IAS 28 Investments in Associates and Joint Ventures addresses the application, with certain exceptions, of the equity method for investments in associates and joint ventures.
The standard also defines an associate by reference to the concept of “significant influence,” which requires the power to participate in the financial and operating policy decisions of the investee (but not to control or jointly control those policies).
1. Key Issues to Note During Transition
| Content | IFRS | VAS |
| IAS 28 – Investments in Associates and Joint Ventures | ||
| Objective | The objective of this Standard is to prescribe the accounting for investments in associates and to set out the requirements for applying the equity method when accounting for investments in associates and joint ventures. | This issue is addressed in VAS 7 and VAS 8. The objective of this standard is to prescribe the accounting policies and procedures for investments in associates, including the recognition of investments in associates in the investor’s separate financial statements and consolidated financial statements, serving as the basis for accounting, preparation, and presentation of financial statements. |
| Significant Influence | Significant influence is presumed when the investor has the power to participate in the financial and operating policy decisions of the investee but does not control or jointly control those policies (typically when holding more than 20% but less than 50% ownership). | |
| The existence and effect of currently exercisable or convertible potential voting rights, including potential voting rights held by other entities, shall be considered when assessing whether the entity has significant influence. | Not addressed. | |
| Equity Method | Under the equity method, the investment is initially recognized at cost. Subsequently, the carrying amount of the investment is adjusted to reflect the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the investee’s profit or loss is recognized in the investor’s profit or loss. Distributions received from the investee reduce the carrying amount of the investment. Adjustments to the carrying amount are also required when the investor’s share of changes in the investee’s equity arises from items recognized in the investee’s other comprehensive income. Such changes in the investee’s equity may include revaluations of property, plant, and equipment and foreign exchange translation differences. These changes in the value of the investment are recognized in the investor’s other comprehensive income. If the investor’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, the investor discontinues recognizing its share of further losses. After the investor’s interest is reduced to zero, additional losses and liabilities are recognized only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, the investor resumes recognizing its share of those profits only after its share of the profits equals the share of losses not recognized. | |
| Discontinuing the Use of the Equity Method | An entity shall discontinue the use of the equity method from the date it ceases to have an investment in the associate or joint venture if: (a) The investment becomes an investment in a subsidiary, in which case the entity shall account for the investment in accordance with IFRS 3 Business Combinations and IFRS 10. (b) If the retained interest in the former associate or joint venture is a financial asset, the entity shall recognize the retained interest at fair value. The fair value of this retained interest is regarded as the fair value at initial recognition of the financial asset in accordance with IFRS 9. (i) The fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture; and (ii) The carrying amount of the investment at the date the equity method is discontinued. (c) Upon discontinuing the use of the equity method, the entity shall recognize all amounts previously recognized in other comprehensive income related to the investment on the same basis as would be required if the investee had directly disposed of the related assets or liabilities. | The standard stipulates that the carrying amount of the investment at the date the investor ceases to account for the investment in the associate or joint venture shall be regarded as the new cost basis.
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| Changes in Ownership Interests | If the investor’s ownership interest in an associate or joint venture is reduced but the investment continues to be classified as an investment in the associate or joint venture, the entity shall reclassify to profit or loss the proportion of gains or losses previously recognized in other comprehensive income relating to the reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities. | Not addressed. |
| Exceptions to Applying the Equity Method for Investments in Associates | An entity is not required to apply the equity method to its investment in an associate or joint venture if the entity is a parent exempted from preparing consolidated financial statements under the exemption in paragraph 4(a) of IFRS 10 or if all the following conditions are met: (a) The entity is a wholly-owned subsidiary or a partially-owned subsidiary of another entity, and its other owners, including those not otherwise entitled to vote, have been informed and do not object to the entity not applying the equity method. (b) Its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets). (c) The entity is not filing, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market. (d) The ultimate or any intermediate parent of the entity produces publicly available consolidated financial statements that comply with IFRS, in which subsidiaries are either consolidated or measured at fair value through profit or loss in accordance with IFRS 10. | Exceptional Cases: (a) The investment is acquired and held exclusively with a view to its disposal in the near future (within 12 months); or (b) The investment in the associate operates under severe long-term restrictions that significantly impair the ability to transfer funds to the investor. In such cases, the investment in the associate is accounted for in the consolidated financial statements using the cost method. |
| Separate Financial Statements of the Investor | Investments in joint ventures and associates are accounted for in the investor’s separate financial statements in accordance with the guidance of IAS 27 Separate Financial Statements. | Investments in associates are presented only using the cost method in the investor’s separate financial statements. |
2. Tasks to Be Performed
- Ensure that the accounting department is well-trained to apply IAS 28.
- Review the implementation roadmap for IFRS at the Company and its joint ventures and associates.
