Objective
Prescribes accounting for investments in associates and sets out the equity method for both associates and joint ventures.
Scope
- All entities that are investors with joint control of, or significant influence over, an investee.
- Venture capital organisations, mutual funds and similar entities may instead measure these investments at fair value through profit or loss under IFRS 9.
Key definitions
- Associate
- An entity over which the investor has significant influence.
- Significant influence
- The power to participate in financial and operating policy decisions without control or joint control. Holding 20% or more of voting power is presumed to give significant influence, and less than 20% presumed not to, unless clearly shown otherwise.
- Equity method
- Initially recognise the investment at cost, then adjust it for the investor's share of the investee's post-acquisition profit or loss and OCI, less distributions received.
Recognition & measurement
Equity method
- Investment = cost + share of post-acquisition retained profits and OCI − impairment − dividends received.
- Share of profit or loss goes to profit or loss; share of OCI goes to OCI.
- Eliminate unrealised profits on transactions between investor and associate to the extent of the investor's interest.
- Use the associate's most recent financial statements, aligned to the investor's policies; a reporting date gap of more than three months is not allowed.
- Goodwill is included in the carrying amount and is not tested separately; the whole investment is tested for impairment under IAS 36 when there are indicators.
- Stop recognising losses once the investment reaches zero, unless the investor has obligations or has made payments on the associate's behalf.
- On losing significant influence, measure any retained interest at fair value and recognise the gain or loss in profit or loss.
Evidence of significant influence
- Board representation; participation in policy-making (including dividends); material transactions; interchange of managerial personnel; provision of essential technical information.
Key disclosures
- Disclosure requirements are in IFRS 12.
Common exam traps
- Associates are not consolidated line by line; only one line in the statement of financial position and one in profit or loss.
- Unrealised profit is eliminated only to the investor's percentage, not 100% as with subsidiaries.
- Dividends received reduce the investment; they are not income in the group statements.
- 20% is a presumption — board representation can create significant influence below it.
Worked example: Carrying amount of an associate
Scenario. An investor buys 30% of an associate for $500,000. In the first year the associate makes a profit of $200,000 and pays dividends of $50,000. At the year end the associate holds goods bought from the investor that include $20,000 of profit.
- Share of profit = 30% × 200,000 = $60,000.
- Dividends received = 30% × 50,000 = $15,000 (reduces the investment).
- Unrealised profit to eliminate = 30% × 20,000 = $6,000.
- Investment = 500,000 + 60,000 − 15,000 − 6,000.
Answer: Investment in associate = $539,000 (one common approach deducts the unrealised profit from the investment when the investor is the seller).
Practise MCQs on this standard
Test your understanding of IAS 28 with free chapter-wise MCQs and explanations in these question banks.
CAF-6 Corporate ReportingICAP CAFACCA FR Financial ReportingACCACA Inter P1 Advanced AccountingICAI CA Intermediate
ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.