International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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A group’s share in an associate or joint venture is the aggregate of the holdings in that
associate or joint venture by the parent and its subsidiaries. The holdings of the group’s other
associates or joint ventures are ignored for this purpose. Example 11.10 below illustrates the
group’s share in an associate where investments are also held by other entities in the group.
Example 11.10: Share in an associate or a joint venture
Parent A holds a 100% investment in subsidiary B, which in turn holds a 25% investment in associate Z. In
addition, parent A also holds a 30% investment in associate C and a 50% investment in joint venture D, each
of which holds a 10% investment in associate Z.
A
100%
30%
50% JV
B
C
D
25%
10%
10%
Others
55%
Z
In its consolidated financial statements, parent A accounts for a 25% investment in associate Z under the
equity method because:
• the investments in associate Z held by associate C and joint venture D should not be taken into account; and
• parent A fully consolidates the assets of subsidiary B, which include a 25% investment in associate Z.
7.5.5
Where the investee is a group: non-controlling interests in an
associate or joint venture’s consolidated financial statements
When an associate or joint venture itself has subsidiaries, the profits or losses, other
comprehensive income and net assets taken into account in applying the equity method
are those recognised in the associate or joint venture’s consolidated financial
statements, but after any adjustments necessary to give effect to uniform accounting
policies (see 7.8 below). [IAS 28.27].
It may be that the associate or joint venture does not own all the shares in some of its
subsidiaries, in which case its consolidated financial statements will include non-controlling
interests. Under IFRS 10, any non-controlling interests are presented in the consolidated
statement of financial position within equity, separately from the equity of the owners of the
parent. Profit or loss and each component of other comprehensive income are attributed to
the owners of the parent and to the non-controlling interests. [IFRS 10.22, B94]. The profit or loss
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and other comprehensive income reported in the associate or joint venture’s consolidated
financial statements will include 100% of the amounts relating to the subsidiaries, but the
overall profit or loss and total comprehensive income will be split between the amounts
attributable to the owners of the parent (i.e. the associate or joint venture) and those
attributable to the non-controlling interests. The net assets in the consolidated statement of
financial position will also include 100% of the amounts relating to the subsidiaries, with any
non-controlling interests in the net assets presented in the consolidated statement of financial
position within equity, separately from the equity of the owners of the parent.
IAS 28 does not explicitly say whether the investor should base the accounting for its share
of the associate or joint venture’s profits, other comprehensive income and net assets under
the equity method on the amounts before or after any non-controlling interests in the
associate or joint venture’s consolidated accounts. However, as the investor’s interest in the
associate or joint venture is as an owner of the parent, the share is based on the profit or loss,
comprehensive income and equity (net assets) that are reported as being attributable to the
owners of the parent in the associate or joint venture’s consolidated financial statements, i.e.
after any amounts attributable to the non-controlling interests. This is consistent with the
implementation guidance to IAS 1 – Presentation of Financial Statements, where it is
indicated that the amounts disclosed for ‘share of profits of associates’ and ‘share of other
comprehensive income of associates’ represent the amounts ‘attributable to owners of the
associates, i.e. it is after tax and non-controlling interests in the associates’.11
7.6
Transactions between the reporting entity and its associates or
joint ventures
7.6.1
Elimination of ‘upstream’ and ‘downstream’ transactions
IAS 28 requires gains and losses resulting from what it refers to as ‘upstream’ and
‘downstream’ transactions between an entity (including its consolidated subsidiaries)
and its associate or joint venture to be recognised in the entity’s financial statements
only to the extent of unrelated investors’ interests in the associate or joint venture.
‘Upstream’ transactions are, for example, sales of assets from an associate or a joint
venture to the investor. ‘Downstream’ transactions are, for example, sales or
contributions of assets from the investor to its associate or its joint venture. The
investor’s share in the associate’s or joint venture’s gains or losses resulting from these
transactions is eliminated. [IAS 28.28].
IAS 28 is not entirely clear as to how this very generally expressed requirement
translates into accounting entries, but we suggest that an appropriate approach might be
to proceed as follows:
• in the income statement, the adjustment should be taken against either the
investor’s profit or the share of the associate’s or joint venture’s profit, according
to whether the investor or the associate or joint venture recorded the profit on the
transaction, respectively; and
• in the statement of financial position, the adjustment should be made against the
asset which was the subject of the transaction if it is held by the investor or against
the carrying amount for the associate or joint venture if the asset is held by the
associate or joint venture.
Investments in associates and joint ventures 781
This is consistent with the approach required by IAS 28 in dealing with the elimination
of unrealised gains and losses arising on contributions of non-monetary assets to an
associate or joint venture in exchange for an equity interest in the associate or joint
venture (see 7.6.5 below).
Examples 11.11 and 11.12 below illustrate our suggested approach to this requirement of
IAS 28. Both examples deal with the reporting entity H and its 40% associate A. The
journal entries are based on the premise that H’s financial statements are initially
prepared as a simple aggregation of H and the relevant share of its associates. The
entries below would then be applied to the numbers at that stage of the process.
Although these examples illustrate transactions between the reporting entity and an
associate, the accounting would be the same if the transactions occurred between the
reporting entity and a joint venture.
Example 11.11: Elimination of profit on sale by investor to associate
(‘downstream transaction’)
One month before its reporting date, H sells inventory costing £750,000 to A for £1 million. Within the first
month after the reporting date, A sells the inventory to a third party for £1.2 million. What adjustments are
made in the group
financial statements of H before and after the reporting date?
Before the reporting date, H has recorded revenue of £1 million and cost of sales of £750,000. However since,
at the reporting date, the inventory is still held by A, only 60% of this transaction is regarded by IAS 28 as having
taken place (in effect with the other shareholders of A). This is reflected by the equity-accounting entry:
£
£
Revenue 400,000
Cost of sales
300,000
Investment in A
100,000
This effectively defers recognition of 40% of the profit on sale (£250,000 × 40%) and offsets the deferred
profit against the carrying amount of H’s investment in A.
After the reporting date, when the inventory is sold on by A, this deferred profit can be released by H, reflected
by the following equity-accounting entry:
£
£
Opening reserves
100,000
Cost of sales
300,000
Revenue 400,000
Opening reserves are adjusted because the financial statement working papers (if prepared as assumed above)
will already include this profit in opening reserves, since it forms part of H’s opening reserves.
An alternative approach would be to eliminate the profit on 40% of the sale against the cost of sales. Before
the reporting date, this is reflected by the equity-accounting entry:
£
£
Cost of sales
100,000
Investment in A
100,000
After the reporting date, when the inventory is sold on by A, this deferred profit can be released by H, reflected
by the following equity-accounting entry:
£
£
Opening reserves
100,000
Cost of sales
100,000
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An argument in favour of the alternative approach is that the revenue figures should not be adjusted
because the sales to associates or joint ventures need to be disclosed as related party transactions.
However, this may be outweighed by the drawback of the approach, namely that it causes volatility
in H’s reported gross margin as revenue and the related net margin are not necessarily recognised in the
same accounting period.
Example 11.12: Elimination of profit on sale by associate to reporting entity
(‘upstream transaction’)
This is the mirror image of the transaction in Example 11.11 above. Before H’s reporting date, A sells inventory
costing £750,000 to H for £1,000,000. After the reporting date, H sells the inventory to a third party for £1.2 million.
What adjustments are made in the group financial statements of H before and after the reporting date?
H’s share of the profit of A as included on the financial statement working papers before the reporting date
will include a profit of £250,000 (£1,000,000 – £750,000), 40% of which (£100,000) is regarded under IAS 28
as unrealised by H, and is therefore deferred and offset against closing inventory:
£
£
Share of profit of A
100,000
Inventory 100,000
In the following period when the inventory is sold H’s separate financial statements will record a profit of
£200,000, which must be increased by the £100,000 deferred from the previous period. The entry is:
£
£
Opening reserves
100,000
Share of profit of A
100,000
Again, opening reserves are adjusted because the financial statement working papers (if prepared as assumed
above) will already include this profit in opening reserves, this time, however, as part of H’s share of the
opening reserves of A.
A slightly counter-intuitive consequence of this treatment is that at the reporting date the investment in A
in H’s consolidated statement of financial position will have increased by £100,000 more than the share of
profit of associates as reported in group profit or loss (and in the following period by £100,000 less). This is
because the statement of financial position adjustment at the reporting date is made against inventory rather
than the carrying value of the investment in A, which could be seen as reflecting the fact that A has, indeed,
made a profit. It might therefore be necessary to indicate in the notes to the financial statements that part of
the profit made by A is regarded as unrealised by the group and has therefore been deferred to the following
reporting period by offsetting it against inventory.
It may be that a transaction between an investor and its associate or joint venture
indicates a reduction in the net realisable value or an impairment loss of the asset
that is the subject of the transaction. IAS 28 requires that when downstream
transactions provide evidence of a reduction in the net realisable value of the assets
to be sold or contributed, or of an impairment loss of those assets, those losses shall
be recognised in full by the investor. When upstream transactions provide evidence
of a reduction in the net realisable value of the assets to be purchased or of an
impairment loss of those assets, the investor shall recognise its share in those losses.
[IAS 28.29].
The effect of these requirements is illustrated in Examples 11.13 and 11.14 below.
Although these examples illustrate transactions between the reporting entity and a joint
venture, the accounting would be the same if the transactions occurred between the
reporting entity and an associate.
Investments in associates and joint ventures 783
Example 11.13: Sale of asset from venturer to joint venture at a loss
Two entities A and B establish a joint arrangement involving the creation of a joint venture C in which A and B each
hold 50%. A and B each contribute €5 million in cash to the joint venture in exchange for equity shares. C then uses
€8 million of its €10 million cash to acquire from A a property recorded in the financial statements of A at €10 million.
€8 million is agreed to be the fair market value of the property. How should A account for these transactions?
The required accounting entry by A is as follows:
€m €m
Cash (1)
3
Investment in C (2)
5
Loss on sale (3)
2
Property (4)
10
(1) €8 million received from C less €5 million contributed to C.
(2) Represented by 50% of C’s cash €2 million (€10 million from A and B minus €8 million to A), plus 50%
of €8 million (carrying value of the property in books of C), not adjusted since the transaction indicated
an impairment of A’s asset.
(3) Loss on sale of property €2 million (€8 million received from C less €10 million carrying value =
€2 million) not adjusted since the transaction indicated an impairment of the property. In effect, it is the
result that would have been obtained if A had recognised an impairment charge immediately prior to the
sale and then recognised no gain or loss on the sale.
(4) Derecognition of A’s original property.
Example 11.14: Sale of asset from joint venture to venturer at a loss
Two entities A and B establish a joint arrangement involving the creation of a joint venture C in which A and
; B each hold 50%. A and B each contribute €5 million in cash to the joint venture in exchange for equity
shares. C then uses €8 million of its €10 million cash to acquire a property from an independent third party
D. The property is then sold to A for €7 million settled in cash, which is agreed to be its market value. How
should A account for these transactions?
The required accounting entry by A is as follows:
€m €m
Property (1)
7.0
Investment in C (2)
4.5
Share of loss of C (3)
0.5
Cash (4)
12.0
(1) €7 million paid to C not adjusted since the transaction indicated an impairment of C’s asset.
(2) Represented by 50% of C’s cash €9 million (€10 million from A and B minus €8 million to D plus
€7 million received from A).
(3) Loss in C’s books is €1 million (€8 million cost of property less €7 million proceeds of sale). A
recognises its 50% share because the transaction indicates an impairment of the asset. In effect, it is the
result that would have been obtained if C had recognised an impairment charge immediately prior to the
sale and then recognised no gain or loss on the sale.
(4) €5 million cash contributed to C plus €7 million consideration for property.
7.6.1.A
Elimination of ‘downstream’ unrealised profits in excess of the
investment
Occasionally an investor’s share of the unrealised profit on the sale of an asset to an
associate or a joint venture exceeds the carrying value of the investment held. In that case,
to what extent is any profit in excess of the carrying value of the investment eliminated?
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IAS 28 is unclear about the elimination of ‘downstream’ unrealised gains in excess
of the investment. Consequently, the Interpretations Committee received a request
asking for clarification of the accounting treatment when the amount of gains to
eliminate in a ‘downstream’ transaction in accordance with paragraph 28 of IAS 28
exceeds the amount of the entity’s interest in the joint venture. The request