IFRS 9 Financial Instruments s3

for Accounting Professionals

IAS 28 Investments in Associates and Joint Ventures

2011

www.banks2ifrs.ru

http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IFRS WORKBOOKS

(1 million downloaded)

Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.

The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills.

Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any additional knowledge is required this is mentioned at the beginning of the section.

Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the European Union.

We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers) who led the projects and all friends at Bankir.Ru for hosting the books.

TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and edited the first two versions. We are proud to realise his vision.

Robin Joyce

Professor of the Chair of

International Banking and Finance

Financial University

under the Government of the Russian Federation

Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011

CONTENTS

The main changes from the previous version of IAS 28 5

Introduction 6

Scope 7

Definitions 8

Significant influence 9

Equity method 12

Exemptions from applying the equity method 14

Classification as held for sale 16

Discontinuing the use of the equity method 16

Changes in ownership interest 20

Equity method procedures 21

Associate, or joint venture, has subsidiaries, associates or joint ventures 21

Intercompany transactions 22

Acquisition date 23

Reporting dates 24

Uniform accounting policies 24

Cumulative preference shares of the investee 25

Losses exceed investment in investee 25

Impairment losses 26

Separate financial statements 27

An investment in an associate, or a joint venture, shall be accounted for in the undertaking's separate financial statements in accordanceIAS 27. 27

Self-Test Questions 27

Answers 29

IAS 28 Investments in Associates and Joint Ventures effective date: 1 January 2013.

The main changes from the previous version of IAS 28 are as follows:

(1) The accounting for joint ventures has been incorporated into IAS 28.
(2) The scope exception for venture capital organisations, or mutual funds, unit trusts and similar undertakings, including investment-linked insurance funds has been eliminated and has been characterised as a measurement exemption from the requirement to measure investments in associates and joint ventures in using the equity method.
(3) IAS 28 now permits an undertaking that has an investment in an associate, a portion of which is held indirectly through venture capital organisations, or mutual funds, unit trusts and similar undertakings including investment-linked insurance funds, to elect to measure that portion of the investment in the associate at fair value through profit or loss in accordance withIFRS 9regardless of whether these undertakings have significant influence over that portion of the investment.
(4) IAS 28 requires a portion of an investment in an associate, or a joint venture, to be classified as held for sale, if the disposal of that portion of the interest would fulfil the criteria inIFRS 5.
(5) Gains and losses resulting from a contribution of a non-monetary asset to an associate, or a joint venture, in exchange for an equity interest in an associate, or a joint venture, are recognised only to the extent of unrelated investors' interests in the associate, or joint venture, except when the contribution lacks commercial substance, as that term is described inIAS 16.
(6) The disclosure requirements have been placed inIFRS 12.

Introduction

IAS 28 prescribes the accounting for investments in associates, and sets out the requirements for the application of the equity method, when accounting for investments in associates and joint ventures. (During the transition period to 2013, our earlier book covering IAS 28 will remain available.)

IAS 28 is to be applied by all undertakings that are investors with joint control of, or significant influence over, an investee.

IAS 28 defines significant influence as the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control of those policies.

IFRS 11Joint Arrangementsestablishes principles for the financial reporting of parties to joint arrangements. It defines joint control as the contractually-agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

An undertaking appliesIFRS 11to determine the type of joint arrangement in which it is involved. If it is a joint venture, the undertaking records an investment and accounts for it using the equity method, in accordance with IAS 28 (unless the undertaking is exempted from applying the equity method).

Equity method

IAS 28 defines the equity method as a method of accounting whereby:

- the investment is initially recognised at cost and

-adjusted thereafter for the post-acquisition change in the investor's share of net assets of the investee.

The profit or loss of the investor includes its share of the profit or loss of the investee, and the other comprehensive income of the investor includes its share of other comprehensive income of the investee.

An undertaking uses the equity method to account for its investments in associates, or joint ventures, in its consolidated financial statements.

An undertaking that does not have any subsidiaries also uses the equity method to account for its investments in associates, or joint ventures, in its financial statements, even though those are not described as consolidated financial statements.

The only financial statements to which an undertaking does not apply the equity method are separate financial statements it presents in accordance withIAS 27Separate Financial Statements.

Exemptions from applying the equity method

IAS 28 provides exemptions from applying the equity method similar to those provided inIFRS 10for parents not to prepare consolidated financial statements.

IAS 28 also provides exemptions from applying the equity method when the investment in the associate, or joint venture is held by, or is held indirectly through, venture capital organisations, or mutual funds, unit trusts and similar undertakings including investment-linked insurance funds. Those investments in associates and joint ventures may be measured at fair value through profit or loss in accordance withIFRS 9 Financial Instruments.

Disclosure

The disclosure requirements for undertakings with joint control of, or significant influence over, an investee are specified inIFRS 12Disclosure of Interests in Other Undertakings.

Scope

IAS 28 shall be applied by all undertakings that are investors with joint control of, or significant influence over, an investee.

Definitions

Anassociateis an undertaking over which the investor has significant influence.

Consolidated financial statementsare the financial statements of a group in which assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic undertaking.

Theequity methodis a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets. The investor's profit or loss includes its share of the investee's profit or loss, and the investor's other comprehensive income includes its share of the investee's other comprehensive income.

Ajoint arrangementis an arrangement of which two or more parties have joint control.

Joint controlis the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Ajoint ventureis a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Ajoint ventureris a party to a joint venture that has joint control of that joint venture.

Significant influenceis the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control of those policies.

The following terms are defined in IAS 27 or IFRS 10:

● control of an investee

● group

● parent

● separate financial statements

● subsidiary.

Significant influence

If an undertaking holds, directly or indirectly (such as through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the undertaking has significant influence, unless it can be clearly demonstrated that this is not the case.

Conversely, if the undertaking holds, directly or indirectly, less than 20 per cent of the voting power of the investee, it is presumed that the undertaking does not have significant influence, unless such influence can be clearly demonstrated.

A substantial, or majority ownership, by another investor does not necessarily preclude an undertaking from having significant influence.

The existence of significant influence by an undertaking is usually evidenced in one, or more, of the following ways:

(1) representation on the board of directors, or equivalent governing body, of the investee;

(2) participation in policy-making processes, including participation in decisions about dividends, or other distributions;

(3) material transactions between the undertaking and its investee;

(4) interchange of managerial personnel; or

(5) provision of essential technical information.

Potential voting rights

An undertaking may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the undertaking additional voting power, or to reduce another party's voting power, over the financial and operating policies of another undertaking.

The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other undertakings, are considered when assessing whether an undertaking has significant influence. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised, or converted, until a future date (or until the occurrence of a future event).

The undertaking examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential rights.

EXAMPLES: SIGNIFICANT INFLUENCE

Owning 30% of an undertaking may provide significant influence, if the other shareholdings are smaller and in diverse hands. Our investor bought the 30% for a purpose and knew whether he/she would secure significant influence with the purchase.

Alternatively, holding a 30% interest when there is another shareholder with 70% may provide no significant influence, unless the 30% holder has something specific to offer, such as technical information.

Significant influence may be determined by the reason for the investment. It may become an issue for auditors when their client wishes to disclaim loss-making associates. This was an issue for Enron (US) which parked losses and liabilities in companies that did not appear in its financial statements.

Significant influence is also a key issue for IAS 24 Related Party Transactions.

Loss of significant influence

An undertaking loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with, or without, a change in absolute, or relative, ownership levels.

EXAMPLES: LOSS OF SIGNIFICANT INFLUENCE

When an associate becomes subject to the control of a government, court, administrator or regulator. It could also occur as a result of a contractual arrangement.

Equity method

On initial recognition, the investment in an associate, or a joint venture, is recorded at cost.

After the date of acquisition, the carrying amount is increased, or decreased, to record the investor's share of the profit or loss of the investee.

The investor's share of the investee's profit or loss is recorded in the investor's profit or loss.

Distributions (dividends) received from an investee reduce the carrying amount of the investment.

Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investee arising from changes in the investee's other comprehensive income (OCI).

Such OCI changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. The investor's share of those changes is recognised in the investor's other comprehensive income (seeIAS 1).

Instruments containing potential voting rights in an associate, or a joint venture, are accounted for in accordance withIFRS 9.

Unless an investment, or a portion of an investment, in an associate, or a joint venture, is classified as held for sale in accordance withIFRS 5, The investment, or any retained interest in the investment not classified as held for sale, shall be classified as a non-current asset.

EXAMPLE: EQUITY METHOD

Vera buys 25% of Lubov’s company for 250 on January 1. Vera is made a director and provides essential technical support.

The investment is recorded at cost (250). Lubov’s profits for the year are 100. Vera records her share of the profit as 25. She debits investment in associate 25 and credits income from associates 25 (even though there is no dividend).