The document discusses accounting standards for associates and joint ventures. It defines associates as entities over which an investor has significant influence, but not control. Joint arrangements are either joint operations or joint ventures depending on parties' rights and obligations. The equity method is used to account for investments in associates and joint ventures, recording the investment at cost initially and adjusting it over time for the investor's share of post-acquisition profits or losses. Transactions between investors and their associates or joint ventures require elimination of unrealized profits.

1. ASSOCIATES AND JOINT VENTURES
(IAS28, IAS31)

2. Associates and significant influence
IAS28 includes the following definitions:
• An associate is "an entity ... over which the investor has
significant influence and that is neither a subsidiary nor
an interest in a 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 over these policies".
When an investor company owns (directly or indirectly) at least 20%
of the voting power of an investee company, significant influence is
presumed to exist unless it can be clearly demonstrated that this is not
the case. Owning at least 20% of a company's voting power normally
means owning at least 20% of that company's ordinary shares.

3. Evidence of significant influence
• representation on the board of directors which governs
the investee company, or
• participation in policy-making processes of the investee,
including participation in decisions about dividends or
other distributions, or
• material transactions between the investor and the
investee, or
• interchange of managerial personnel, or
• provision of essential technical information.
The existence of significant influence may be
evidenced by:

4. The equity method
IAS28 requires that an investment in an associate
should normally be accounted for using the "equity
method".
The equity method is defined as "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
net assets of the investee".
The profit or loss of the investor should include the
investor's share of the investee's profit or loss.

5. Equity method
• IAS 28 requires all investments in associates
and joint ventures to be accounted for using
the equity method (unless held for sale)
• Exemptions:
– If parent is exempt for preparing consolidated
financial statements
– Or:

6. Exemptions to equity method
• (if all apply)
– Investor is a wholly owned subsidiary or partially
owned subsidiary of another entity and the
owners do not object to not using the equity
method
– Securities are not publicly traded
– Not in the process of issuing securities
– The ultimate parent publishes financial
statements in accordance with IFRS

7. When to discontinue equity
accounting
• When the investor ceases to have significant
influence
• Then it is treated under IAS 39 Financial
Instruments (e.g. fair value of retained
interest must be treated as fair value on
initial recognition as a financial asset

8. Application of the equity method
• The investor's share of the investee's profit or loss for the
year is recognised in the investor's statement of
comprehensive income and is either added to or subtracted
from the carrying amount of the investment shown in the
investor's statement of financial position.
• Any dividends received from the investee are subtracted
from the carrying amount of the investment.
The investment made by the investing company is
recorded initially at cost. In subsequent years:

9. Application of equity method: in
summary
• SOFP: at cost, plus (or minus) share of post
acquisition profits less impairment
• Profit or loss: group share of associate’s profit
after tax
• OCI: group share of associate’s OCI after tax

10. Example
• Zyco acquired 35,000 of the 100,000 $1
shares of Beta Co for $70,000 on 1 January
20X7. In the year to 31 December 20X7, Beta
Co generates profit for the year of $34,000. It
then declares a dividend of $8,000.
• How should Zyco show its investments in its
own accounts and in the consolidated
accounts for year ended 31 December 20X7?

11. Individual accounts - Zyco
• Recorded at cost on acquisition (1/1/20X7)
• Kept at this value in Zyco’s SOFP permanently
• Record dividends in statement of profit or
loss and OCI (35% x $8,000 = $2,800)
• DEBIT: Cash $2,800
• CREDIT: Income from shares in associates $2,800

12. Consolidated accounts of Zyco Group
• Using equity accounting:
• Group’s share of Beta’s profit after tax (35%
of $34,000 = $11,900)
• As already distributed as dividend, it is
already included in Zyco’s company accounts
and so will be included on consolidation. The
portion not distributed will require an
adjustment:

13. Consolidated accounts of Zyco Group
(2)
• DEBIT: Investments in associates $9,100
• CREDIT: Income from shares in associates $9,100
• This is then added to the ‘Investments in
associates’ non current asset in the SOFP, e.g.
$79100. This equates to cost plus group share of
post acquisition profits.

14. Other issues
• Any impairment of investments in associates should
be deducted from the asset value
• Financial statements should be to the same reporting
date
• Adjust for any material transactions/events in the
intervening period if not possible
• Use common accounting policies
• If there are third party held cumulative preference
shares held in the associate, adjust for the
appropriate dividend first prior to calculating share of
investor’s profits/losses

15. Upstream and downstream
transactions
• These are transactions between an investor
and an associate. IAS28 requires that
unrealised profits resulting from such
transactions should be eliminated to the
extent of the investor's interest in the
associate

16. Upstream and downstream
transactions
• An example of an upstream transaction is the
sale of goods by an associate to an investor
• A downstream transaction is the same
transaction in reverse

17. Upstream and downstream transactions
• Upstream. In the investor's financial statements, the unrealised
profit is subtracted from the investor's share of profit from
associates. This automatically reduces the investment in associates
figure shown in the investor's statement of financial position.
• Downstream. The unrealised profit is subtracted from the investor's
gross profit (usually by increasing cost of sales) and is also subtracted
from the investment in associates figure shown in the investor's
statement of financial position.

18. Losses of an associate
• Should its share of an associate’s losses
exceed the carrying amount of the
associate in the investor’s financial
statements:
- the investor should cease to recognise its
share of any further losses, unless it has a
legal or constructive obligation
• See Example 5

19. IFRS11 JOINT
ARRANGEMENTS

20. Joint arrangements
• Joint arrangements are either joint operations or
joint ventures
• Depends on the rights and obligations of the
parties
• Contributions can vary, e.g. finance, purchases,
manufacture of goods, marketing skills, logistics
• IFRS 11 considers how the interest in the joint
arrangement is accounted for by each party

21. Joint arrangements
• Joint operation: parties have joint control
(the joint operators) have rights to the assets
and obligations for the liabilities of the
arrangement. A joint arrangement which is
not a separate entity is always a joint
operation
• Joint venture: parties (joint venturers) have
joint control and have rights to the net assets
of the arrangement

22. JA as separate entity
• Can be either joint operation or joint venture,
depends on the contract
• If they have rights to assets and obligations
for liabilities, then it is a joint operation
• If they have rights to the net assets it is a
joint venture

23. Contractual arrangement
• Distinguishes a JA from an investment in an
associate
• If there is no contractual arrangement, then a
joint arrangement does not exist
• Evidence of a contractual arrangement could
be a contract, minutes of discussions,
incorporation of the joint venture

24. Joint venture considerations
• Contractual arrangement should cover in
writing:
• Purpose, activity and duration
• Appointment of board of directors and voting
rights of parties
• Capital contributions of parties
• How output, income, expenses or results will
be shared

25. Accounting for Joint Operations
• Line by line recognition in relation to its
interest in a JO:
– Assets, including share of jointly held assets
– Liabilities, including share of joint incurred
liabilities
– Revenue from sale of its share of output from JO
– Share of revenue from sale of output by the JO
– Expenses, including its share of expenses
incurred jointly

26. Accounting for Joint Ventures
• Only equity accounting permitted now
• SOFP: interest in JV at cost plus share of post-
acquisition reserves less impairment
• SOFP: include the group share of post
acquisition total comprehensive income in
group reserves

27. Accounting for joint ventures (2)
• Consolidated statement of profit or loss and
OCI:
• Include:
– Group share of joint venture’s profit or loss
– Group share of the joint venture’s other
comprehensive income

28. Transactions between JV’er and JV
• Upstream:
• When JV sells to Jver, the Jver should not
recognise its share of profit made by JV on
transaction until it resells the assets outside
the group
• So the group share of the unrealised profit or
loss in year end inventory should be
eliminated

29. Transactions between JV and JV’er
• Downstream:
• When Jver sells assets to JV, then the group
share of unrealised profit or loss in year end
inventory or assets must be eliminated unless
• There is a loss AND
• The transaction provides evidence of a reduction
in NRV of the asset or an impairment loss
• Then the loss should be recognised in full by the
JVer

30. Associates and JA disclosure requirements
• Nature, extent and financial effects of any interests in
associates or JA s including name, place of business,
interest and method of accounting used including any
restrictions on transfer of funds to the investor
• Risks associated with interests in associate of JV
• Summarised financial information, more detail required
for JVs than associates
The main disclosures required by IFRS12 include: