with IFRS 9 or using the equity method as described in IAS 28.
An investment in an associate or joint venture is accounted for in the entity’s separate
financial statements in accordance with paragraph 10 of IAS 27. [IAS 28.44]. IAS 27
requires that, in separate financial statements, investments in subsidiaries, associates or
joint ventures are accounted for either:
• at cost;
• in accordance with IFRS 9; or
• using the equity method as described in IAS 28.
The entity applies the same accounting for each category of investments. Investments
accounted for at cost or using the equity method are accounted for in accordance with
IFRS 5 when they are classified as held for sale (or included in a disposal group that is
classified as held for sale). [IAS 27.10].
If an entity elects, in accordance with paragraph 18 of IAS 28, to measure its investments
in associates or joint ventures at fair value through profit or loss in accordance with
IFRS 9 – see 5.3 above, it shall also account for those investments in the same way in
its separate financial statements. [IAS 27.11].
IAS 27 requires the investor to recognise all dividends, whether relating to pre-
acquisition or post-acquisition profits of the investee, in profit or loss within its separate
financial statements once the right to receive payments has been established. [IAS 27.12].
The investor then needs to consider whether there are indicators of impairment as set
out in paragraph 12(h) of IAS 36 (see Chapter 8 at 2.4.1).
The detailed IFRS requirements for separate financial statements as set out in IAS 27
are discussed more fully in Chapter 8.
9.1
Impairment of investments in associates or joint ventures in
separate financial statements
An issue considered by the Interpretations Committee and the IASB is how
impairments of investments in associates should be determined in the separate
financial statements of the investor. In January 2013 the Interpretations Committee
issued an agenda decision18 stating that according to paragraphs 4 and 5 of IAS 36
and paragraph 2(a) of IAS 39 [now paragraph 2(a) of IFRS 9], investments in
818 Chapter
11
subsidiaries, joint ventures, and associates that are not accounted for in accordance
with IFRS 9 are within the scope of IAS 36 for impairment purposes. Consequently,
in its separate financial statements, an entity should apply the provisions of IAS 36
to test for impairment its investments in subsidiaries, joint ventures, and associates
that are carried at cost or using the equity method.
10
PRESENTATION AND DISCLOSURES
10.1 Presentation
10.1.1
Statement of financial position
Unless an investment, or a portion of an investment, in an associate or a joint venture is
classified as held for sale in accordance with IFRS 5 (see 6 above), the investment, or
any retained interest in the investment not classified as held for sale, is classified as a
non-current asset. [IAS 28.15]. The aggregate of investments in associates and joint
ventures accounted for using the equity method are presented as a discrete line item in
the statement of financial position. [IAS 1.54(e)].
IAS 28 does not explicitly define what is meant by ‘investment ... in an associate or a joint
venture’. However, paragraph 38 states that ‘the interest in an associate or a joint venture
is the carrying amount of the investment in the associate or joint venture determined
under the equity method together with any long-term interests that, in substance, form
part of the investor’s net investment in the associate or joint venture. ... Such items may
include preference shares and long-term receivables or loans but do not include trade
receivables, trade payables or any long-term receivables for which adequate collateral
exists, such as secured loans.’ [IAS 28.38]. Some have interpreted this as a requirement to
present the investment in ordinary shares and other long-term interests in associates
within the same line item.
Yet, when associates are profitable, long-term interests such as loans are normally
accounted for under IFRS 9 rather than under the equity method. Therefore, it is
generally considered acceptable to present the investment in ordinary shares in
associates and joint ventures and other long-term interests in associates and joint
ventures in separate line items.
Goodwill relating to an associate or joint venture is included in the carrying amount of
the investment, [IAS 28.32], as is illustrated in Extract 11.2 below.
Extract 11.2: RWE Aktiengesellschaft (2016)
Notes [extract]
Consolidation principles [extract]
For investments accounted for using the equity method, goodwill is not reported separately, but rather included in the
value recognised for the investment. In other respects, the consolidation principles described above apply
analogously. If impairment losses on the equity value become necessary, we report such under income from
investments accounted for using the equity method. The financial statements of investments accounted for using the
equity method are prepared using uniform accounting policies.
Investments in associates and joint ventures 819
10.1.2
Profit or loss
In the statement of comprehensive income or separate income statement, the
aggregate of the investor’s share of the profit or loss of associates and joint ventures
accounted for using the equity method must be shown. [IAS 1.82(c)]. ‘Profit or loss’ in
this context is interpreted in the implementation guidance to IAS 1 as meaning the
‘profit attributable to owners’ of the associates and joint ventures, i.e. it is after tax
and non-controlling interests in the associates or joint ventures.19 There is no
requirement as to where in the statement of comprehensive income or separate
income statement the investor’s share of the profit or loss of associates and joint
ventures accounted for using the equity method should be shown, and different
approaches are therefore seen in practice. As discussed in Chapter 3 at 3.2.2.A, some
entities present operating income on the face of the income statement. In this case,
equity accounted investments may form part of operating activities with their results
included in that measure and with non-operating investments excluded from it.
Another acceptable alternative may be to exclude the results of all associates and
joint ventures from operating profit.
Nokia for example includes its share of the (post-tax) results of associates after operating
profit, but before pre-tax profit:
Extract 11.3: Nokia Corporation (2016)
Consolidated income statement [extract]
2016
2015(1) 2014(1)
For the year ended December 31
Notes
EURm
EURm EURm
Operating (loss)/profit
(1 100)
1 697
1 414
Share of results of associated companies and
34
18
29 (12)
joint ventures
Financial income and expenses
11
(287)
(186) (403)
(Loss)/profit before tax
(1 369)
1 540
999
(1) In 2016, following the Acquisition of Alcatel Lucent, the Group adopted a new financial reporting structure
which resulted in changes to allocation and presentation principles of certain costs. Comparatives for 2015 and
2014 have been recasted to reflect the new financial reporting structure.
In contrast, Nestlé includes its share of the post-tax results of associates below tax expense:
Extract 11.4: Nestlé S.A. (2016)
Consolidated income statement
for the year ended 31 December 2016 [extract]
In millions of CHF
Notes
2016
2015
Profit before taxes, associates and joint ventures
12 526
11 784
Taxes
13
(4 413)
(3 305)
Income from associates and joint ventures
14
770
988
Profit for the year
8 883
9 467
820 Chapter
11
10.1.2.A
Impairment of associates or joint ventures
It is unclear where impairments of associates or joint ventures should be presented in
the statement of comprehensive income or separate income statement. IAS 28 requires
an impairment test to be performed ‘after application of the equity method’, [IAS 28.40],
which could be read as implying that impairment of an associate or joint venture is not
part of the investor’s share of the profit or loss of an associate or joint venture accounted
for using the equity method. On the other hand, the guidance on accounting for
impairment losses on associates is presented under the heading ‘Application of the
equity method’ in IAS 28, which suggests that accounting for impairments of associates
is part of the equity method. In practice, both interpretations appear to have gained a
degree of acceptance.
RWE, for example, reports impairment losses on associates within income from
investments accounted for using the equity method (see Extract 11.2 at 10.1.1 above).
10.1.3
Other items of comprehensive income
The investor’s share of items recognised in other comprehensive income by the
associate or joint venture is recognised in the investor’s other comprehensive income.
[IAS 28.10].
In December 2014, the IASB issued Disclosure Initiative (amendments to IAS 1).
Paragraph 82A of IAS 1 was amended to clarify that entities must present the share of
other comprehensive income of associates and joint ventures accounted for using the
equity method, separated into the share of items that, in accordance with other IFRSs:
• will not be subsequently reclassified to profit or loss; and
• will be reclassified subsequently to profit or loss when specific conditions are met.
[IAS 1.82A].
The amendment applied to annual periods beginning on or after 1 January 2016.
‘Other comprehensive income’ in this context is interpreted in the implementation
guidance to IAS 1 as meaning the ‘other comprehensive income attributable to owners’
of the associates and joint ventures, i.e. it is after tax and non-controlling interests in the
associates or joint ventures.20
10.1.4
Statement of cash flows
IAS 7 – Statement of Cash Flows – notes that for an equity accounted investment,
reporting in the cash flow statement is limited to cash flows between the investor and
the investee, such as dividends received. The question arises as to whether dividends
received should be recognised as operating or investing cash flows. As discussed in
Chapter 36 at 4.4.1, IAS 7 is not prescriptive; however, entities should select an
accounting policy and apply it consistently.
10.2 Disclosures
The disclosure requirements for associates and joint ventures are dealt with in IFRS 12,
together with the disclosure requirements for subsidiaries and unconsolidated
structured entities. The disclosure requirements in relation to associates and joint
ventures are discussed in Chapter 13 at 5.
Investments in associates and joint ventures 821
11 FUTURE
DEVELOPMENTS
As discussed in 7.2 above, many procedures appropriate for the application of the equity
method are similar to the consolidation procedures described in IFRS 10 (see
Chapter 7). Furthermore, IAS 28 explains that the concepts underlying the procedures
used in accounting for the acquisition of a subsidiary are also adopted in accounting for
the acquisition of an investment in an associate or a joint venture. [IAS 28.26]. This does
raise a number of practical difficulties, and there has been an ongoing debate about
whether the equity method of accounting is a consolidation method or a measurement
method. Although IAS 28 generally adopts consolidation principles it nevertheless
retains features of a valuation methodology.
In 2015, the IASB tentatively decided to undertake a research project on the equity
method.21 However, in May 2016 the IASB22 deferred this project until the Post-
implementation Reviews (PIR) of IFRS 10, IFRS 11 – Joint Arrangements – and IFRS 12
are complete which will include seeking feedback on investors’ information needs
regarding equity method investments.
References
1
IFRIC Update, November 2016.
14 Detailed worked examples on the elimination
2
IFRS
12.9(d).
cross-holdings in subsidiaries and associates can
3
IFRS
12.9(e).
be found in Bogie on group accounts, John C.
4 Staff Paper, Interpretations Committee meeting,
Shaw (editor), Bristol, 1973.
May 2009, Agenda reference 3, Venture capital
15 IFRIC Update, August 2002, p.3.
consolidations and partial use of fair value 16 IFRIC Update, January 2018.
through profit or loss.
17 Sale or Contribution of Assets between an
5
IFRIC Update, September 2017.
Investor and its Associate or Joint Venture
6
IFRIC Update, July 2009.
(amendments to IFRS
10 and IAS
28),
7
IASB Update, March 2018.
September 2014.
8
IFRIC Update, July 2010.
18 IFRIC Update, January 2013.
9 Staff paper, Interpretations Committee meeting,
19
IAS
1
IG6 ‘XYZ Group – Statement of
July 2010, Agenda reference
16, IAS 28 –
comprehensive income for the year ended
Investments in Associates – Purchase in stages –
31 December 20X7 (illustrating the presentation of
fair value as deemed cost, paras. 24 and 29.
profit and loss and other comprehensive income in
10 IFRIC Update, July 2010.
one statement and the classification of expenses
11
IAS
1
IG6 ‘XYZ Group – Statement of
within profit by function)’.
comprehensive income for the year ended
20
IAS
1
IG6 ‘XYZ Group – Statement of
31 December 20X7 (illustrating the presentation of
comprehensive income for the year ended
profit and loss and other comprehensive income in
31 December 20X7 (illustrating the presentation of
one statement and the classification of expenses
profit and loss and other comprehensive income in
within profit by function)’.
one statement and the classification of expenses
12 IFRIC Update, May 2013.
within profit by function)’.
13 IASB Update, July 2013.
21 IASB Update, May 2016.
822 Chapter
11
823
Chapter 12
Joint arrangements
1 INTRODUCTION ............................................................................................ 827
1.1
The nature of joint arrangements ...................................................................... 827
2 EFFECTIVE DATE, OBJECTIVE AND SCOPE OF IFRS 11 .............................. 828
2.1
Effective date ........................................................................................................ 828
2.2 Objective
...............................................................................................................
828
2.3 Scope
...................................................................................................................... 828
2.3.1
Application by venture capital organisations and similar
entities .................................................................................................... 828
2.3.2
Application to joint arrangements held for sale ............................ 829
2.3.3
Accounting by a joint operation ....................................................... 829
3 JOINT ARRANGEMENT .................................................................................. 829
3.1
Unit of account ..................................................................................................... 830
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 162