Investments in Associates and Joint Ventures

PAS 28 prescribes the accounting for investments in associates and the application of the equity method
to investments in associates and joint ventures.

Investors apply PAS 28 when they have significant influence or joint control over an investee.

Investment in Associate

 An associate is “an entity over which the investor has significant influence." (PAS28.3)
 Significant influence distinguishes an investment in associate from all other types of
investments.

Investment in Associates:

Types of investments Nature of relationship with Investee Applicable reporting standards

Investment measured at fair Regular investor PFRS 9

Investment in associate Significant influence PAS 28

Investment in subsidiary control PFRS 3 and PFRS 10

Investment in joint venture Joint control PFRS 11 and PAS 28

 Significant influence is “the power to participate in the financial and operating policy decisions
of the investee but is not control or joint control of those policies." (PAS 28.3)
 Significant influence is presumed to exist if the investor holds, directly or indirectly (e.g. through
subsidiaries), 20% or more of the voting power of the investee.

Percentage of ownership interest Type of investment

Less then 20% Financial assets at fair value

20% to 50% Investment in associates
51% to 100% Investment in subsidiary
Contractually agreed sharing of control Investment in Joint Venture

Investment in Associates:

Any of the following may provide evidence of the existence of significant influence:

A. representation on the board of directors or equivalent governing body of the investee;

B. participation in policy-making processes, including participation in decisions about dividends or
other distributions;
 C. material transactions between the entity and its investee;
D. interchange of managerial personnel; or
E. provision of essential technical information.

Accounting for Investment in Associates:

Investments in associates are accounted for using the equity method.

Under the equity method, the investment is initially recognized at cost and subsequently adjusted for
the investors share in the investee's changes in equity (e.g, profit or loss, dividends and other
comprehensive income).

Accounting for Investment in Associates:

Share in associate’s Effect on investment in associate Effect on investment income

a. Profit or loss - Increase for share in profit/ - Increase for share in profit, decrease for share
decrease for share in loss in loss

b. Dividends - decrease - No effect

c. Other comprehensive income - Increase for share in gain/ - No effect; the shares in OCI is included in the
decrease for share in loss investor’s OCI

Application of the Equity Method:

An investor starts using the equity method as from the date when it obtains significant influence or joint
control over an investee.

On acquisition, the difference between the cost of the investment and the entity's share in the net fair
value of the investee's identifiable assets and liabilities is accounted for as follows:

 If cost is greater than the fair value of the interest acquired, the excess is goodwill.
 If cost is less than the fair value of the interest acquired, the deficiency is included as income in
determining the entity's share in the investee's profit or loss in the period of acquisition.

Investee’s Financial statements and Accounting policies:

 When applying the equity method, the investor uses the investee's most recent financial
statements.
 When the reporting periods of the investee and the investor do not coincide,

-the investee shall prepare financial statements that coincide with the investor's reporting period for
purposes of applying the equity method.

Adjustments shall be made for significant transactions and events that occur between the end of the
investee's reporting period and that of the investors.

Investee’s Financial statements and Accounting policies:

  The difference between the investor's and investee's end of reporting periods shall not exceed
three months.
 Uniform accounting policies shall be used.
 If the investee uses different accounting policies, its financial statements need to be adjusted
before the investor uses them, for purposes of applying the equity method.

Cumulative preference shares:

If the investee has outstanding cumulative preference shares that are held by parties other than the
investor and classified as equity, the investor computes its share of profits or losses after deducting one-
year dividends on those shares, whether declared or not.

Shares in Losses:

The investor shares in the investee's losses only up to the amount of its interest in the associate or joint
venture.

Interest in the associate or joint venture includes the following:

A. Carrying amount of the investment in associate/joint venture

B. Investment in preference shares of the associate/joint venture
C. Unsecured, long-term receivables or loans Interest in the associate or joint venture does not
include or loans trade receivables and payables and secured long-term receivables

Exemptions from applying the Equity method:

 An investor is exempt from applying the equity method if it is exempted from preparing
consolidated financial statements, e.g. the investor is a parent but is a subsidiary of another
parent and its securities are not being traded.
 Investments in associates and joint ventures held by an entity that is a venture capital
organization, mutual fund, unit trust, investment-linked insurance fund and similar entities may
be measured at fair value through profit or loss.

Classification as Held for sale:

 Investments in associates or joint ventures that are classified as held for sale in accordance with
PFRS 5 Non-current Assets Held for Sale and Discontinued Operation are accounted for using
that standard.
 If only a portion of the investment is classified as held for sale, the remaining portion is
accounted for using the equity method until the portion classified as held for sale is actually
sold.
 After the sale, the retained portion is accounted for under PFRS 9, unless significant influence or
joint control remains, in which case the equity method continues to be applied.
 If the investment previously classified as held for sale ceases to be so classified, it is accounted
for using the equity method retrospectively from the date of its classification as held for sale.
The prior year financial statements are restated accordingly.

Discontinuance of Equity method:

An entity stops using the equity method as from the date when it loses significant influence or joint
control over the investee. If the investment becomes a subsidiary, it is accounted for using PFRS 3
Business Combinations and PFRS 10 Consolidated Financial Statements.

If the investment becomes a regular investment, it is accounted for using PFRS 9. The fair value of the
retained interest is regarded as its fair value on initial recognition under PFRS 9.

The difference between the following is recognized in profit or loss:

 the fair value of the retained interest and any proceeds from disposing part of the investment;
and
 the carrying amount of the investment at the date the equity method was discontinued.

If an investment in associate becomes an investment in joint venture or vice versa, the entity continues
to apply the equity method and does not remeasure the retained interest.

When the equity method is discontinued, all amounts previously recognized in other comprehensive
income in relation to the investment are either reclassified to profit or loss as a reclassification
adjustment or transferred directly to retained earnings.

If ownership interest is reduced but significant influence or joint control is not lost, only a proportionate
amount of the OCI

Investment in Joint Venture:

The investor uses PFRS 11 Joint Arrangements to determine whether its interest in a joint arrangement
is an investment in joint venture.

If this is so, the investor accounts for the investment in joint venture in accordance with PAS 28 i.e.,
using the equity method similar to an investment in associate.