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Significant influence Potential voting rights IN7 An entity is required to consider the existence and effect of potential voting rights currently exercisable or convertible when assessin

International Accounting Standard 28

Investments in Associates

This version includes amendments resulting from IFRSs issued up to 17 January 2008.

IAS 28 Accounting for Investments in Associates was issued by the International Accounting Standards Committee in April 1989 It replaced those parts of IAS 3 Consolidated Financial Statements (issued in June 1976) that had not been replaced by IAS 27 IAS 28 was

reformatted in 1994, and amended in 1998, 1999 and 2000

The Standing Interpretations Committee developed three Interpretations relating to IAS 28:

• SIC-3 Elimination of Unrealised Profits and Losses on Transactions with Associates

(issued December 1997)

• SIC-20 Equity Accounting Method—Recognition of Losses (issued July 2000)

• SIC-33 Consolidation and Equity Method—Potential Voting Rights and Allocation of Ownership Interests (issued December 2001).

In April 2001 the International Accounting Standards Board (IASB) resolved that allStandards and Interpretations issued under previous Constitutions continued to beapplicable unless and until they were amended or withdrawn

In December 2003 the IASB issued a revised IAS 28 with a new title—Investments in Associates.

The revised standard also replaced SIC-3, SIC-20 and SIC-33

Since then, IAS 28 has been amended by the following IFRSs:

• IFRS 3 Business Combinations (issued March 2004)

• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (issued March 2004)

• IAS 1 Presentation of Financial Statements (as revised in September 2007)

• IFRS 3 Business Combinations (as revised in January 2008)

• IAS 27 Consolidated and Separate Financial Statements (as amended in January 2008).

The following Interpretation refers to IAS 28:

• IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (issued December 2004).

Amendments to other pronouncements

APPROVAL OF IAS 28 BY THE BOARD

BASIS FOR CONCLUSIONS

International Accounting Standard 28 Investments in Associates (IAS 28) is set out in

paragraphs 1–43 and the Appendix All the paragraphs have equal authority but retainthe IASC format of the Standard when it was adopted by the IASB IAS 28 should be read

in the context of the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Framework for the Preparation and Presentation of Financial Statements IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for

selecting and applying accounting policies in the absence of explicit guidance

IN1 International Accounting Standard 28 Investments in Associates replaces IAS 28

Accounting for Investments in Associates (revised in 2000) and should be applied for

annual periods beginning on or after 1 January 2005 Earlier application isencouraged The Standard also replaces the following Interpretations:

• SIC-3 Elimination of Unrealised Profits and Losses on Transactions with Associates

• SIC-20 Equity Accounting Method—Recognition of Losses

• SIC-33 Consolidation and Equity Method—Potential Voting Rights and Allocation of Ownership Interests

Reasons for revising IAS 28

IN2 The International Accounting Standards Board developed this revised IAS 28 as

part of its project on Improvements to International Accounting Standards.The project was undertaken in the light of queries and criticisms raised inrelation to the Standards by securities regulators, professional accountants andother interested parties The objectives of the project were to reduce or eliminatealternatives, redundancies and conflicts within the Standards, to deal with someconvergence issues and to make other improvements

IN3 For IAS 28 the Board’s main objective was to reduce alternatives in the application

of the equity method and in accounting for investments in associates in separatefinancial statements The Board did not reconsider the fundamental approachwhen accounting for investments in associates using the equity methodcontained in IAS 28

The main changes

IN4 The main changes from the previous version of IAS 28 are described below

Scope

IN5 The Standard does not apply to investments that would otherwise be associates or

interests of venturers in jointly controlled entities held by venture capitalorganisations, mutual funds, unit trusts and similar entities when thoseinvestments are classified as held for trading and accounted for in accordance

with IAS 39 Financial Instruments: Recognition and Measurement Those investments

are measured at fair value, with changes in fair value recognised in profit or loss

in the period in which they occur

IN6 Furthermore, the Standard provides exemptions from application of the equity

method similar to those provided for certain parents not to prepare consolidatedfinancial statements These exemptions include when the investor is also a

parent exempt in accordance with IAS 27 Consolidated and Separate Financial Statements from preparing consolidated financial statements (paragraph 13(b)),

and when the investor, though not such a parent, can satisfy the same type ofconditions that exempt such parents (paragraph 13(c))

Significant influence

Potential voting rights

IN7 An entity is required to consider the existence and effect of potential voting rights

currently exercisable or convertible when assessing whether it has the power toparticipate in the financial and operating policy decisions of the investee Thisrequirement was previously included in SIC-33, which has been superseded

Equity method

IN8 The Standard clarifies that investments in associates over which the investor has

significant influence must be accounted for using the equity method whether ornot the investor also has investments in subsidiaries and prepares consolidatedfinancial statements However, the investor does not apply the equity methodwhen presenting separate financial statements prepared in accordance withIAS 27

Exemption from applying the equity method

IN9 The Standard does not require the equity method to be applied when an associate

is acquired and held with a view to its disposal within twelve months ofacquisition There must be evidence that the investment is acquired with theintention to dispose of it and that management is actively seeking a buyer.The words ‘in the near future’ were replaced with the words ‘within twelvemonths’ When such an associate is not disposed of within twelve months it must

be accounted for using the equity method as from the date of acquisition, except

in narrowly specified circumstances.*

IN10 The Standard does not permit an investor that continues to have significant

influence over an associate not to apply the equity method when the associate isoperating under severe long-term restrictions that significantly impair its ability

to transfer funds to the investor Significant influence must be lost before theequity method ceases to be applicable

* In March 2004, the Board issued IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

IFRS 5 removes this scope exclusion and now eliminates the exemption from applying the equitymethod when significant influence over an associate is intended to be temporary See IFRS 5 Basisfor Conclusions for further discussion

Elimination of unrealised profits and losses on transactions with associates

IN11 Profits and losses resulting from ‘upstream’ and ‘downstream’ transactions

between an investor and an associate must be eliminated to the extent of theinvestor’s interest in the associate The consensus in SIC-3 has been incorporatedinto the Standard

Non-coterminous year-ends

IN12 When financial statements of an associate used in applying the equity method are

prepared as at the end of the reporting period that is different from that of theinvestor, the difference must be no greater than three months

Uniform accounting policies

IN13 The Standard requires an investor to make appropriate adjustments to the

associate’s financial statements to conform them to the investor’s accountingpolicies for reporting like transactions and other events in similar circumstances.The previous version of IAS 28 provided an exception to this requirement when itwas ‘not practicable to use uniform accounting policies’

Recognition of losses

IN14 An investor must consider the carrying amount of its investment in the equity of

the associate and its other long-term interests in the associate when recognisingits share of losses of the associate SIC-20 limited the recognition of the investor’sshare of losses to the carrying amount of its investment in the equity of theassociate Therefore, that Interpretation has been superseded

Separate financial statements

IN15 The requirements for the preparation of an investor’s separate financial

statements are established by reference to IAS 27

International Accounting Standard 28

Investments in Associates

Scope

However, it does not apply to investments in associates held by:

insurance funds

that upon initial recognition are designated as at fair value through profit or loss

or are classified as held for trading and accounted for in accordance with IAS 39

Financial Instruments: Recognition and Measurement Such investments shall be

measured at fair value in accordance with IAS 39, with changes in fair value recognised in profit or loss in the period of the change

Definitions

An associate is an entity, including an unincorporated entity such as a partnership,

over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture

Consolidated financial statements are the financial statements of a group presented

as those of a single economic entity

Control is the power to govern the financial and operating policies of an entity so

as to obtain benefits from its activities

The equity method is 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 profit or loss of the investor includes the investor’s share of the profit or loss of the investee

Joint control is the contractually agreed sharing of control over an economic

activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers)

Separate financial statements are those presented by a parent, an investor in an

associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees

Significant influence is the power to participate in the financial and operating

policy decisions of the investee but is not control or joint control over those policies

A subsidiary is an entity, including an unincorporated entity such as a partnership,

that is controlled by another entity (known as the parent)

3 Financial statements in which the equity method is applied are not separate

financial statements, nor are the financial statements of an entity that does nothave a subsidiary, associate or venturer’s interest in a joint venture

4 Separate financial statements are those presented in addition to consolidated

financial statements, financial statements in which investments are accountedfor using the equity method and financial statements in which venturers’interests in joint ventures are proportionately consolidated Separate financialstatements may or may not be appended to, or accompany, those financialstatements

5 Entities that are exempted in accordance with paragraph 10 of IAS 27 Consolidated

and Separate Financial Statements from consolidation, paragraph 2 of IAS 31 Interests

in Joint Ventures from applying proportionate consolidation or paragraph 13(c) of

this Standard from applying the equity method may present separate financialstatements as their only financial statements

Significant influence

6 If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or

more of the voting power of the investee, it is presumed that the investor hassignificant influence, unless it can be clearly demonstrated that this is not thecase Conversely, if the investor holds, directly or indirectly (eg throughsubsidiaries), less than 20 per cent of the voting power of the investee, it ispresumed that the investor does not have significant influence, unless suchinfluence can be clearly demonstrated A substantial or majority ownership byanother investor does not necessarily preclude an investor from havingsignificant influence

7 The existence of significant influence by an investor is usually evidenced in one

or more of the following ways:

(a) representation on the board of directors or equivalent governing body ofthe investee;

(b) participation in policy-making processes, including participation indecisions about dividends or other distributions;

(c) material transactions between the investor and the investee;

(d) interchange of managerial personnel; or

(e) provision of essential technical information

8 An entity may own share warrants, share call options, debt or equity instruments

that are convertible into ordinary shares, or other similar instruments that havethe potential, if exercised or converted, to give the entity additional voting power

or reduce another party’s voting power over the financial and operating policies

of another entity (ie potential voting rights) The existence and effect of potentialvoting rights that are currently exercisable or convertible, including potentialvoting rights held by other entities, are considered when assessing whether anentity has significant influence Potential voting rights are not currentlyexercisable or convertible when, for example, they cannot be exercised orconverted until a future date or until the occurrence of a future event

9 In assessing whether potential voting rights contribute to significant influence,

the entity examines all facts and circumstances (including the terms of exercise

of the potential voting rights and any other contractual arrangements whetherconsidered individually or in combination) that affect potential rights, except theintention of management and the financial ability to exercise or convert

10 An entity loses significant influence over an investee when it loses the power to

participate in the financial and operating policy decisions of that investee.The loss of significant influence can occur with or without a change in absolute

or relative ownership levels It could occur, for example, when an associatebecomes subject to the control of a government, court, administrator orregulator It could also occur as a result of a contractual agreement

Equity method

11 Under the equity method, the investment in an associate is initially recognised at

cost and the carrying amount is increased or decreased to recognise the investor’sshare of the profit or loss of the investee after the date of acquisition.The investor’s share of the profit or loss of the investee is recognised in theinvestor’s profit or loss Distributions received from an investee reduce thecarrying amount of the investment Adjustments to the carrying amount mayalso be necessary for changes in the investor’s proportionate interest in theinvestee arising from changes in the investee’s other comprehensive income.Such changes include those arising from the revaluation of property, plant andequipment and from foreign exchange translation differences The investor’sshare of those changes is recognised in other comprehensive income of the

investor (see IAS 1 Presentation of Financial Statements (as revised in 2007)).

12 When potential voting rights exist, the investor’s share of profit or loss of the

investee and of changes in the investee’s equity is determined on the basis ofpresent ownership interests and does not reflect the possible exercise orconversion of potential voting rights

Application of the equity method

except when:

Non-current Assets Held for Sale and Discontinued Operations;

investment in an associate not to present consolidated financial statements, applies; or

subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method;

(ii) the investor’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);

statements with a securities commission or other regulatory organisation, for the purpose of issuing any class of instruments in a public market; and

consolidated financial statements available for public use that comply with International Financial Reporting Standards.

with IFRS 5

15 When an investment in an associate previously classified as held for sale no

longer meets the criteria to be so classified, it shall be accounted for using theequity method as from the date of its classification as held for sale Financialstatements for the periods since classification as held for sale shall be amendedaccordingly

17 The recognition of income on the basis of distributions received may not be an

adequate measure of the income earned by an investor on an investment in anassociate because the distributions received may bear little relation to theperformance of the associate Because the investor has significant influence overthe associate, the investor has an interest in the associate’s performance and, as aresult, the return on its investment The investor accounts for this interest byextending the scope of its financial statements to include its share of profits orlosses of such an associate As a result, application of the equity method providesmore informative reporting of the net assets and profit or loss of the investor

18 An investor shall discontinue the use of the equity method from the date when it

ceases to have significant influence over an associate and shall account for theinvestment in accordance with IAS 39 from that date, provided the associate doesnot become a subsidiary or a joint venture as defined in IAS 31 On the loss ofsignificant influence, the investor shall measure at fair value any investment theinvestor retains in the former associate The investor shall recognise in profit orloss any difference between:

(a) the fair value of any retained investment and any proceeds from disposing

of the part interest in the associate; and

(b) the carrying amount of the investment at the date when significantinfluence is lost

19 When an investment ceases to be an associate and is accounted for in accordance

with IAS 39, the fair value of the investment at the date when it ceases to be anassociate shall be regarded as its fair value on initial recognition as a financialasset in accordance with IAS 39