International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 161
venture’s losses (see 7.9 above), the entity applies the following requirements to
determine whether there is any objective evidence that its net investment in the
associate or joint venture is impaired. [IAS 28.40]. The entity applies the impairment
requirements in IFRS 9 (see Chapter 47) to its other interests in the associate or joint
Investments in associates and joint ventures 813
venture that are in the scope of IFRS 9 and that do not constitute part of the net
investment. [IAS 28.41].
• The net investment in an associate or joint venture is impaired and impairment
losses are incurred if, and only if, there is objective evidence of impairment as
a result of one or more events that occurred after the initial recognition of the
net investment (a ‘loss event’) and that loss event (or events) has an impact on
the estimated future cash flows from the net investment that can be reliably
estimated. It may not be possible to identify a single, discrete event that caused
the impairment. Rather the combined effect of several events may have caused
the impairment. Losses expected as a result of future events, no matter how
likely, are not recognised. Objective evidence that the net investment is
impaired includes observable data that comes to the attention of the entity
about the following loss events:
• significant financial difficulty of the associate or joint venture;
• a breach of contract, such as a default or delinquency in payments by the
associate or joint venture;
• the entity, for economic or legal reasons relating to its associate’s or joint
venture’s financial difficulty, granting to the associate or joint venture a
concession that the entity would not otherwise consider;
• it becoming probable that the associate or joint venture will enter bankruptcy
or other financial reorganisation; or
• the disappearance of an active market for the net investment because of
financial difficulties of the associate or joint venture. [IAS 28.41A].
• The disappearance of an active market because the associate’s or joint venture’s
equity or financial instruments are no longer publicly traded is not evidence of
impairment. A downgrade of an associate’s or joint venture’s credit rating or a
decline in the fair value of the associate or joint venture, is not of itself, evidence
of impairment, although it may be evidence of impairment when considered with
other available information. [IAS 28.41B].
• In addition to the types of events mentioned above, objective evidence of
impairment for the net investment in the equity instruments of the associate or
joint venture includes information about significant changes with an adverse effect
that have taken place in the technological, market, economic or legal environment
in which the associate or joint venture operates, and indicates that the cost of the
investment in the equity instrument may not be recovered. A significant or
prolonged decline in the fair value of an investment in an equity instrument below
its cost is also objective evidence of impairment. [IAS 28.41C].
Because goodwill that forms part of the carrying amount of the net investment in an
associate or a joint venture is not separately recognised, it is not tested for impairment
separately by applying the requirements for impairment testing goodwill in IAS 36.
Instead, the entire carrying amount of the investment is tested for impairment in
accordance with IAS 36 as a single asset, by comparing its recoverable amount (higher of
value in use and fair value less costs to sell) with its carrying amount whenever application
of the bullets above indicates that the net investment may be impaired. An impairment
814 Chapter
11
loss recognised in those circumstances is not allocated to any asset, including goodwill,
which forms part of the carrying amount of the net investment in the associate or joint
venture. Accordingly, any reversal of that impairment loss is recognised in accordance
with IAS 36 to the extent that the recoverable amount of the net investment subsequently
increases. In determining the value in use of the net investment, an entity estimates:
• its share of the present value of the estimated future cash flows expected to be
generated by the associate or joint venture, including the cash flows from the
operations of the associate or joint venture and the proceeds from the ultimate
disposal of the investment; or
• the present value of the estimated future cash flows expected to arise from
dividends to be received from the investment and from its ultimate disposal.
Using appropriate assumptions, both methods give the same result. [IAS 28.42].
The IASB issued an amendment to IAS 28 that clarifies that an entity applies IFRS 9 to
long-term interests in an associate or joint venture to which the equity method is not
applied but that, in substance, form part of the net investment in the associate or joint
venture (long-term interests). [IAS 28.14A]. This clarification is relevant because it implies
that the expected credit loss model in IFRS 9 applies to such long-term interests. The
IASB also clarified that, in applying IFRS 9, an entity does not take account of any losses
of the associate or joint venture, or any impairment losses on the net investment,
recognised as adjustments to the net investment in the associate or joint venture that
arise from applying IAS 28. The amendment is effective for annual periods beginning
on or after 1 January 2019. Early application of the amendments is permitted and must
be disclosed. [IAS 28.45G]. Entities must apply the amendments retrospectively, with the
following exceptions:
• An entity that first applies the amendments at the same time it first applies IFRS 9
shall apply the transition requirements in IFRS 9 to the long-term interests.
• An entity that first applies the amendments after it first applies IFRS 9 shall apply
the transition requirements in IFRS 9 necessary for applying the amendments to
long-term interests. For that purpose, references to the date of initial application
in IFRS 9 shall be read as referring to the beginning of the annual reporting period
in which the entity first applies the amendments (the date of initial application of
the amendments). The entity is not required to restate prior periods to reflect the
application of the amendments. The entity may restate prior periods only if it is
possible without the use of hindsight.
• When first applying the amendments, an entity that applies the temporary
exemption from IFRS 9 in accordance with IFRS 4 – Insurance Contracts – is not
required to restate prior periods to reflect the application of the amendments. The
entity may restate prior periods only if it is possible without the use of hindsight.
• If an entity does not restate prior periods, at the date of initial application of the
amendments it shall recognise in the opening retained earnings (or other
component of equity, as appropriate) any difference between the previous carrying
amount of long-term interests at that date; and the carrying amount of those long-
term interests at that date.
Investments in associates and joint ventures 815
<
br /> To illustrate how entities apply the requirements in IAS 28 and IFRS 9 with respect to
long-term interests, the Board also published an illustrative example when it issued the
amendments. Example 11.26 reproduces this example, however excluding the journal
entries as per the example in the standard.
Example 11.26: Long-term Interests in Associates and Joint Ventures
An investor has the following three types of interests in an associate:
(a) O Shares – ordinary shares representing a 40% ownership interest to which the investor applies the
equity method. This interest is the least senior of the three interests, based on their relative priority in
liquidation.
(b) P Shares – non-cumulative preference shares that form part of the net investment in the associate and
that the investor measures at fair value through profit or loss applying IFRS 9.
(c) LT Loan – a long-term loan that forms part of the net investment in the associate and that the investor
measures at amortised cost applying IFRS 9, with a stated interest rate and an effective interest rate of
5% a year. The associate makes interest-only payments to the investor each year. The LT Loan is the
most senior of the three interests.
The LT Loan is not an originated credit-impaired loan. Throughout the years illustrated, there has not been
any objective evidence that the net investment in the associate is impaired applying IAS 28, nor does the LT
Loan become credit-impaired applying IFRS 9.
The associate does not have any outstanding cumulative preference shares classified as equity, as described
in paragraph 37 of IAS 28. Throughout the years illustrated, the associate neither declares nor pays dividends
on O Shares or P Shares.
The investor has not incurred any legal or constructive obligations, nor made payments on behalf of
the associate, as described in paragraph 39 of IAS 28. Accordingly, the investor does not recognise
its share of the associate’s losses once the carrying amount of its net investment in the associate is
reduced to zero.
The amount of the investor’s initial investment in O Shares is €200, in P Shares is €100 and in the LT Loan
is €100. On acquisition of the investment, the cost of the investment equals the investor’s share of the net fair
value of the associate’s identifiable assets and liabilities.
This table summarises the carrying amount at the end of each year for P Shares and the LT Loan applying
IFRS 9 but before applying IAS 28, and the associate’s profit (loss) for each year. The amounts for the LT
Loan are shown net of the loss allowance.
At the end
P Shares applying IFRS 9
LT Loan applying IFRS 9
Profit (Loss) of the
of year
(fair value) (€)
(amortised cost) (€)
Associate (€)
1
110 90 50
2 90
70
(200)
3 50
50
(500)
4 40
50
(150)
5 60
60
–
6 80
70
500
7 110
90
500
The table below summarises the amounts recognised in the investor’s profit or loss. When recognising interest
revenue on the LT Loan in each year, the investor does not take account of any adjustments to the carrying
amount of the LT Loan that arose from applying IAS 28 (paragraph 14A of IAS 28). Accordingly the investor
recognises interest revenue on LT Loan based on the effective interest rate of 5% each year.
816 Chapter
11
Items
recognised
Impairment
Gains (losses)
Share of profit
Interest revenue
(losses),
of P Shares
(loss) of the
applying
including
applying
associate
IFRS 9 (€)
reversals,
IFRS 9 (€)
recognised
applying
applying the
During year
IFRS 9 (€)
equity method (€)
1 (10)
10
20
5
2 (20)
(20)
(80)
5
3 (20)
(40)
(200)
5
4 –
(10)
(30)
5
5 10
20
(30)
5
6 10
20
200
5
7 20
30
200
5
(1) In Year 1, the increase in fair value of the P Shares of €10 is the difference between the €110 and €100;
the increase in the loss allowance of the LT Loan of (€10) is the difference between €90 and €100; and
the investor’s share of profit of €20 is €50 × 40%. At the end of Year 1, the carrying amount of O Shares
is CU220, P Shares is CU110 and the LT Loan (net of loss allowance) is CU90.
(2) In Year 2, the decrease in fair value of the P Shares of (€20) is the difference between the €90 and €110;
the increase in the loss allowance of the LT Loan of (€20) is the difference between €70 and €90; and
the investor’s share of losses of €80 is €200 × 40%. At the end of Year 2, the carrying amount of O
Shares is CU140, P Shares is CU90 and the LT Loan (net of loss allowance) is CU70.
(3) Applying paragraph 14A of IAS 28, the investor applies IFRS 9 to P Shares and the LT Loan before it
applies paragraph 38 of IAS 28. Accordingly, in Year 3 the decrease in fair value of the P Shares of
(€40) is the difference between the €50 and €90; the increase in the loss allowance of the LT Loan of
(€20) is the difference between €50 and €70; and the investor’s share of losses of €200 is €200 × 40%.
The investor recognises its share of the associate’s loss in reverse order of seniority as specified in
paragraph 38 of IAS 28 and allocate €10 to the LT Loan, €50 to the P Shares and €140 to the O Shares.
At the end of Year 3, the carrying amount of O Shares is zero, P Shares is zero and the LT Loan (net of
loss allowance) is CU40.
(4) In Year 4, the decrease in fair value of the P Shares of (€10) is the difference between the €40 and €50.
Recognition of the change in fair value of €10 in Year 4 results in the carrying amount of P Shares being
negative €10. Consequently, the investor reverses a portion of €10 of the associate’s losses previously allocated
to P Shares. Applying paragraph 38 of IAS 28, the investor limits the recognition of the associate’s losses to
€40 because the carrying amount of its net investment in the associate is then zero. At the end of Year 4, the
carrying amount of O Shares is zero, P Shares is zero and the LT Loan (net of loss allowance) is zero. There
is also an unrecognised share of the associate’s losses of €30 (the investor’s share of the associate’s cumulative
losses of €340 – €320 losses recognised cumulatively + €10 losses reversed).
(5) In Year 5, the increase in fair value of the P Shares of €20 is the difference between the €60 and €40;
the decrease in the loss allowance of €10 is the difference between €60 and €50
. After applying IFRS 9
to P Shares and the LT Loan, these interests have a positive carrying amount. Consequently, the investor
allocates the previously unrecognised share of the associate’s losses of €30 to these interests, being €20
to the P Shares and €10 to the LT Loan. At the end of Year 5, the carrying amount of O Shares is zero,
P Shares is zero and the LT Loan (net of loss allowance) is zero.
(6) In Year 6, the increase in fair value of the P Shares of €20 is the difference between the €80 and €60;
the decrease in the loss allowance of €10 is the difference between €70 and €60; and the investor’s share
of the associate’s profit of €200 is €500 × 40%. The investor allocates the associate’s profit to each
interest in the order of seniority. The investor limits the amount of the associate’s profit it allocates to P
Shares and the LT Loan to the amount of equity method losses previously allocated to those interests,
which in this example is CU60 for both interests. The balancing €60 is allocated to the investment in the
O Shares. At the end of Year 6, the carrying amount of O Shares is €80, P Shares is €80 and the LT Loan
(net of loss allowance) is €70.
Investments in associates and joint ventures 817
(7) In Year 7, the increase in fair value of the P Shares of €30 is the difference between the €110 and €80;
the decrease in the loss allowance of €20 is the difference between €90 and €70; and the investor’s share
of the associate’s profit of €200 is €500 × 40%, allocated in full to the investment in the O Shares. At
the end of Year 7, the carrying amount of O Shares is CU280, P Shares is CU110 and the LT Loan (net
of loss allowance) is CU90.
9 SEPARATE
FINANCIAL
STATEMENTS
IAS 27 was amended in August 2014 to allow entities the option to account for investments
in subsidiaries, associates and joint ventures using the equity method of accounting.
For the purposes of IAS 28, separate financial statements are as defined in IAS 27,
[IAS 28.4], as those presented by an entity, in which the entity could elect to account for
its investments in subsidiaries, joint ventures and associates either at cost, in accordance