Eshetie

1. IAS 28- Investments in
Associates and Joint Ventures

2. 2
• Scope and introduction
• IAS 28 must be applied by all entities that are investors with joint
control of, or significant influence in an investee.
• An associate is any entity over which the investor has significant
influence.
• A joint venture is joint arrangement whereby the parties have joint
control of the arrangement.
• the contractually agreed sharing of control of an arrangement
IAS 28- Investments in Associates and
Joint Ventures

3. 3
 Significant influence is the power to participate in the financial
and operating policy decisions of the investee.
• significant influence is not control (which indicates a subsidiary)
• significant influence is not joint control (which indicates an interest
in a joint arrangement)
Significant Influence

4. 4
• Significant influence is usually evidenced in one or more of the
following ways:
• representation on the board of directors;
• participation in policy making, including decisions about dividends;
• a close relationship involving transactions between investor and
investee;
• interchange of managerial personnel; or
• provision of essential technical information.
Significant influence continued

5. 5
 Associates and joint ventures are accounted for using the equity
method.
 At initial recognition of an equity investment:
 investor/joint venturer measures investment in associate/joint venture at
the transaction price (including transaction costs)
 Subsequently measurement reflects the investor’s/joint venturer’s share of:
 the profit or loss and other comprehensive income of the associate/joint
venture
 other changes in the equity of the associate/joint venture
 for example, distributions received from the associate/joint venture
• Presentation:
• a one-line entry in the statement of comprehensive income ‘investor’s
share of the associate or joint venture’s profit or loss’ and a separate line
item for other comprehensive income.
• a one-line item in the statement of financial position—Investment in
associate or joint venture.
Measurement (Equity method)

6. 6
• Equity accounting for an associate’s losses continues until the
investment is reduced to zero.
• Additional losses may be recognised as a liability if an entity has a
legal or constructive obligation or made payments on behalf of the
associate or joint venture
• Recognition of future share of profits only after share of profits
equals losses
Equity method continued

7. 7
 On 1/3/2014 EEP buys 30% of Entity B for Br120
million(assume no implicit goodwill & fair value adjustments).
Entity B’s profit = Br80 million for the year ended 31/12/2014
(including Br66.67million from March to Dec). On 31/12/2014
Entity B declared a dividend of Br100 million
At 31/12/2014 the recoverable amount of EEP’s investment in
Entity B = Br95 million (i.e. fair value 98 million less costs to
sell 3 million).
Entity B reported loss of Br400 million for year ended
31/12/2015 and declared no dividend. It also reported profit of
Br300 million for year ended 31/12/2016 and declared no
dividend.
Example equity method

8. 8
 Uniform accounting policies should be used
 If the associate or joint venture’s year end differs from the investor’s
adjustments must be made for significant transactions that occurred
between the dates.
 Application of the equity method is discontinued when:
 The investment becomes a subsidiary
 Significant influence or joint control of the investment is lost
 IFRS 9 application to interest retained (if any)
 Profit or loss on disposal
Example equity method

9.  On 1 January 20x1 Entity A incurred Br2,000 transactions
costs when it acquired 25% of Entity Z’s equity for
Br200,000.
 for simplicity, assume no implicit goodwill and no fair
value adjustments
 Entity Z’s profit for 20x1 = Br100,000
 On 31 December 20x1 Entity Z declares a dividend of
Br120,000
 At 31 December 20x1 the recoverable amount of Entity A’s
investment in Entity Z = Br190,000
 (ie fair value of Br195,000 less cost to sell Br5,000)
The equity method basic
example

10. What is the (equity method) carrying amount of Entity A’s
investment in Entity Z at 31 December 20x1? Choose one of:
1) Br190,000;
2) Br195,000;
3) Br200,000;
4) Br202,000;
5) Br225,000; or
6) Br227,000.
The equity method
basic example continued

11. 11
Thank you
Questions or Comments
End of IAS 28