Section 14

Investment in Associates
 Overview

• Scope
• Definition
• Accounting Policy Election
• Cost Model
• Fair Value Model
• IFRS for SMEs’ Equity Method
• Loss of Significant Influence
• Financial Statement Presentation
• Disclosure
• Differences between IFRS for SMEs and Full IFRS
 Scope
This guidance applies to the accounting for
investments in associates in both of the
following financial statements:
• Consolidated financial statements
• Individual financial statements, such as in the
financial statements of a nonparent entity,
which does not need to prepare consolidated
financial statements.
 Definition

“An associate is an entity

including an unincorporated entity
such as a partnership
over which the investor has
significant influence and that is
neither a subsidiary
nor an interest in a joint venture.”
 Definition

Significant
Significant
influence must Control
influence
be clearly presumed
presumed
demonstrated >50%
20-50%
<20%
 Definition
• More than one entity can have significant influence
over another entity at the same time. However, only
one entity can control another at a point in time. A
substantial or majority ownership by another
investor does not preclude an investor from having
significant influence.
• Significant influence is the power to participate in
the financial and operating policy decisions of the
associate but is not control or joint control over
those policies.
 Definition
• investor is usually evidenced in one or more of the
following ways (note, this is not an exhaustive list):
(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 investor and the
investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
 Potential Voting Rights

Exercisable potential voting

rights are considered in
determining significant
influence.
• EXAMPLE : Florence holds an 18% interest in
Venice. Florence also has an option to acquire a further
10% interest in Venice; no other shareholders have
such options. The options are exercisable at the
reporting date.
 Measurement
An investor shall account for all of its
investments in associates using one of the
following:
C
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s m
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 Measurement

The accounting policy choice is for all

investments in associates and not an investment-
by-investment policy choice.
 Cost Model
• The cost model option is not applicable to investments in
associates for which there is a published price quotation
available.
• When published price quotations are available, the fair
value or IFRS for SMEs’ equity method must be applied.
• investments in associates are measured at cost less any
accumulated impairment losses.
• Dividends or other distributions received from the
investment are recognized as income.
• No special treatment is required for pre-acquisition profit of
the associate.
 Example
• On January 1, 20X1, Cape Town purchased a
40% interest in Robben Island for $2,000,000.
• Robben Island generated a total profit after tax
for the periods ended December 31, 20X1 and
December 31, 20X2 of CU600,000 and
$1,200,000 respectively.
• On December 31, 20X1 and December 31,
20X2, Robben Island declared dividends of
$200,000 and $500,000 respectively.
 Example
• On 1 January 20X1 entity A acquired 30 per cent of
the ordinary shares that carry voting rights at a
general meeting of shareholders of entity B for
CU300,000
• (1). For the year ended 31 December 20X1 entity B
recognized a profit of CU400,000.
• On 30 December 20X1 entity B declared and paid a
dividend of CU150,000 for the year 20X1.
• At 31 December 20X1 the fair value of entity A’s
investment in entity B is CU425,000. However, there
is no published price quotation for entity B.
 Fair Value Model
• The investment in an associate is initially
measured at the transaction price, excluding
transaction costs.
• At subsequent reporting dates, the investment in
the associate is measured at fair value with
changes in fair value recognized in profit or loss
• An investor using the fair value model shall use
the cost model for any investment in an
associate for which fair value cannot be
measured reliably without undue cost or effort.
 Example
• On January 1, 20X1, Cape Town purchased a 40% interest
in Robben Island for $2,000,000. On December 31, 20X1
and December 31, 20X2, Robben Island declared dividends
of $200,000 and $500,000 respectively. Robben Island
generated a total profit after tax for the periods ended
December 31, 20X1 and December 31, 20X2 of $600,000
and $1,200,000, respectively. The price of a Robben Island
share is not publicly quoted, but management obtains the
following valuations, deemed to be the fair values, without
undue cost and effort:
• December 31 20X1 $2,500,000
• December 31 20X2 $2,400,000
 Equity Method
• An investment in associate is initially recognized at the
transaction price (including transaction costs), and is subsequently
adjusted to reflect the investor’s share of the profit or loss and
other comprehensive income of the associate.

The IFRS for SMEs’ equity

method is different to that in full
IFRS and is therefore referred to
as the IFRS for SMEs’ equity
method.
 Example
• On January 1, 20X1, Cape Town purchased a
40% interest in Robben Island for $2,000,000.
On December 31, 20X1 and December 31,
20X2, Robben Island declared dividends of
$200,000 and $500,000, respectively. Robben
Island generated a total profi after tax for the
periods ended December 31, 20X1 and
December 31,
 Loss of Significant Influence
• An investor ceases using the equity method
from the date that significant influence ceases.
• The accounting treatment then depends on the
subsequent classification of the investment:
 Loss of Significant Influence
1. If the associate becomes a subsidiary or JV,
the previously held equity interest is re-
measured to fair value and the resulting gain
or loss recognized in profit or loss.
• Carrying amount of the subsidiary + fair value
adjustment = consideration for combination.
 Loss of Significant Influence
• If an investor loses significant influence over an
associate as a result of a full or partial disposal, the
associate is derecognized and a profit or loss is
recognized as the difference between:
• The sum of the proceeds received plus the fair value
of any retained interest
• The carrying amount of the investment in the
associate at the date significant influence is lost
• The investor then accounts for any retained interest as
a financial instrument
 Presentation

• An investor shall classify investments in

associates as non-current assets.
 Disclosure
• An entity shall disclose the following:
a) its accounting policy for investments in
associates;
b) the carrying amount of investments in
associates; and
c) the fair value of investments in associates
accounted for using the equity method for
which there are published price quotations.
 IFRS for SMEs and Full IFRS
SME
Three measurement models are
provided–cost, equity accounting,
or fair value.
Transaction costs are specifically
included in cost, under the equity
method.
If significant influence is lost for
reasons other than the disposal of
the investment, the carrying amount
of the investment becomes the cost
for future recognition.
FULL
Only the equity method is allowed
No specific requirements regarding
transaction costs.
If significant influence is lost for
reasons
other than the disposal of the
investment, the fair value of the
investment becomes the initial
measurement basis for the financial
instrument.