Associates and Joint Arrangements (IAS 28 and IFRS 11)

IAS 28 applies to investments in associates (where the investor has significant influence) and joint ventures (under IFRS 11). It prescribes the equity method for both.

Associate: An entity over which the investor has significant influence — the power to participate in financial and operating policy decisions but NOT control (which would make it a subsidiary under IFRS 10) or joint control.

Significant influence:

• Rebuttable presumption of significant influence if the investor holds (directly or indirectly) 20% or more of the voting power of the investee
• Rebuttable presumption that there is NO significant influence if the holding is less than 20%
• Both presumptions can be rebutted by evidence to the contrary

Indicators of significant influence (even without 20%):

• Representation on the board of directors or equivalent
• Participation in policy-making processes (including dividend decisions)
• Material transactions between the investor and the investee
• Interchange of managerial personnel
• Provision of essential technical information

Indicators that a 20%+ holding does NOT give significant influence (rebutting the presumption):

• Investor actively opposes significant influence being exercised
• Investor excluded from board representation and decision-making
• Minority shareholders with opposing interests block influence

Substantive potential voting rights: Consider currently exercisable share options or convertible instruments in assessing influence (similar to IFRS 10 for control).

Exemptions from equity accounting:

• Investment held for sale under IFRS 5 (accounted for under IFRS 5)
• Venture capital organisations, mutual funds, and similar entities may elect to measure investments at FVTPL under IFRS 9 (instead of equity method)
• Parent exempted from presenting consolidated FS (IFRS 10) is also exempt from equity accounting in its own FS

Initial recognition: Investment recorded at cost (including transaction costs).

Subsequent measurement: Carrying amount adjusted each period for:

Initial goodwill / fair value adjustments:

• At acquisition, any difference between cost and the investor's share of fair value of identifiable net assets represents notional goodwill — it is included within the carrying amount of the investment (NOT recognised separately)
• Fair value adjustments on associate's assets affect the investor's share of the associate's profit (e.g., extra depreciation on uplifted PPE reduces the investor's share)

Key differences from consolidation:

• Single line in the SoFP: "Investment in associate"
• Single line in the SoPL: "Share of profit of associate" (after operating profit or near finance costs, typically)
• NO consolidation of individual assets and liabilities, NO NCI, NO goodwill separate recognition
• Intra-group balances are NOT eliminated (the associate is not a group company)

Accounting period differences: If the associate's reporting date differs from the investor's:

• Use associate's most recent FS, adjusted for significant transactions/events between its reporting date and the investor's reporting date
• Difference must not exceed three months

Uniform accounting policies: If the associate uses different accounting policies from the investor, the investor adjusts the associate's FS to conform (for the purposes of applying the equity method).

When the investor and associate transact with each other, the profits from those transactions are only partially realised from the investor's perspective — the investor effectively made a profit with itself to the extent of its ownership. Under the equity method:

Upstream transactions (associate → investor): Goods/assets sold by associate to investor. If the goods remain in the investor's inventory (or the asset is still held):

• Eliminate the investor's share of the associate's unrealised profit
• Effectively reduces "share of profit of associate" in the investor's P/L

Downstream transactions (investor → associate): Goods/assets sold by investor to associate. If the goods remain in the associate's inventory (or the asset is still held):

• Eliminate the investor's share of its own unrealised profit on the sale
• Effectively reduces the investor's revenue/profit by the elimination (reducing retained earnings)

Calculation: URP is calculated on the total transaction, then the investor's SHARE is eliminated (the remaining profit is considered realised from the "other investor's" perspective in the associate). Contrast with consolidation where 100% of the URP is eliminated.

Example: Investor P owns 30% of Associate A. P sold inventory to A for £100,000 with a 20% margin. Half remains in A's inventory at year-end.
• Total URP = £100,000 × 50% × 20% = £10,000
• Investor's share of URP (to eliminate) = 30% × £10,000 = £3,000
• Adjustment: reduce P's retained earnings (downstream sale) and reduce investment in associate by £3,000.

Losses exceeding the investment:

• If the investor's share of losses equals or exceeds the carrying amount of the investment, the investor discontinues recognising further losses
• The investment is not reduced below zero (it becomes zero)
• Additional losses are recognised only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate (e.g., guarantees)
• If the associate subsequently reports profits, the investor resumes recognising its share of profits only after those profits equal the share of unrecognised losses (to "catch up" on the unrecognised losses)

Impairment testing:

• At each reporting date, the investor must assess whether there is objective evidence of impairment — indicators include: significant financial difficulties of the associate, breach of contract, high probability of bankruptcy, significant decline in the associate's share price (if quoted) below its cost
• If impairment is indicated, determine the recoverable amount (under IAS 36):
  • Fair value less costs of disposal, OR
  • Value in use — determined using the higher of: (a) PV of estimated future cash flows from continuing ownership + ultimate disposal, or (b) PV of estimated future cash flows expected from dividends and from ultimate disposal
• Impairment is tested on the investment as a single asset — goodwill within it is NOT tested separately
• Impairment losses can be REVERSED (unlike goodwill in a business combination — the rule here is that the investment as a whole can recover, and any previously recognised impairment can be reversed if conditions improve)

The equity method is discontinued when the investor loses significant influence. Possible scenarios:

1. Loss of significant influence without obtaining control or joint control:

• Measure any retained investment at fair value at the date significant influence is lost
• Account for the retained investment under IFRS 9 (typically FVTPL or FVOCI by election for equity instruments)
• Recognise a gain or loss in P/L:
  • Gain/loss on disposal (if any — proceeds vs carrying amount of disposed portion)
  • PLUS the difference between FV of retained investment and its (pre-disposal) carrying amount
• Reclassify to P/L any amounts previously in OCI that would have been reclassified on disposal (e.g., FX translation reserve)

2. Associate becomes a subsidiary (investor acquires control):

• Apply IFRS 3 "step acquisition" rules — remeasure the previously held equity interest at fair value, with any gain/loss to P/L
• Goodwill calculation uses: consideration + NCI + FV of previously held interest − FVNA

3. Associate becomes a joint venture (or vice versa):

• Equity method continues — no remeasurement at the date of change
• Under the current IAS 28 (2014 revision), no gain/loss is recognised on the change from associate to joint venture or vice versa

4. Held for sale: If the investment meets IFRS 5 criteria, cease equity accounting and apply IFRS 5.

Joint arrangement: An arrangement where two or more parties have joint control. Joint control = the contractually agreed sharing of control, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

IFRS 11 classifies joint arrangements into two types:

1. Joint operation (JO): The parties that have joint control have rights to the assets, and obligations for the liabilities, relating to the arrangement. A JO is typically NOT structured through a separate vehicle (or if it is, the vehicle is a "thin wrapper" and the parties still have direct rights to assets/obligations for liabilities).

Accounting for a joint operation — each joint operator recognises:

• Its assets, including its share of jointly held assets
• Its liabilities, including its share of jointly incurred liabilities
• Its revenue from the sale of its share of output
• Its share of revenue from the sale of output by the joint operation
• Its expenses, including its share of jointly incurred expenses

This is essentially "proportional consolidation" line-by-line.

2. Joint venture (JV): The parties that have joint control have rights to the net assets of the arrangement. A JV is typically structured through a separate vehicle (company, LLP) and the parties have rights only to the net outcome (profits, net assets) — not to specific assets or direct liabilities.

Accounting for a joint venture — equity method (per IAS 28): initial cost, subsequent share of profit/loss/OCI, dividends reduce carrying amount, impairment testing. Same mechanics as for associates.

Determining classification (JO vs JV):

Parties that participate but do NOT have joint control:

• If they have significant influence → account as an associate (equity method)
• Otherwise → account as a financial asset under IFRS 9