Accounting for Investments in Associates (IAS 28)

15th july 2015

Wednesday, thank God, cds day. Time to rest and chill. Woke up at around 7.30. The sleep was delicious eehn, then my mum came to spoil show and reminded me that i had to go for my Cds before 9.00 clock. So I woke up, had my bath and breakfast and dashed off. I got to my Lga by 9.30 and they had not started anything serious, we were waiting for the gender desk president to arrive. Finally, he came around 10, we had a brief meeting, signed our cds cards and we were off. Then I called my friend, telling her that we should hang out. we were from the same department in school, and she is also serving in Lagos state. Then we went to visit another friend who was also a colleague.

We got to her friends place, she entertained us and we had a lot of fun gisting. It was getting late and I had to go and rest in order to prepare for work the following day. I got to my bustop, waved goodbye to her, got home and slept off. I woke up 2hours later and then read about Accounting for associates in the dark because almighty Phcn had taken the light away. This is a brief summary, please enjoy.

Accounting for Associates

An associate company is an entity including an incorporated entity such as a partnership over which an investor has significant influence over another company without the company being its subsidiary nor an interest in joint venture. Associate have between 20 % to 50 % holding in an invested company. If it has more than 50% holding, then the company invested in becomes its subsidiary.

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 those policies. The accounting standard that covers associates is the IAS 28 (Accounting for associates). IAS 28 requires all investments in associates to be accounted for in the consolidated accounts using the equity method, unless the investment is classified as held for sale in accordance with IFRS5 in which case it should be accounted for under IFRS 5.

The equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee.
An investor is exempt from applying the equity method if ;

• It is a parent exempt from preparing consolidated financial statements under IAS27,
• If the investor is a wholly owned subsidiary or it is a partially owned subsidiary of another entity and its owners, including those not otherwise entitled to vote have been informed about, and do not object to the investor not applying the equity method.
• The investors securities are not publicly traded.
• It is not in the process of issuing securities in public securities markets.
• The ultimate or intermediate parent publishes consolidated financial statements that comply with international financial reporting standards.

In a situation whereby an investee company finds it difficult to transfer funds to investors due to severe long term restrictions or any other factor, the investor is required under the revision version of IAS 28 to prepare the holdings of the associate in the consolidated accounts using the equity method.

If an investor issues consolidated financial statements because it has subsidiaries, an investment in an associate should be either accounted for at cost or in accordance with Ifrs 9 (at fair value).

To apply the equity method, the investing company for example ABC should take account of its share of the earnings of the associate XYZ. Whether or not XYZ distributes the earnings as dividends. ABC achieves this by adding to consolidated profit of the group. In equity accounting under associates, the associate’s sales revenue, cost of sales and so on are not joined together with those group , unlike equity method under subsidiaries. The group share only of the associate’s profit after tax is added to the group profit.

Under the consolidated statement of financial position, a figure for investment in associates is shown which at the time of the acquisition must be stated at cost. At the end of each accounting period the group share of the retained reserves of the associate is added to the original cost to get the total investment to be shown in the consolidated statement of financial position.

 

Recommended Readings

Abbas A Mirza., Graham Holt., Liesel Knorr., Wiley IFRS: Practical Implementation Guide and Workbook

Dieter Christian., Nobert Ludenbach., IFRS Essentials