Accounting for Associates, Joint

Arrangement and Equity Basis of

Accounting (CHAPTER 14)
MFRS 128 Investment in Associates and
Joint Ventures

DEFINITION OF AN ASSOCIATE
MFRS

128 defines an associate

as an entity over which the
investor has significant
influence.

INVESTMENT IN ASSOCIATES
Significant Influences
Investor

has significant influence over the investee if

holds directly or indirectly 20% or more of the voting power.

Significant

influence = evidenced by participation in the

financial and operating policy decisions of the investee but
not control of those policies.

An

investor may exercise significant influence in several

ways, usually:

1)
2)
3)
4)
5)

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.

Potential Voting Shares

The

existence and effect of potential voting shares

(share options, warrants, or convertible instruments)
that are currently exercisable or convertible should be
considered in determining whether investor has
significant influence or not.

For

example,

investor AB holds 150,000 OSC out of one million shares@RM1

of ACE
AB also has share options that it can exercise at any time
=150,000 shares in ACE.
If exercise, AB will hold 300,000 in total out of 1,150,000
shares @RM1 of ACE.
AB not yet hold 26% or more of the voting shares of ACE
(150/1000 = 15%) in ACE but AB need to treat ACE as its
ASSOCIATE (300/1150 = 26%)

Loss Of Significant
Influence
An

investor loses significant

influence when it loses the
power to participate in the
financial and operating policy
decisions of that investee.

This

loss of significant
influence may be lost with or
without a change of ownership.

ACCOUNTING TREATMENT OF
ASSOCIATES
1) Accounting in the Investors Own Financial
Statements
MFRS128 requires the investor to account for
the associate, which is not held for sale, at
cost or in accordance to MFRS 139 in its own
financial statements.
2) Accounting in the Investors Consolidated
Financial Statements
In the consolidated financial statements the
associate is accounted for using the equity
method

EQUITY METHOD
The

investment in associate or joint venture is initially

recognised 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 investors share of the investees
profit or loss is recognised in the investors profit or loss.

The

increases and decreases to the carrying amount of the

investment will also include the investors share of changes to the
investees other comprehensive income, (e.g. revaluation of
property, plant and equipment, etc). The investors share of these
changes will be recognised in the investors other comprehensive
income.

Equity

method = a method of accounting hereby the investment

is initially recognized at cost and adjusted thereafter for the postacquisition change in the investors share of the investees profit or
loss, and the investors other comprehensive income includes its
share of the investees othe comprehensive income.

EQUITY METHOD
Dividends

and other distributions from the

investee reduce the carrying amount of the
investment.

The

carrying amount of the investment in

associate or joint venture is disclosed as noncurrent asset unless the investment is classified

as held for sale in accordance with MFRS5.

Investmentatcost
Add:
Post-acquisitionprofitorloss
Post-acquisition share in other comprehensive
income
Dividends
Impairmentofgoodwill
Carryingamount

xxx

xxx
xxx

(xxx)
(xxx)
Xxx

Exemptions from Applying the

Equity Method

MFRS12 requires an entity is to account for its investment in the joint

venture or associate using the equity method.

a)

The investor is exempted from applying the equity method if the

entity is a parent that is exempt from preparing consolidated financial
statements; or

b)

When all of the following apply:

The entity itself is a wholly owned subsidiary, or is partially-owned

subsidiary and the other owners were informed and do not object to the
parent not presenting consolidated financial statements.

The entitys debt or equity instruments are not traded in a public market
(not a listed entity).

The entity 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 produced

consolidated financial statements.

The investment is classified as held for sale in accordance with MFRS 5

Non-current Assets Held for Sale and Discontinued Operations,

Discontinuing the Use of the

Equity Method
The

entity is to discontinue the use of equity method from the date

the investment ceases to be an associate or joint venture when:

a)

The investment becomes a subsidiary, in which case it will be

accounted in accordance with MFRS3 Business Combinations and
MFRS 10 Consolidated Financial Statements.

b)

The residual interest in the investment is a financial asset, in

which case it will be measured at fair value. This occurs when the
joint control or significant influence is lost such as where a
substantial interest in the investee is disposed. The fair value of
the investment on the date that it ceases to be an associate or
joint venture will be the deemed cost on initial measurement as a
financial asset under MFRS 139. The difference between the fair
value and carrying amount (under equity method) will be
recognised as part of the gain on the disposal of the portion not
retained.
The entity discontinues the use of the equity method.

c)

JOINT ARRANGEMENT
A

joint arrangement = is an
economic arrangement where
there are two or more parties
who have joint control.

MFRS11

Joint Arrangements
establishes the principles for
financial reporting by parties to
joint arrangements.

According to MFRS 11, the following characteristics identifies a

joint arrangement:
A. The parties are bound by a contractual arrangement (e.g.
writing, form of contract or documented discussions between
the parties). The terms of the arrangements could be
incorporated into the articles, charter or by-laws of the parties
with the vested interest in the joint arrangement. Some of the
areas covered by the contractual arrangement are:

B.

The activity, duration and reporting obligations of the joint arrangement,

The appointment of the board of directors or equivalent governing body
and voting rights of the venturers,
The decision making process such as voting rights, matters requiring
decision by the parties and the required level of support for those
matters.
Capital or other contribution by the parties, and
Manner of sharing among the parties of the joint arrangements assets,
liabilities, revenue, expenses, profits or losses.

The contractual arrangement gives two or more of the

parties joint control of the arrangement.

Joint Control
Joint

control exists where the parties

contractually agree to share control
and, decisions about the relevant
activities of the joint arrangement have
the unanimous consent of all the
parties sharing control. The parties have
to assess the extent to which the parties
should act together to direct the
activities that significantly affect the
returns of the joint arrangement.

No

single
party
controls
the
arrangement on its own but a party to

Joint Control
There

could be parties that do

not have joint control. For
example four parties have an
interest in a joint arrangement.
Three of the four parties have
joint control and one does not.
The party that does not have
joint control is a party that
participates in but has no joint
control.

Joint Control
Example 1
A(40%), B(30%) and C(30%) are parties to an
arrangement. The contractual agreement
between the three is that at least 80% voting
rights are required to make decisions about the
relevant activities of the arrangement. In this
case all three have joint control as all three
have to agree on the decision.

Joint Control
Example 2
A(60%), B(30%) and C(10%) are parties to
an
arrangement.
The
contractual
agreement between the three is that at
least 80% voting rights are required to
make decisions about the relevant activities
of the arrangement. In this case A and B
have joint control as A needs the consent of
B to make decisions about the relevant
activities. C has no joint control though a
party to the joint arrangement.

Types of Joint
Arrangement

According to the standard, there are 2 types of joint

arrangements :
1. Joint operation and
2. Joint venture.
)The

classification as to whether the joint arrangement is a

joint operation or a joint venture depends on the rights and
obligations of the parties to the arrangement. The terms of
the contractual arrangements are crucial in deciding
whether it is a joint operation or a joint venture.

)The

venturer determines the type of joint arrangement it is

involved in.

)MFRS

11 includes a table of issues that aid in classifying the

joint arrangement as a joint operation or a joint venture.


The
termsof
contract
ual
arrange
ment

Jointoperation
The parties to the arrangement have
rights to the assets, and obligations for
the
liabilities
relating
to
the
arrangement.

Jointventure
The parties to the arrangement have rights
to the net assets. The separate vehicle
(entity) that has the rights to the assets,
and obligations for the liabilities relating
to the arrangement.

Rightsto The parties to the arrangement share all

the
interests (e.g. rights, title or ownership)
assets
in the assets relating to the arrangement
in a specified proportion (e.g. in
proportion to the parties ownership
interest in the arrangement or in
proportion to the activity carried out
through the arrangement that is directly
attributed to them).

The assets brought into the arrangement or

subsequently acquired by the joint
arrangement are the arrangements assets.
The parties have no interest (i.e. no rights,
title or ownership) in the assets of the
arrangement.


Obligatio
nsforthe
liabilities

Jointoperation
The parties to the arrangements share all
liabilities, obligations, costs and expenses in a
specified proportion (e.g. in proportion to the
parties ownership interest in the arrangement
or in proportion to the activity carried out
through the arrangement that is directly
attributed to them).

Jointventure
The joint arrangement is liable for the debts and
obligations of the arrangements.
The parties are liable to the arrangement to the
extent of:
Their respectiveinvestment, or
Their obligationtocontributeanyunpaid
oradditionalcapital, or
Both

The parties to the arrangement are liable for Creditors of the arrangement do not have rights
claims raised by third parties.
of recourse against any party for debts or
obligations of the arrangement.
Revenue,
expenses,
profitor
loss

The contractual arrangement establishes The contractualarrangement establishes each

the allocation of revenue and expenses on partys share in the profitorloss relating to the
the basis of the performance of each party. activities of the arrangements.
(For example revenue and expenses may be
allocated on the basis of the capacity that
each party uses in a plant operated jointly
regardless of ownership interest). In some
cases revenue and expenses may be allocated
in specified proportion.

Guarante The provision of guarantees to third parties, or the commitment by the parties is not a
es
determining factor.

Joint Operation
The

operation can be structured either

through a separate entity (or vehicle) or no
separate vehicle or entity is established.

In

a joint operation, the venturers, called

joint operators, have rights to the assets
and obligations to the liabilities of the
arrangement.

In

joint operation, the operators will

recognise in their own financial statements
their interests in the assets, liabilities,
revenue and expenses in the joint

Joint Operation
E.g

three friends decide to buy, recondition and

sell secondhand cars. One party may source for
old cars, another repairs and reconditions and
the third undertakes the selling process. At the
end of the reporting period a memorandum
statement of comprehensive income may be
prepared to determine the share of profits of
each venturer. In the separate financial
statements and in the consolidated financial
statements the operator will have to disclose
the assets it controls and the liabilities it incurs
together with its share of revenue and expenses
it incurs in relation to the joint venture.

Joint Operation
A

common arrangement is the use by the

operators of a common asset such as a gas
pipeline. A few companies may jointly
operate an oil pipeline to transport their
own oil.

In

the separate financial statements and in

the consolidated financial statements the
operators will have to disclose its share of
the jointly controlled assets, liabilities it has
incurred, share of revenue and share of
expenses, etc.

Joint Venture
This

form of joint venture involves the

establishment of a separate entity which
could be a company, partnership or any
other form of entity.

The

entity set up operates as a separate

business operation except that the
venturers have joint control over the joint
venture. The joint venture will have its own
set of accounts and prepare its own set of
financial statements. The venturers are
entitled to a share of the results of the joint
venture. For the venturer its contribution to
the joint venture will be disclosed as an

Joint Venture
For

example, if a company was established as a

joint venture, the share capital will be contributed
by the venturers and the share capital in the joint
venture will be held by the individual venturer,
which will be disclosed as investment in the
separate financial statements.

In

their own financial statements the venturers are

to disclose their interest in the joint venture as
financial assets and measured in compliance with
MFRS139. The venturer is to account for the
interest in the joint venture in its separate financial
statement, which is not held for sale, at cost or in
accordance with MFRS 139.

In

the consolidated financial statements the