be classified as held for sale, the entity applies IFRS 5 as discussed at 6 above. [IAS 28.20].
7.12.1
Investment in associate or joint venture becoming a subsidiary
If as a result of an increased investment in an associate or joint venture an investor
obtains control over the investee, or there is a change in circumstances such that
the investor obtains control over the investee, the investment becomes a
subsidiary. The entity discontinues the use of the equity method and accounts for
its investment in accordance with IFRS 3 and IFRS 10. [IAS 28.22]. In this situation,
IFRS 3 requires revaluation of the previously held interest in the equity accounted
investment at its acquisition-date fair value, with recognition of any gain or loss in
808 Chapter
11
profit or loss. [IFRS 3.41-42]. The accounting for an increase in an associate or joint
venture that becomes a subsidiary is discussed further in Chapter 9 at 9.
In addition, the entity accounts for all amounts previously recognised in other
comprehensive income in relation to that investment on the same basis as would have
been required if the investee had directly disposed of the related assets or liabilities.
[IAS 28.22].
Therefore, if a gain or loss previously recognised in other comprehensive income
by the investee would be reclassified to profit or loss on the disposal of the related
assets or liabilities, the entity reclassifies the gain or loss from equity to profit or loss
(as a reclassification adjustment) when the equity method is discontinued. For
example, if an associate or a joint venture has cumulative exchange differences
relating to a foreign operation and the entity discontinues the use of the equity
method, the entity shall reclassify to profit or loss the gain or loss that had previously
been recognised in other comprehensive income in relation to the foreign operation.
[IAS 28.23].
7.12.2
Retained investment in the former associate or joint venture is a
financial asset
If an investor disposes of a portion of its investment, such that it no longer has
significant influence or joint control over the investee, it will discontinue the use
of the equity method. If the retained interest is a financial asset, the entity measures
the retained interest at fair value. The fair value of the retained interest is to be
regarded as its fair value on initial recognition as a financial asset in accordance
with IFRS 9.
In such situations, the entity recognises in profit or loss any difference between:
(a) the fair value of any retained interest and any proceeds from disposing of a part
interest in the associate or joint venture; and
(b) the carrying amount of the investment at the date the equity method was
discontinued.
Furthermore, the entity accounts for all amounts previously recognised in other
comprehensive income in relation to that investment on the same basis as would have
been required if the investee had directly disposed of the related assets or liabilities.
[IAS 28.22].
Therefore, if a gain or loss previously recognised in other comprehensive income
by the investee would be reclassified to profit or loss on the disposal of the related
assets or liabilities, the entity reclassifies the gain or loss from equity to profit or loss
(as a reclassification adjustment) when the equity method is discontinued. For
example, if an associate or a joint venture has cumulative exchange differences
relating to a foreign operation and the entity discontinues the use of the equity
method, the entity reclassifies to profit or loss the gain or loss that had previously
been recognised in other comprehensive income in relation to the foreign operation.
[IAS 28.23].
When the retained interest after the partial disposal of an interest in a joint venture or a
partial disposal of an interest in an associate that includes a foreign operation is a
Investments in associates and joint ventures 809
financial asset that includes a foreign operation, IAS 21 – The Effects of Changes in
Foreign Exchange Rates – requires it to be accounted for as a disposal. [IAS 21.48A]. As
such, it should be noted that the reclassification adjustment from equity to profit or loss
is for the full amount that is in other comprehensive income and not just a proportionate
amount based upon the interest disposed of. The Basis for Conclusions to IAS 21
explains that the loss of significant influence or joint control is a significant economic
event that warrants accounting for the transaction as a disposal under IAS 21,
[IAS 21.BC33-34], and hence the transfer of the full exchange difference rather than just the
proportionate share that would be required if this was accounted for as a partial disposal
under IAS 21.
The accounting described above applies not only when an investor disposes of an
interest in an associate or joint venture, but also where it ceases to have significant
influence due to a change in circumstances. For example, when an associate issues
shares to third parties, changes to the board of directors may result in the investor no
longer having significant influence over the associate. Therefore, the investor will
discontinue the use of the equity method.
7.12.3
Investment in associate becomes a joint venture (or vice versa)
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 does
not discontinue the use of the equity method. In such circumstances, the entity
continues to apply the equity method and does not remeasure the retained interest.
[IAS 28.24].
When the change in status of the investment results from the acquisition of an additional
interest in the investee, the increase in the investment is accounted for as discussed
at 7.4.2.C above. When the change in status results from the disposal of an interest in
the investee, this is accounted for as explained at 7.12.4 below.
As discussed at 6 and at 7.12 above, if a portion of an interest in an associate or joint
venture fulfils the criteria for classification as held for sale, it is only that portion that is
accounted for under IFRS 5. An entity maintains the use of the equity method for the
retained interest until the portion classified as held for sale is finally sold.
7.12.4
Partial disposals of interests in associate or joint venture where the
equity method continues to be applied
IAS 28 does not explicitly state that an entity should recognise a gain or loss when it
disposes of a part of its interest in an associate or a joint venture, but the entity continues
to apply the equity method. However, as explained below, it is evident that a gain or
loss should be recognised on the partial disposal.
The standard requires that when an entity’s ownership interest in an associate or a joint
venture is reduced, but the entity continues to apply the equity method, the entity
reclassifies to profit or loss the proportion of the gain or loss that had previously been
recognised in other comprehensive income relating to that reduction in ownership
interest if that gain or loss would be required to be re
classified to profit or loss on the
disposal of the related assets or liabilities. [IAS 28.25].
810 Chapter
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In addition, IAS 21 requires for such partial disposals that the investor should ‘reclassify
to profit or loss only the proportionate share of the cumulative amount of the exchange
differences recognised in other comprehensive income’. [IAS 21.48C].
That means that the investor recognises in profit or loss a proportion of:
• foreign exchange differences recognised in other comprehensive income under
IAS 21;
• accumulated hedging gains and losses recognised in other comprehensive income
under IFRS 9 (see Chapter 49) (or IAS 39); and
• any other amounts previously recognised in other comprehensive income that
would have been recognised in profit or loss if the associate had directly disposed
of the assets to which they relate,
in each case proportionate to the interest disposed of.
IAS 21 requires that the proportion of the foreign exchange differences are reclassified
‘when the gain or loss on disposal is recognised’. [IAS 21.48]. In addition, the
Interpretations Committee in the context of deemed disposals (see 7.12.5 below), noted
that reclassification of amounts to profit or loss from other comprehensive income is
generally required as part of determining the gain or loss on a disposal.
Although IFRS 10 requires that partial disposals of subsidiaries, where control is retained,
are accounted for as equity transactions (see Chapter 7 at 3.3) and no profit or loss is
recognised, we do not believe that this has an impact on the accounting for a partial disposal
of an associate or a joint venture (which continues to be accounted for under the equity
method). Under equity accounting an investor only accounts for its own interest. Given that
the other investors’ ownership in the associate is not reflected in the accounts of an investor
there is no basis for concluding that partial disposals can be treated as equity transactions.
7.12.5 Deemed
disposals
An investor’s interest in an associate or a joint venture may be reduced other than by an
actual disposal. Such a reduction in interest, which is commonly referred to as a deemed
disposal, gives rise to a ‘dilution’ gain or loss. Deemed disposals may arise for a number
of reasons, including:
• the investor does not take up its full allocation in a rights issue by the associate or
joint venture;
• the associate or joint venture declares scrip dividends which are not taken up by
the investor so that its proportional interest is diminished;
• another party exercises its options or warrants issued by the associate or joint
venture; or
• the associate or joint venture issues shares to third parties.
In some situations, the circumstances giving rise to the dilution in the investor’s interest
may be such that the investor no longer has significant influence over the investee. In
that case, the investor will account for the transaction as a disposal, with a retained
interest in a financial asset measured at fair value. This is described at 7.12.2 above.
However, in other situations, the deemed disposal will only give rise to a partial disposal,
such that the investor will continue to equity account for the investee.
Investments in associates and joint ventures 811
As discussed in more detail at 7.12.4 above, although IAS 28 does not explicitly state that
an entity should recognise a gain or loss on partial disposal of its interest in an associate
or a joint venture when the entity continues to apply the equity method, it is evident
that a gain or loss should be recognised on partial disposals.
In the absence of further guidance, we believe that gains or losses on deemed disposals
should be recognised in profit or loss, and this will include amounts reclassified from
other comprehensive income.
However, what is not clear is whether any of the notional goodwill component of the
carrying amount of the associate or joint venture should be taken into account in the
calculation of the gain or loss on the deemed disposal. We believe that it is appropriate
to take into account the entire carrying amount of the associate or joint venture, i.e.
including the notional goodwill, as shown in Example 11.25 below. Although the
example is based on a deemed disposal of an associate, the accounting would be the
same if it had been a deemed disposal of a joint venture.
IAS 28 defines the equity method as ‘a method of accounting whereby the investment
is initially recognised at cost and adjusted thereafter for the post acquisition change in
the investor’s share of the investee’s net assets. ...’ [IAS 28.3]. A literal reading of this
definition suggests that in calculating the loss on dilution, the investor should only take
account of the change in its share of the associate’s or joint venture’s net assets but not
account for a change in the notional goodwill component.
However, paragraph 42 of IAS 28 specifically states that goodwill included in the
carrying amount of an investment in an associate or a joint venture is not separately
recognised. Hence, we believe that it should not be excluded from the cost of a deemed
disposal either.
Although the IASB did not explicitly consider accounting for deemed disposals of
associates or joint ventures, paragraph 26 of IAS 28 refers to the concepts underlying
the procedures used in accounting for the acquisition of a subsidiary in accounting for
acquisitions of an investment in an associate or joint venture. Therefore, it is
appropriate to account for deemed disposals of associates or joint ventures in the same
way as deemed disposals of subsidiaries.
Example 11.25: Deemed disposal of an associate
At the start of the reporting period, investor A acquired a 30% interest in entity B at a cost of £500,000.
Investor A has significant influence over entity B and accounts for its investment in the associate under the
equity method. The associate has net identifiable assets of £1,000,000 at the date of acquisition, which have
a fair value of £1,200,000. During the year entity B recognised a post-tax profit of £200,000, and paid a
dividend of £18,000. Entity B also recognised foreign exchange losses of £40,000 in other comprehensive
income.
Entity B’s net assets at the end of the reporting period can be determined as follows:
£
Net identifiable assets – opening balance
1,000,000
Profit for year 200,000
Dividends paid
(18,000)
Foreign exchange losses
(40,000)
B’s net assets – closing balance
1,142,000
812 Chapter
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Investor A’s interest in entity B at the end of the reporting period is calculated as follows:
£
On acquisition (including goodwill of
500,000
£500,000 – (30% × £1,200,000) = £140,000):
Share of profit after tax (30% × £200,000)
60,000
Elimination of dividend (30% of £18,000)
(5,400)
A’s share of exchange differences (30% × £40,000)
(12,000)
A’s interes
t in B at the end of the reporting period under
542,600
the equity method
which can also be determined as follows:
£
A’s share of B’s net identifiable assets (30% × £1,142,000)
342,600
Goodwill 140,000
A’s share of fair value uplift (30% × £200,000) †
60,000
A’s interest in B at the end of the reporting period
542,600
†
This assumes that none of the uplift related to depreciable assets, such that
the £200,000 did not diminish after the acquisition.
At the start of the next reporting period, entity B has a rights issue that investor A does not participate in. The
rights issue brings in an additional £150,000 in cash, and dilutes investor A’s interest in entity B to 25%.
Consequently, entity B’s net assets at this date are:
£
Entity B’s net assets before the rights issue
1,142,000
Additional cash
150,000
Entity B’s net assets after the rights issue
1,292,000
The loss on the deemed disposal, taking into account the entire carrying amount of the associate, including
the notional goodwill is calculated as follows:
£
£
Carrying amount of the investment before the deemed disposal
542,600
Cost of deemed disposal (£542,600 × (30% – 25%) / 30%)
(90,433)
Share of the contribution (£150,000 × 25%)
37,500
Reduction in carrying amount of associate
(52,933)
(52,933)
Reclassification of share in currency translation:
(£40,000 × 30% × (25% – 30%) / 30%)
(2,000)
Loss on deemed disposal
(54,933)
Carrying amount of the investment after the deemed disposal
489,667
8 IMPAIRMENT
LOSSES
IFRS 9 includes consequential amendments to IAS 28 to include the requirement to
determine whether there is any objective evidence that the net investment in the
associate or joint venture is impaired.
After application of the equity method, including recognising the associate’s or joint
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 160