IND AS 28 Investments in Associates and Joint Ventures

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Scope

• This Standard shall be applied in accounting for investments in associates and joint venture. However, it does not apply to investments in associates held by:

-Venture Capital Organizations

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Subsidiary Vs Associate

Investing Company

Control Significant Influence

Subsidiary Associate

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Definitions • Associates

An entity over which the investor has significant influence.

• 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 over those policies.

• Control

Control is the power to govern the Financial and Operating policies of an entity so as to obtain benefits from its activities.

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• Joint arrangement

Arrangement of which two or more parties have joint control.

• Joint Control

The contractually agreed sharing of control of an arrangement – decisions require the unanimous consent of the parties sharing control.

• Joint Venture

A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

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Definitions Contd…

Existence of Significant Influence

4. Inter-change of Managerial Personnel

one or more

following

criteria

1.Holding of ,directly or indirectly

(e.g through subsidiary(ies),

20%-50% of the voting Power

(including Potential voting power)

2. Representation in the Board of

Directors or equivalent governing

body.

3.Material transaction between

investor and investee

5. Provision of essential

Technical Information.

6.Participation in Policy making

processes

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Equity Method

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• Initial Recognition :- At cost

• carrying amount :-

i. Increased or decreased to recognize 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 Statement of profit or loss.

ii. Distributions received from an investee reduce the carrying amount of the investment.

iii. Other adjustments as per Equity method:-

Alteration in the Investor’s proportionate interest in the associate arising from changes in the Associate’s Equity, adjustment for the same should be made to the carrying amount through OCI (Eg. Changes arising from the revaluation of property, plant and equipment and from foreign exchange translation differences)

Equity method Continue….

iv) Goodwill and Capital Reserve:-

a) Goodwill relating to an associate is included in the carrying amount of the investment. However, amortization of that goodwill is not permitted.

b) Any excess of the entity’s share of the net fair value of the investee’s identifiable assets and liabilities over the cost of the investment is recognized directly in equity as capital reserve in the period in which the investment is acquired.

(The equity method is used from the date significant influence arises, to the date significant influence cease.)

Example of implication of Equity Method

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Potential Voting Rights

• The entity 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 Voting Rights.

• The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities are considered when assessing whether an entity has significant influence.

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Equity method procedures

A group’s share in an associate is the aggregate of the holdings in that

associate by the parent and its subsidiaries. The holdings of the group’s

other associates or joint ventures are ignored for this purpose.

When an associate and joint venture has subsidiaries, associates, or joint

ventures, the profits or losses, OCI and net assets taken into account in

applying the equity method are those recognised in the associate’s or joint

venture’s financial statements (ie; including the associate’s share of the

profits or losses and net assets of its associates and joint ventures), after any

adjustments necessary to give effect to uniform accounting policies.

If an associate has outstanding cumulative preference shares that are held

by parties other than the investor and classified as equity, the investor

computes its share of profits or losses after adjusting for the dividends on

such shares, whether or not the dividends have been declared.

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• Profits and losses resulting from "upstream" and "downstream" transactions between an investor (including its consolidated subsidiaries) and its associate or joint venture are recognised in the investor's financial statements only to the extent of unrelated investors' interests in the associate and joint venture.

• "Upstream" transactions are, for example, sales of assets from an associate to the investor.

• "Downstream" transactions are, for example, sales of assets from the investor to an associate.

• The investor's share in the associate's unrealised profits and losses resulting from these transactions is eliminated.

‘Upstream’ and ‘Downstream’ Transactions

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Different Reporting Date

The financial statements of an associate or a joint venture used in applying the equity method should be drawn up to the same reporting date.

If it is not practicable to draw up the financial statements to such date, adjustments should be made for the effects of significant transactions or other events that occur between those dates and the date of the parent financial statements.

However, the difference between reporting dates should not be more than 3 months unless it is impracticable to do so .

The Length of the reporting periods and any difference in the reporting periods and reporting dates shall be the same from period to period.

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Uniform Accounting Policies

Accounting policies of Investor

Equals to

=

Accounting policies of associate’s or joint venture’s for like transactions and event in similar circumstances

No adjustment

Adjustment shall be made to confirm associate’s / joint

venture’ accounting policies to those of the investor

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Yes No

Investor’s share of losses> Carrying amount

• If an investor’s share of losses of an associate equals or exceeds its interest in the associate, the investor discontinues recognizing its share of further losses.

• After the investor's interest is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate.

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Exemption from Equity method.

1

• Investor is a wholly owned subsidiary ands its owners have been informed about the decision.

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• The Investor’s debt or equity instrument are not publicly traded.

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• The Investor did not file its financial statement with the securities commission or the other regulator for the purpose of issuing its share to the public.

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• The ultimate or intermediate parent of the investor produces consolidated financial statements that comply with IND AS.

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Discontinue the use of Equity Method

• If an investment become a subsidiary, the entity follow the guidance in IND AS 103 and IND AS 110

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• If any retained investment is held as a financial assets, the entity applies IND AS 109 (recognize in P&L difference between FV of retained interest less proceeds from disposing of part interest in associate or JV)

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• Account for all amount recognized in OCI in relation to that investment on same basis as if investee has directly disposed of related assets and liabilities

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Topic

AS 23 – Accounting for Investments in Associates in Consolidated Financial Statements

Ind AS 28 – Investments in Associates and Joint Ventures

Significant Influence

Significant influence is the power to participate in the financial and/or operating policy decisions of the investee but not control over those policies.

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

Potential Equity Shares

Potential voting rights are not considered in assessing significant influence.

The existence and effect of potential voting rights that are currently exercisable or convertible, are considered when assessing significant influence.

Comparison

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Topic Indian GAAP IND AS

Equity Method

Existing AS 23 requires application of the equity method only when the entity has subsidiaries and prepares Consolidated Financial statements.

Ind AS 28 requires application of equity method in financial statements other than separate financial statements even if the investor does not have any subsidiary.

Exception One of the exception from applying equity method in the existing AS 23 is where the associate operate under severe long term restrictions that significantly impair its ability to transfer funds to the investee.

No such exception is provided in Ind AS 28.

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Topic Indian GAAP IND AS

Scope Currently there is no exemption for investments made by venture capital organisations, mutual funds, unit trusts and similar entities from applying the equity method.

Ind As 28 now permits an entity that has an investment in an associate, a portion of which is held indirectly through venture capital organisations, or a mutual fund, unit trust and similar entities 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 with Ind AS 109 regardless of whether these entities have significant influence over that portion of the investment.

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Topic Indian GAAP IND AS

Investment classified as Held for Sale

As 23 does not specifically deal with this aspect.

Ind AS 28 requires a portion of an investment in an associate or joint venture to be classified as held for sale if the disposal of that portion of the interest would fulfil the criteria to be classified as held for sale in accordance with Ind AS 105.

Application of Method in Separate Financial Statements

As per AS 23, in separate financial statements, investment in an associate is not accounted for as per the equity method, the same is accounted for in accordance with existing AS 13 - ‘Accounting for investments’.

As per Ind AS 28, the same is to be accounted for at cost or in accordance with Ind AS 109, ‘Financial Instruments’.

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Topic Indian GAAP IND AS

Difference in reporting dates

The existing AS 23 permits the use of financial statements of the associate drawn up to a date different from the date of financial statements of the investor when it is impracticable to draw the financial statements of the associate up to the date of the financial statements of the investor. There is no limit on the length of difference in the reporting dates of the investor and the associate.

As per Ind AS 28, length of difference in the reporting dates of the associate or joint venture should not be more than three months.

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Topic Indian GAAP IND AS

Uniform Accounting policies

AS 23 provides exemption to this that if it is not possible to make adjustments to the accounting policies of the associate, the fact shall be disclosed along with a brief description of the differences between the accounting policies.

Ind AS 28 provides that the entity’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances unless, in case of an associate, it is impracticable to do so.

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IFRS Complying Company (Unilever).

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