB has also published an illustrative example on applying the requirements in IFRS 9 and IAS 28 to long-term interests in an associate or joint venture.

In December 2016, the IASB issued as part of Annual Improvements – 2014-2016 cycle an amendment to IAS 28. The amendment clarifies that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is a venture capital organisation, or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition. It is effective for annual periods beginning on or after 1 January 2018.

Overview

IAS 28, 'Investments in Associates and Joint Ventures', requires that interests in such entities are accounted for using the equity method of accounting. An associate is an entity in which the investor has significant influence, but which is neither a subsidiary nor a joint venture of the investor. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but not to control those policies. It is presumed to exist when the investor holds at least 20% of the investee's voting power. It is presumed not to exist when less than 20% is held. These presumptions may be rebutted.

The equity method of accounting also applies to interests in joint ventures. A joint venture is a joint arrangement where the parties that have joint control have rights to the arrangements net assets.

Under the equity method, the investment in the associate or joint venture is initially carried at cost. It is increased or decreased to recognise the investor's share of the profit or loss of the associate or joint venture after the date of acquisition. Associates and joint ventures are accounted for using the equity method unless they meet the criteria to be classified as 'held for sale' under IFRS 5, 'Non-current assets held for sale and discontinued operations'.

Investments in associates or joint ventures are classified as non-current assets and presented as one line item in the balance sheet (inclusive of notional goodwill arising on acquisition). Investments in associates or joint ventures are tested for impairment in accordance with IAS 36, 'Impairment of assets', as single assets if there are impairment indicators under IAS 28 (as amended by IFRS 9.’Financial instruments’).

An entity applies IFRS 9 to financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term interests that, in substance, form part of the entity’s net investment in an associate or joint venture.

If an investor's share of its associate's or joint venture's losses exceeds the carrying amount of the investment (which, for this purpose, includes other long-term interests that in substance form part of the entity’s investment in the associate or the joint venture), the carrying amount of the investment is reduced to nil. Recognition of further losses are discontinued, unless the investor has an obligation to fund the associate or joint venture or the investor has guaranteed to support the associate or joint venture.

In the separate (non-consolidated) financial statements of the investor, the investments in associates or joint venture are carried at cost, in accordance with IFRS 9 or using the equity method.

 
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