INVESTMENTS IN ASSOCIATES

Investments in Associates

Scope of this section

14. 1 This section applies to accounting for associates in consolidated financial statements and in the financial statements of an investor that is not a parent but that has an investment in one or more associates. Paragraph 9.26 establishes the requirements for accounting for associates in separate financial statements.

Associates defined

14. 2 An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.

14. 3 Significant influence is the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies:
    1. if an investor holds, directly or indirectly (for example, through subsidiaries), 20 per cent or more of the voting power of the associate, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case;
    2. conversely, if the investor holds, directly or indirectly (for example, through subsidiaries), less than 20 per cent of the voting power of the associate, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated; and
    3. a substantial or majority ownership by another investor does not preclude an investor from having significant influence.

Measurement—accounting policy election

14. 4 An investor shall account for all of its investments in associates using one of the following:
    1. the cost model in paragraph 14.5;
    2. the equity method in paragraph 14.8; or
    3. the fairvaluemodel in paragraph 14.9.

Cost model

14. 5 An investor shall measure its investments in associates, other than those for which there is a published price quotation (see paragraph 14.7) at cost less any accumulated impairment losses recognised in accordance with Section 27 Impairment of Assets.

14. 6 The investor shall recognise dividends and other distributions received from the investment as income without regard to whether the distributions are from accumulated profits of the associate arising before or after the date of acquisition.

14. 7 An investor shall measure its investments in associates for which there is a published price quotation using the fair value model (see paragraph 14.9).

Equity method

14. 8 Under the equity method of accounting, an equity investment is initially recognised at the transaction price (including transaction costs) and is subsequently adjusted to reflect the investor’s share of the profit or loss and other comprehensive income of the associate:
    1. distributions and other adjustments to carrying amount. Distributions received from the associate reduce the carrying amount of the investment. Adjustments to the carrying amount may also be required as a consequence of changes in the associate’s equity arising from items of other comprehensive income.
    2. potential voting rights. Although potential voting rights are considered in deciding whether significant influence exists, an investor shall measure its share of profit or loss and other comprehensive income of the associate and its share of changes in the associate’s equity on the basis of present ownership interests. Those measurements shall not reflect the possible exercise or conversion of potential voting rights.
    3. implicit goodwill and fair value adjustments. On acquisition of the investment in an associate, an investor shall account for any difference (whether positive or negative) between the cost of acquisition and the investor’s share of the fair values of the net identifiable assets of the associate in accordance with paragraphs 19.22–19.24. An investor shall adjust its share of the associate’s profits or losses after acquisition to account for additional depreciation or amortisation of the associate’s depreciable or amortisable assets (including goodwill) on the basis of the excess of their fair values over their carrying amounts at the time the investment was acquired.
    4. impairment. If there is an indication that an investment in an associate may be impaired, an investor shall test the entire carrying amount of the investment for impairment in accordance with Section 27 as a single asset. Any goodwill included as part of the carrying amount of the investment in the associate is not tested separately for impairment but, instead, as part of the test for impairment of the investment as a whole.
    5. investor’s transactions with associates. The investor shall eliminate unrealised profits and losses resulting from upstream (associate to investor) and downstream (investor to associate) transactions to the extent of the investor’s interest in the associate. Unrealised losses on such transactions may provide evidence of an impairment of the asset transferred.
    6. date of associate’s financial statements. In applying the equity method, the investor shall use the financial statements of the associate as of the same date as the financial statements of the investor unless it is impracticable to do so. If it is impracticable, the investor shall use the most recent available financial statements of the associate, with adjustments made for the effects of any significant transactions or events occurring between the accounting period ends.
    7. associate’s accounting policies. If the associate uses accounting policiesthat differ from those of the investor, the investor shall adjust the associate’s financial statements to reflect the investor’s accounting policies for the purpose of applying the equity method unless it is impracticable to do so.
    8. losses in excess of investment. If an investor’s share of losses of an associate equals or exceeds the carrying amount of its investment in the associate, the investor shall discontinue recognising its share of further losses. After the investor’s interest is reduced to zero, the investor shall recognise additional losses by a provision(see Section 21 Provisions and Contingencies) only to the extent that the investor has incurred legal or constructive obligations or has made payments on behalf of the associate. If the associate subsequently reports profits, the investor shall resume recognising its share of those profits only after its share of the profits equals the share of losses not recognised.
    9. discontinuing the equity method. An investor shall cease using the equity method from the date that significant influence ceases:
       1. if the associate becomes a subsidiary or joint venture, the investor shall remeasure its previously held equity interest to fair value and recognise the resulting gain or loss, if any, in profit or loss.
       2. if an investor loses significant influence over an associate as a result of a full or partial disposal, it shall derecognise that associate and recognise in profit or loss the difference between, on the one hand, the sum of the proceeds received plus the fair value of any retained interest and, on the other hand, the carrying amount of the investment in the associate at the date significant influence is lost. Thereafter, the investor shall account for any retained interest using Section 11 Basic Financial Instruments and Section 12 Other Financial Instrument Issues, as appropriate.
       3. if an investor loses significant influence for reasons other than a partial disposal of its investment, the investor shall regard the carrying amount of the investment at that date as a new cost basis and shall account for the investment using Sections 11 and 12, as appropriate.

Fair value model

14. 9 When an investment in an associate is recognised initially, an investor shall measure it at the transaction price. Transaction price excludes transaction costs.

14. 10 At each reportingdate, an investor shall measure its investments in associates at fair value, with changes in fair value recognised in profit or loss, using the fair value measurement guidance in paragraphs 11.27–11.32. An investor using the fair value model shall use the cost model for any investment in an associate for which fair value cannot be measured reliably without undue cost or effort.

Financial statement presentation

14. 11 An investor shall classify investments in associates as non-current assets.

Disclosures

14. 12 An entity shall disclose the following:
    1. its accounting policy for investments in associates;
    2. the carrying amount of investments in associates (see paragraph 4.2(j)); and
    3. the fair value of investments in associates accounted for using the equity method for which there are published price quotations.

14. 13 For investments in associates accounted for by the cost model, an investor shall disclose the amount of dividends and other distributions recognised as income.

14. 14 For investments in associates accounted for by the equity method, an investor shall disclose separately its share of the profit or loss of such associates and its share of any discontinued operations of such associates.

14. 15 For investments in associates accounted for by the fair value model, an investor shall make the disclosures required by paragraphs 11.41–11.44. If an investor applies the undue cost or effort exemption in paragraph 14.10 for any associates it shall disclose that fact, the reasons why fair value measurement would involve undue cost or effort and the carrying amount of investments in associates accounted for under the cost model.