Accounting for investment in associates (Part 2)

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 net assets of the investee.

The equity method Application of the equity method financial statements of the investor In some circumstances, an entity has, entities and prepares consolidated An entity with significant influence Under the equity method, an and the separate financial in substance, an existing ownership financial statements, these over, or joint control of, an investee investment is initially recognised at statements, when prepared. as a result of a transaction that consolidated financial statements will should account for its investment in an cost, and the carrying amount is currently gives it access to the returns be used in applying the equity associate or a joint venture using the adjusted thereafter for: Although IFRS 3 Business associated with an ownership method. When the associate or joint Combinations requires the costs interest. In such circumstances, the venture does not prepare equity method except when the ?? the investor's share of the post- associated with acquiring a subsidiary proportion allocated to the entity is consolidated financial statements, investment qualifies for exemption. acquisition profits or losses of the to be recognised as an expense in determined by taking into account because it has associates and/or joint investee, which are recognised in consolidated financial statements, the eventual exercise of those ventures but no subsidiaries, the IAS 28 defines the equity method as a the investor's profit or loss; and this has not changed the appropriate potential voting rights and other starting point for applying the equity method of accounting whereby the ?? distributions received from the treatment of the costs incurred in derivative instruments that currently method should be the financial investment is initially recognised at investee, which reduce the carrying acquiring an associate or a joint give the entity access to the returns. statements that account for those cost and adjusted thereafter for the amount of the investment. post-acquisition change in the venture. associates and/or joint ventures using As a general principle, IFRS 9 the equity method, rather than any investor's share of net assets of the Adjustments to the carrying amount Share of profits or losses Financial Instruments does not apply separate financial investee. The profit or loss of the may also be necessary for changes in to interests in associates and joint statements. investor includes the investor's share the investor's proportionate interest in Proportionate ownership interest ventures that are accounted for using of the profit or loss of the investee, the investee arising from changes in The investor's share of the profits or the equity method. Nor does it apply and the investor's other the investee's other comprehensive losses of the investee, or other to instruments containing potential As a general principle, comprehensive income includes its income (such as the impact of changes in the investee's equity, is voting rights that in substance IFRS 9 Financial share of the investee's other property revaluations and some determined on the basis of its currently give access to the returns comprehensive income. exchange differences). The investor's proportionate ownership interest. associated with an ownership interest Instruments does not share of those changes is recognised in an associate or a joint venture. apply to interests in IAS 28 justifies the use of the equity in other comprehensive income of the The investor generally recognises its However, in all other cases, method by noting that the recognition investor. share of the investee's earnings and instruments containing potential associates and joint of income on the basis of distributions losses based on the percentage of the voting rights in an associate or a joint ventures that are received may not be an adequate The investor's share of the investee's equity interest owned by the investor. venture are accounted for in measure of the income earned by an profits or losses after acquisition is However, when agreements accordance with IFRS 9. accounted for using investor on an investment in an also adjusted to take account of items designate allocations among the the equity method associate or a joint venture because such as additional depreciation of investors of profits and losses, certain Aggregation of group interests Oduware is the partner-in-charge of the distributions received may bear depreciable assets based on their fair costs and expenses, distributions When the investor is a parent, the Accounting and Financial Advisory little relation to the performance of values at the acquisition date. from operations, or distributions group's share of the investee is the in Akintola Williams Deloitte the associate or joint venture. Because Similarly, appropriate adjustments to upon liquidation that are different aggregate of the holdings in that the investor has joint control of, or the investor's share of the associate's from ownership percentages, investee by the parent and its This publication contains general information only and Akintola Williams significant influence over, the investee, or joint venture's profit or loss after recognising equity method income subsidiaries. The holdings of the the investor has an interest in the acquisition are made for impairment based on the percentage of the Deloitte is not, by means of this parent's other associates and joint publication, rendering accounting, associate's or joint venture's losses such as for goodwill or equity interest owned may not be ventures are ignored for this purpose. performance and, as a result, the appropriate. The substance of these business, financial, investment, legal, tax, property, plant and equipment. or other professional advice or services. return on its investment. It is therefore IAS 28(2011):10 specifies that the agreements should be reflected in When an associate or a joint venture appropriate for the investor to account investment in an associate or joint determining how an increase or has subsidiaries, associates or joint for this interest by extending the decrease in net assets of the investee Deloitte refers to one or more of Deloitte venture accounted for using the ventures, the profit or loss, other Touche Tohmatsu Limited, a UK private scope of its financial statements to equity method is initially recognised will affect cash payments to the comprehensive income and net assets company limited by guarantee, and its include its share of the profit or loss of at cost. Generally, cost includes the investor over the life of the investee taken into account in applying the network of member firms, each of which such an investee. As a result, purchase price and other costs and upon its liquidation. equity method are those recognised is a legally separate and independent application of the equity method directly attributable to the acquisition in the associate's or joint venture's entity. Please see www.deloitte.com/about for a detailed provides more informative reporting of or issuance of the asset such as Potential voting rights financial statements (including the the investor's net assets and profit or professional fees for legal services, When potential voting rights or other description of the legal structure of associate's or joint venture's share of Deloitte Touche Tohmatsu Limited and its loss. transfer taxes and other transaction derivatives containing potential the profit or loss, other member firms. costs. Therefore, the cost of an voting rights exist , only the investor's comprehensive income and net assets The equity method is used whether or investment in an associate or joint existing ownership interests are taken of its associates and joint ventures), Akintola Williams Deloitte a member firm not the investor, because it also has venture at initial recognition into account in determining the after any adjustments necessary to of Deloitte Touche Tohmatsu Limited, subsidiaries, prepares consolidated comprises the investment's purchase investor's share of the investee's provides audit, tax, consulting, give effect to uniform accounting accounting and financial advisory, financial statements. However, the price and any directly attributable profits or losses. That share does not policies. corporate finance and risk advisory to investor does not apply the equity expenditure necessary to acquire it. reflect the possible exercise or public and private clients spanning method when presenting separate conversion of potential voting rights Accordingly, when the associate or multiple industries. Please visit us at financial statements. This applies to both the consolidated and other derivative instruments. joint venture is itself a group of www.deloitte.com/ng

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