(g) the unrecognised share of losses of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate;
(h) the fact that an associate is not accounted for using the equity method in accordance with paragraph 13; and
(i) summarised financial information of associates, either individually or in groups, that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues and profit or loss.
38 Investments in associates accounted for using the equity method shall be classified as non-current assets. The investor’s share of the profit or loss of such associates, and the carrying amount of those investments, shall be separately disclosed. The investor’s share of any discontinued operations of such associates shall also be separately disclosed.
39 The investor’s share of changes recognised directly in the associate’s equity shall be recognised directly in equity by the investor and shall be disclosed in the statement of changes in equity as required by IAS 1 Presentation of Financial Statements.
40 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets the investor shall disclose:
(a) its share of the contingent liabilities of an associate incurred jointly with other investors; and
(b) those contingent liabilities that arise because the investor is severally liable for all or part of the liabilities of the associate.
Effective date________________________________________________________________________________
41 An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact.
Withdrawal of other pronouncements_____________________________________________________________
42 This Standard supersedes IAS 28 Accounting for Investments in Associates (revised in 2000).
43 This Standard supersedes the following Interpretations:
(a) SIC-3 Elimination of Unrealised Profits and Losses on Transactions with Associates;
(b) SIC-20 Equity Accounting Method—Recognition of Losses; and
(c) SIC-33 Consolidation and Equity Method—Potential Voting Rights and Allocation of Ownership Interests.
Appendix
Amendments to other pronouncements
The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that earlier period.
* * * * *
The amendments contained in this appendix when this Standard was issued in 2003 have been incorporated into the relevant pronouncements published in this volume.
Approval of IAS 28 by the Board_________________________________________________________________
International Accounting Standard 28 Investments in Associates was approved for issue by the fourteen members of the International Accounting Standards Board.
| Sir David Tweedie | Chairman |
| Thomas E Jones | Vice-Chairman |
| Mary E Barth | |
| Hans-Georg Bruns | |
| Anthony T Cope | |
| Robert P Garnett | |
| Gilbert Gélard | |
| James J Leisenring | |
| Warren J McGregor | |
| Patricia L O’Malley | |
| Harry K Schmid | |
| John T Smith | |
| Geoffrey Whittington | |
| Tatsumi Yamada | |
IAS 28 BC
Basis for Conclusions on
IAS 28 Investments in Associates
This Basis for Conclusions accompanies, but is not part of, IAS 28.
Introduction_____________________________________________________________________________
BC1 This Basis for Conclusions summarises the International Accounting Standards Board’s considerations in reaching its conclusions on revising IAS 28 Accounting for Investments in Associates in 2003. Individual Board members gave greater weight to some factors than to others.
BC2 In July 2001 the Board announced that, as part of its initial agenda of technical projects, it would undertake a project to improve a number of Standards, including IAS 28. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the Improvements project were to reduce or eliminate alternatives, redundancies and conflicts within Standards, to deal with some convergence issues and to make other improvements. In May 2002 the Board published its proposals in an Exposure Draft of Improvements to International Accounting Standards, with a comment deadline of 16 September 2002. The Board received over 160 comment letters on the Exposure Draft.
BC3 Because the Board’s intention was not to reconsider the fundamental approach to the accounting for investments in associates established by IAS 28, this Basis for Conclusions does not discuss requirements in IAS 28 that the Board has not reconsidered.
Scope exclusion: investments in associates held by venture capital organisations, mutual funds, unit trusts and similar entities
BC4 There are no specific requirements that address accounting for investments by venture capital organisations, mutual funds, unit trusts and similar entities. As a result, depending on whether an entity has control, joint control or significant influence over an investee, one of the following Standards is applied:
(a) IAS 27 Consolidated and Separate Financial Statements,
(b) IAS 28 Investments in Associates, or
(c) IAS 31 Interests in Joint Ventures.
BC5 The Board considered whether another approach is appropriate for these investors when they have joint control or significant influence over their investees. The Board noted that use of the equity or proportionate consolidation methods for investments held by venture capital organisations, mutual funds, unit trusts and similar entities often produces information that is not relevant to their management and investors and that fair value measurement produces more relevant information.
BC6 In addition, the Board noted that there may be frequent changes in the level of ownership in these investments and that financial statements are less useful if there are frequent changes in the method of accounting for an investment.
Measurement at fair value in accordance with IAS 39
BC7 Accordingly, the Board decided that investments held by venture capital organisations, mutual funds, unit trusts and similar entities including investment-linked insurance funds should be excluded from the scope of IAS 28 and IAS 31 when they are measured at fair value in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The Board understands that fair value information is often readily available because fair value measurement is a well-established practice in these industries including for investments in entities in the early stages of their development or in non-listed entities.
Treatment of changes in fair value
BC8 The Board decided that if venture capital organisations, mutual funds, unit trusts and similar entities are to be excluded from the scope of IAS 28, it should be only when they recognise changes in the fair value of their investments in associates in profit or loss in the period in which those changes occur. This is to achieve the same treatment as for investments in subsidiaries or associates that are not consolidated or accounted for using the equity method because control or significant influence is intended to be temporary. The Board’s approach distinguishes between accounting for the investment and accounting for the economic entity. In relation to the former, the Board decided that there should be consistency in the treatment of all investments, including changes in the fair value of these investments.
BC9 The Board noted that if such investments were classified in accordance with IAS 39, they would not always meet the definition of investments classified as held for trading because venture capital organisations may hold an investment for a period of 3-5 years. In accordance with IAS 39 such an investment is classified as available for sale (unless the entity elects to designate the investment on initial recognition at fair value through profit or loss). Classification as available for sale would not result in recognising changes in fair value in profit or loss. To achieve a similar effect on income to that of applying the equity method, the Board decided to exempt investments held by venture capital organisations, mutual funds, unit trusts and similar entities from this Standard only when they are measured at fair value through profit or loss (either by designation or because they meet the definition in IAS 39 of held for trading).
Reference to ‘well-established’ industry practices
BC10 The Exposure Draft proposed to limit the availability of the scope exclusion to situations in which well-established industry practice existed. Some respondents noted that the development of industry practice to measure such investments at fair value would have been precluded in industries established in countries already applying IFRSs. The Board confirmed that the main purpose of the reference to ‘well-established’ practice in the Exposure Draft was to emphasise that the exclusion would apply generally to those investments for which fair value is already available.
BC11 Therefore, the Board decided that the availability of the exclusion should be based only on the nature of an entity’s activities and to delete the reference to ‘well-established’ practices. The Board understands that measurement of these investments at fair value is ‘well-established’ practice in these industries.
Definition of ‘venture capital organisations’
BC12 The Board decided not to define further those ‘venture capital organisations and similar entities’ excluded from the scope of the Standard. Apart from recognising the difficulties of arriving at a universally applicable definition, the Board did not want inadvertently to make it difficult for entities to measure investments at fair value. However, the Board decided to clarify that the reference to ‘similar entities’ in the scope exclusion includes investment-linked insurance funds.
BC13 The Board decided, however, that if an investee is a subsidiary in accordance with IAS 27, it should be consolidated. The Board concluded that if an investor controls an investee, the investee is part of a group and part of the structure through which the group operates its business and thus consolidation of the investee is appropriate.
Application of the equity method___________________________________________________________________
Temporary significant influence
BC14 The Board considered whether to remove the exemption from applying the equity method when significant influence over an associate is intended to be temporary. The Board decided to consider this issue as part of a comprehensive standard dealing with asset disposals. It decided to retain an exemption from applying the equity method when there is evidence that an associate is acquired with the intention to dispose of it within twelve months and that management is actively seeking a buyer. The Board’s Exposure Draft ED 4 Disposal of Non-current Assets and Presentation of Discontinued Operations proposes to measure and present assets held for sale in a consistent manner irrespective of whether they are held by an investor in an associate or in a subsidiary*.
___________________________________________
* In March 2004, the Board issued IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. IFRS 5 removes this scope exclusion and now eliminates the exemption from applying the equity method when significant influence over an associate is intended to be temporary. See IFRS 5 Basis for Conclusions for further discussion.
Severe long-term restrictions impairing ability to transfer funds to the investor
BC15 The Board decided to remove the exemption from applying the equity method for an associate that previously applied when severe long-term restrictions impaired an associate’s ability to transfer funds to the investor. It did so because such circumstances may not preclude the investor’s significant influence over the associate. The Board decided that an investor should, when assessing its ability to exercise significant influence over an entity, consider restrictions on the transfer of funds from the associate to the investor. In themselves, such restrictions do not preclude the existence of significant influence.
Non-coterminous year-ends
BC16 The Exposure Draft of May 2002 proposed to limit to three months any difference between the reporting dates of the investor and the associate when applying the equity method. Some respondents to that Exposure Draft believed that it could be impracticable for the investor to prepare financial statements as of the same date when the date of the investor’s and the associate’s financial statements differ by more than three months. The Board noted that a three-month limit operates in several jurisdictions and it was concerned that a longer period, such as six months, would lead to the recognition of stale information. Therefore, it decided to retain the three-month limit.
Recognition of losses__________________________________________________________________________
BC17 The previous version of IAS 28 and SIC-20 Equity Accounting Method—Recognition of Losses restricted application of the equity method when, in accounting for the investor’s share of losses, the carrying amount of the investment is reduced to zero.
BC18 The Board decided that the base to be reduced to zero should be broader than residual equity interests and should also include other non-equity interests that are in substance part of the net investment in the associate, such as long-term receivables. Therefore, the Board decided to withdraw SIC-20.
BC19 The Board also noted that if non-equity investments are not included in the base to be reduced to zero, an investor could restructure its investment to fund the majority in non-equity investments to avoid recognising the losses of the associate under the equity method.
BC20 In widening the base against which losses are to be recognised, the Board also clarified the application of the impairment provisions of IAS 39 to the financial assets that form part of the net investment.
