Scope of IAS 28
IAS 28 is a go-to standard when it comes to accounting for investments in associates. It also applies to equity accounting for investments in joint ventures, but joint ventures in general are covered in IFRS 11. Equity accounting is applicable in consolidated financial statements. Separate financial statements are covered in IAS 27, which lists equity accounting as one of the alternatives, but accounting at cost is also allowed (and most common). However, if an investor does not have any subsidiaries, but has interest in associates and/or joint ventures, IAS 28 effectively requires to prepare financial statements where these investments are equity accounted even though such statements will not be consolidated financial statements (as there are no subsidiaries to consolidate). Such financial statements are often called ‘economic interest’ financial statements.
IAS 28 requires accounting for investments in associates or joint ventures using the equity method (‘equity accounting’), unless the exemption similar to IFRS 10.4a applies (IAS 28.17).
Additional exemption relates to investments in associates held by or through venture capital organisations, mutual fund and similar entities (IAS 28.18-19).
Associate and significant influence
An associate is defined as an entity over which the investor has significant influence. Significant influence is 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 concept of control is covered in IFRS 10 and joint control in IFRS 11. There is direct link between definitions of control and significant influence, because IAS 28 was not revised after IFRS 10 with new definition of control was issued.
IAS 28 states that the threshold of 20% of the voting power (held directly or indirectly through subsidiaries) normally decides whether an investor has significant influence over an investee, unless it can be clearly demonstrated that this is not the case (IAS 28.5). Paragraph IAS 28.6 lists examples of circumstances that can be considered as an evidence that significant influence exists.
Circumstances where an investor, despite holding 20%+ of the voting power, does not have significant influence, usually revolve around controlling interest of an investee that blocks the participation of the investor in question (e.g. denies a seat in the board). This will also depend on local law and corporate governance codes. It is also helpful to look at the criteria for assessment of control in IFRS 10 and apply some analogy (e.g. how other shareholders are dispersed, what is the purpose and design of the investee) to assessing significant influence in ambiguous circumstances.
When an investor holds less than 20% of the voting power, it also can be demonstrated that 20% threshold is overridden by other factors and investor is able to exercise significant influence. Again, the actions of controlling interest and local law or corporate governance codes will play important role in this assessment.
Potential voting rights
When assessing the voting power, potential voting right held by the investor and other entities should be taken into account (IAS 20.7-8). Although IAS 28 does not mention it specifically, entities can refer to IFRS 10 guidance on potential voting rights. IASB did not want to expand this aspect of equity accounting without broader review of accounting for associates and joint ventures (IAS 28.BC15-BC16).
However, investor’s share when applying equity method (see below) is determined based on existing ownership interest, i.e. potential voting rights are not taken into account unless they are an existing ownership in substance (IAS 28.12-13).
See equity method.
Classification as held for sale
Paragraphs IAS 28.20-21 provide specific requirements on a classification of an investment in associate/JV as an asset held for sale under IFRS 5.
Paragraph IAS 28.21 requires retrospective adjustment when an investment, or a portion of an investment, in an associate or a joint venture previously classified as held for sale no longer meets the criteria to be classified as held for sale.
Presentation in financial statements
Investments accounted for using the equity method should be presented as non-current assets (IAS 28.15) in a separate line in the statement of financial position (IAS 1.54e). Similarly, share of the profit or loss of associates and joint ventures accounted for using the equity method should be presented separately in P/L and OCI (IAS 1.82c).There is no guidance as to in which section of the P/L this line should go and entities have different approaches here (e.g. within operating income, just before income tax etc.).
Financial assets that, in substance, form part of the entity’s net investment in an associate/JV are accounted for under IFRS 9 and are not included in the line presenting investments accounted for using the equity method (although there is no explicit guidance in IFRS).
IFRS 12 is a comprehensive standard that covers all disclosure requirements relating to interests in other entities.
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Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). The information provided on this website does not constitute professional advice and should not be used as a substitute for consultation with a certified accountant.