Chapter 8 Investments in Associates (IAS 28)
â–
97
Different measurement bases can be applied in consolidated financial statements to portions of an investment in an associate when part of the investment is designated at initial recognition as at fair value through profit or loss in accordance with the scope exception. For example: entity X holds 20 percent in associate A and equity accounts for the investment as it is within the scope of IAS 28. Entity Y also holds 20 percent in associate A but it is outside of the scope of IAS 28 as Entity Y is an insurance company and the investment is part of an investment-linked insurance fund. Entity Y therefore accounts for the investment per IAS 39 at fair value through profit or loss. Both entities X and Y are consolidated by entity Z. Collectively the group holds 40 percent in associate A. At group level, the overall investment of 40 percent is not equity accounted per IAS 28. The two portions are recognized in line with the treatment in the underlying subsidiary’s financial statements. This would only apply if the sum of the portions does not exceed 50 percent of the shareholding in the investee. If the sum of the portions exceeds 50 percent, the investee should be consolidated in terms of IAS 27. Different measurements would also not apply if the investees are joint ventures.
8.7.4 If an investment in an associate is designated at fair value through profit or loss in terms of the scope exemption in the stand-alone financial statements, it continues to be recognized at fair value in the consolidated financial statements. The current standard is unclear whether the same principle would apply if within the consolidated group there is more than one investment in the same associate. The IASB has clarified the matter; refer to 8.7.3 above.
8.8
IMPLEMENTATION DECISIONS In order to implement IAS 34 and develop the information management systems that will allow a smooth transition to this standard, management needs to make strategic implementation choices, which will facilitate ongoing tactical choices. The table below sets out some of the strategic and tactical decisions that should be considered when applying IAS 34:
Strategic decisions
Tactical decisions
Problems to overcome
Investments in associates must be identified by applying the definition of significant influence.
Processes must be in place to identify such transactions. Intention and related accounting effects that could arise must be considered when entering into investment transactions.
Significant influence is based on substance over legal form and all circumstances should be carefully considered to identify the true substance of the transaction.
Where separate financial statements are prepared, an accounting policy decision must be made for the measurement of the investment.
A policy decision must be made as to whether such investments will be carried at cost or as per IAS 39. When making the decision all the implications should be considered, for example the profit or loss volatility of the investment is recognized at fair value through profit or loss.
Care must be taken in applying IAS 39 with regards classification. The accounting policy chosen could have various implications with regards issues such as future impairments that may arise, income statement volatility, and so forth.
Where consolidated financial statements are prepared, ensure that the information required for equity accounting is available.
Processes must be in place to ensure that the entity has access to all the financial information for each associate at the relevant reporting date and that the information complies with the investor’s accounting policies and are reliable.
Incorrect, inconsistent, or outdated information.