3. IAS 8 Investments in Associates
• It deals with accounting for an interest in an associate in the books
of the investor and in the consolidated financial statements.
• IAS 8 defines an associate as ‘an entity over which the investor has
significant influence and that is neither a subsidiary nor an interest
in a joint venture’.
4. SIGNIFICANT INFLUENCE
• Investor holds, directly or indirectly, 20% or more of the voting
rights of the investee, unless it can be clearly demonstrated that
this is not the case.
• An investor may exercise significant influence in several ways: by
representation on the board of directors; by participation in policy-
making processes; material inter-company transactions;
interchange of managerial personnel; or dependency on technical
information.
5. Potential Shares
• An investor may own warrants, share call options or convertible
financial instruments that when exercised or converted will give the
investor additional shares.
• To determine whether an investor has significant influence, the
existence and effect of potential voting shares that are currently
exercisable or convertible and the voting rights of existing shares
should be considered.
• The entity should consider all facts and circumstances except
management intention and financial ability when assessing whether
these potential voting rights contribute to significant influence.
6. CONSOLIDATED FINANCIAL STATEMENTS
• The associate is accounted for using the equity method except in the
following situations:
– The investment is classified as held for sale in accordance with FRS 5
Non-current Assets Held for Sale and Discontinued Operations;
– The parent is exempted from presenting consolidated financial
statements; or
When all of the following apply:
– The investor itself is a wholly-owned subsidiary or a partially-owned
subsidiary and the other owners have been informed about, and do not
object to, the parent not presenting consolidated financial statements.
– The investor’s debt or equity instruments are not traded in a public
market (not a listed entity).
– The investor is not in the process of issuing in a public market its debt
or equity instruments by filing its financial statements with the
regulatory authorities like the securities commission.
– The ultimate or any other intermediate parent of the investor is
incorporated in Malaysia and produces consolidated financial
statements that comply with the Financial Reporting Standards.
7. EQUITY METHOD
• The investment in the associate is initially recorded at cost; and
• the carrying amount is increased or decreased by the investor's
share of the post-acquisition profits or losses of the investee.
• The investor’s share of the net profits is recognised in the
investor’s income statement.
• Dividends and other distributions from the investee reduce the
carrying value of the investment.
8. Loss of Significant Influence
• Equity method is discontinued.
• The investment is treated as a financial asset under IAS 39 provided
it does not become a subsidiary or a joint venture.
• The investor is to measure the remaining investment in the former
associate at fair value. The difference between the carrying amount
and the fair value is recognised in the profit or loss.
• The fair value of the investment at that date it ceases to be an
associate is regarded as fair value on initial measurement as a
financial asset, in accordance with IAS 39.
9. Accounting Techniques
• Determining goodwill
– Goodwill or bargain purchase
• Depreciation adjustments
– Appropriate adjustments are made for depreciation based on
the fair values of the associate's depreciable assets.
• Inter-company transfer of assets (including sales)
Examples 1 and 2 of text book
10. Date of financial statements
• If the reporting dates are not the same, then adjustments are made
for effects of significant transactions or events that occur between
that date and the investor’s reporting date.
• However, the difference between the reporting dates of the
associate and the investor should not exceed three months.
11. Accounting policies
Similar accounting policies are applied. If the associate uses different policies,
the investor makes appropriate adjustments to the financial statements of
the associate to conform to those of the investor.
Losses of associate
If the investor’s share of net losses of the associate equals or exceeds its
interest in the associate, the investor should not recognise any more losses.
Amounts owed by associate
Where the investor has some amount owing to it by the associate and there is
no prospect of it being settled in the foreseeable future, then the amount due
is treated as an extension of the entity’s investment in that associate. In other
words, the amount due is part of the carrying amount of the investment in
the associate. Such items include preference shares and long-term
receivables or loans but do not include trade receivables, trade payables or
any long-term receivables for which adequate collateral exists, such as
secured loans.
12. Impairment losses
• The associate should be tested for impairment after applying the
equity method in accordance with IAS 39.
• The carrying amount of the investment is tested for impairment as
a single asset, by comparing its carrying amount with its
recoverable amount (higher of value in use, and fair value less costs
to sell) whenever there is an indication that the investment may be
impaired.
13. Value in Use
• IAS 36 Impairment of Asset specifies that in determining the value
in use an entity shall estimate:
– Its share of the present value of the estimated future cash flow
expected to be generated by the associate, including the cash
flow from operations of the associate plus the proceeds on the
disposal of the investment; or
– The present value of the estimated future cash flows expected
to arise from dividends to be received from the investment and
proceeds from the disposal of the investment.
14. ACCOUNTING FOR ASSOCIATE IN SEPARATE
FINANCIAL STATEMENTS
• IAS 8 requires the investor to account for the associate, which are
not held for sale, at cost or in accordance with IAS 39.
• In the separate financial statement of the investor, the investment
in associate which is not classified as held for sale, is accounted for
as follows:
– At cost, or
– In accordance with IAS 39.
