Investments in associates and joint ventures 803
equity-settled share based payment transaction of an associate, the accounting
treatment would be the same if it been a transaction undertaken by a joint venture.
Example 11.23: Equity-settled share based payment transactions of associate
Entity A holds a 30% interest in Entity B and accounts for its interest in B as an associate using the equity method.
This interest arose on incorporation of B. Accordingly, there are no fair value adjustments required related to the
assets of B in A’s consolidated financial statements and its equity-accounted amount represents an original cost
of £1,500 (30% of B’s issued equity of £5,000) together with A’s 30% share of B’s retained profits of £5,000.
Entity B issues share options to its employees which are to be accounted for by B as an equity-settled share-
based payment transaction. The options entitle the employees to subscribe for shares of B, representing an
additional 20% interest in the shares of B. If the options are exercised, the employees will pay £2,400 for the
shares. The grant date fair value of the options issued is £900 and, for the purposes of the example, it is
assumed that the options are immediately vested. Accordingly, B has recognised a share-based payment
expense of £900 in profit or loss and a credit to equity of the same amount.
The impact of this equity-settled share-based payment transaction on B’s financial statements and on A’s consolidated
financial statements of accounting for this equity-settled share-based payment transaction is summarised below.
Immediately before the granting of the options
B’s financial statements
£
£
Net assets
10,000
Issued equity
5,000
Retained
earnings
5,000
Total 10,000
Total
10,000
A’s consolidated financial statements
£
£
Investment in B
3,000
Issued equity
10,000
Other net assets
21,000
Retained earnings
14,000
Total 24,000
Total
24,000
Immediately after the granting of the options*
B’s financial statements
£
£
Net assets
10,000
Issued equity
5,000
Retained
earnings
5,000
Loss for period
(900)
Other reserve re options
900
Total 10,000
Total
10,000
A’s consolidated financial statements
£
£
Investment in B
2,730
Issued equity
10,000
Other net assets
21,000
Retained earnings
14,000
Loss for period
(270)
Total 23,730
Total
23,730
* For the purposes of illustration, B’s expense and the corresponding credit to equity have been shown
separately within equity as ‘loss for period’ and ‘other reserve re options’ respectively. A’s 30% share of the
expense has similarly been shown separately within equity.
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Immediately after exercise of the options*
B’s financial statements
£
£
Net assets
10,000
Issued equity
5,000
Cash on exercise of options
2,400
Additional equity on exercise
2,400
of options
Retained earnings
5,000
Loss for period
(900)
Other reserve re options
900
Total
12,400
Total 12,400
A’s consolidated financial statements
£
£
Investment in B
3,100
Issued equity
10,000
Other net assets
21,000
Retained earnings
14,000
Loss for period
(270)
Gain on deemed disposal
370
Total
24,100
Total 24,100
* As a result of the employees exercising the options for £2,400, A’s proportionate interest in B has reduced
from 30% to 25%. A is considered still to have significant influence over B, which remains an associate of
A. This deemed disposal results in A recognising a gain on deemed disposal in its profit or loss for the period.
The gain on such a deemed disposal is computed by comparing A’s proportionate share of net assets of B
before and after the exercise of the options as follows:
£
Net assets attributable to A’s 30% interest
2,730
(30% of £9,100)
Net assets attributable to A’s 25% interest
3,100
(25% of £12,400)
Gain on deemed disposal
370
As indicated in Example 11.23 above, when the options are exercised, the investor will
account for the reduction in its proportionate interest in the associate or joint venture as a
deemed disposal (see 7.12.5 below). On the other hand, if the options had lapsed
unexercised, having already vested, the associate or joint venture would make no further
accounting entries to reverse the expense already recognised, but may make a transfer
between different components of equity (see Chapter 30 at 6.1.3). In that situation, as the
investor’s share of the net assets of the associate or joint venture is now increased as a result
(effectively, the impact of the original expense on the share of net assets is reversed), we
believe the investor can account for the increase either as a gain in profit or loss or as a
credit within equity. Once selected, the investor must apply the selected policy consistently.
7.11.4
Effects of changes in parent/non-controlling interests in subsidiaries
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
and other comprehensive income reported in the associate’s or joint venture’s consolidated
Investments in associates and joint ventures 805
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% o
f 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.
The issue of whether the investor’s share of the associate’s or joint venture’s profits, other
comprehensive income and net assets under the equity method should be based on the
amounts before or after any non-controlling interests in the associate’s or joint venture’s
consolidated accounts is discussed at 7.5.5 above. As the investor’s interest in the associate
or joint venture is as an owner of the parent, it is appropriate that 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’s or joint venture’s consolidated
financial statements, i.e. after any amounts attributable to the non-controlling interests.
Under IFRS 10, changes in a parent’s ownership interest in a subsidiary that do not result
in a loss of control are accounted for as equity transactions. [IFRS 10.23]. In such
circumstances the carrying amounts of the controlling and non-controlling interests are
adjusted to reflect the changes in their relative interests in the subsidiary. Any difference
between the amount by which the non-controlling interests are adjusted and the fair
value of the consideration paid or received is recognised directly in equity and
attributed to the owners of the parent. [IFRS 10.B96].
How should such an amount attributed to the owners of the parent that is recognised in
the associate’s or joint venture’s statement of changes in equity be reflected by the
investor in equity accounting for the associate or joint venture?
In our view, the investor may account for its share of the change of interest in the net
assets/equity of the associate or joint venture as a result of the associate’s or joint
venture’s equity transaction by applying either of the approaches set out below:
(a) reflect it as part of the share of other changes in equity of associates or joint
ventures’ in the investor’s statement of changes in equity; or
(b) reflect it as a gain or loss within the share of associate’s or joint venture’s profit or
loss included in the investor’s profit or loss.
Once selected, the investor must apply the selected policy consistently.
Approach (a) reflects the view that although paragraph 10 of IAS 28 only refers to the
investor accounting for its share of the investee’s profit or loss and other items of
comprehensive income, this approach is consistent with the equity method as described
in paragraph 10 of IAS 28 since it:
(a) reflects the post-acquisition change in the net assets of the investee; [IAS 28.3] and
(b) faithfully reflects the investor’s share of the associate’s transaction as presented in
the associate’s consolidated financial statements. [IAS 28.27].
Since, the transaction does not change the investor’s ownership interest in the associate
it is not a deemed disposal (see 7.12.5 below) and, therefore, there is no question of a
gain or loss on disposal arising. Approach (b) reflects the view that:
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(a) the investor should reflect the post-acquisition change in the net assets of the
investee; [IAS 28.3]
(b) from the investor’s perspective the transaction is not ‘a transaction with owners in
their capacity as owners’ – the investor does not equity account for the NCI
(see 7.5.5 above). So whilst the investee must reflect the transaction as an equity
transaction, from the investor’s point of view the increase in the investment is a
‘gain’. This is consistent with the treatment of unrealised profits between a
reporting entity and an associate (see 7.6.1 above). The NCI’s ownership is treated
as an ‘external’ ownership interest to the investor’s group. Therefore, consistent
with this approach, any transaction which is, from the investor’s perspective a
transaction with an ‘external’ ownership interest can give rise to a gain or loss;
(c) the increase in the investee’s equity is also not an item of other comprehensive
income as referred to in paragraph 10 of IAS 28;
(d) any increase in the amount of an asset should go to profit or loss if not otherwise stated
in IFRS. Paragraph 88 of IAS 1 states that an ‘entity shall recognise all items of income
and expense in a period in profit or loss unless an IFRS requires or permits otherwise.’
These approaches are illustrated in Example 11.24 below. Although the example is based
on a transaction by an associate, the accounting would be the same if it had been
undertaken by a joint venture.
Example 11.24: Accounting for the effect of transactions with non-controlling
interests recognised through equity by an associate
Entity A holds a 20% interest in entity B (an associate) that in turn has a 100% ownership interest in
subsidiary C. The net assets of C included in B’s consolidated financial statements are €1,000. For the
purposes of the example all other assets and liabilities in B’s financial statements and in A’s consolidated
financial statements are ignored.
B sells 20% of its interest in C to a third party for €300. B accounts for this transaction as an equity transaction
in accordance with IFRS 10, giving rise to a credit in equity of €100 that is attributable to the owners of B.
The credit is the difference between the proceeds of €300 and the share of net assets of C that are now
attributable to the non-controlling interest (NCI) of €200 (20% of €1,000).
The financial statements of A and B before the transaction are summarised below:
Before
A’s consolidated financial statements
€
€
Investment in B
200
Equity
200
Total 200
Total
200
B’s consolidated financial statements
€
€
Assets (from C)
1,000
Equity
1,000
Total 1,000
Total
1,000
The financial statements of B after the transaction are summarised below:
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After
B’s consolidated financial statements
€
€
Assets (from C)
1,000
Equity
1,000
Cash
300
Equity transaction with non-
100
controlling interest
Equity attributable to owners
1,100
Non-controlling
interest
200
Total 1,300
Total
1,300
As a result of the sale of B’s 20% interest in C, B’s net assets attributable to the owners of B have increased
from €1,000 to €1,100. Although A has not participated in the transaction, the investor’s share of net assets
in B has increased from €200 to €220.
A should account for this increase in net assets arising from this equity transaction using either of the
following approaches:
Approach (
a) – ‘share of other changes in equity’ in investor’s statement of changes in equity
The change of interest in the net assets/equity of B as a result of B’s equity transaction should be reflected in A’s
financial statements as ‘share of other changes in equity of associates’ in its statement of changes in equity.
Therefore, A reflects its €20 share of the change in equity and maintains the same classification as the
associate i.e. a direct credit to equity.
Approach (b) – gain or loss within share of associate’s profit or loss included in investor’s profit or loss
The change of interest in the net assets/equity of B as a result of B’s equity transaction should be reflected
in A’s financial statements as a ‘gain’ in profit or loss.
Therefore, A reflects its €20 share of the change in equity in profit or loss.
7.12 Discontinuing the use of the equity method
An investor discontinues the use of the equity method on the date that its investment
ceases to be either an associate or a joint venture. The subsequent accounting depends
upon the nature of the retained investment. If the investment becomes a subsidiary, it
will be accounted for in accordance with IFRS 10 and IFRS 3 as discussed at 7.12.1
below. If the retained investment is a financial asset, it will be accounted for in
accordance with IFRS 9 as discussed at 7.12.2 below. [IAS 28.22]. If an investment in an
associate becomes an investment in a joint venture, or an investment in a joint venture
becomes an investment in an associate, the entity continues to apply the equity method,
as discussed at 7.12.3 below. [IAS 28.24].
Where a portion of an investment in an associate or a joint venture meets the criteria to
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 159