IAS 28 – Investments in Associates and Joint Ventures ( summary with examples )

Objective

IAS 28 prescribes the accounting for investments in associates and joint ventures using the equity method, ensuring the investor’s financial statements reflect their share of profit or loss and other comprehensive income of these investments.

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🧾 1. Scope

• Associates: Entities over which the investor has significant influence, but not control or joint control.

• Joint Ventures: Joint arrangements where parties have joint control and rights to net assets (as opposed to joint operations, which follow proportional consolidation).

Significant influence is generally presumed if the investor holds 20% to 50% of voting power, unless evidence shows otherwise.

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💡 2. Key Definitions

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⚙️ 3. Accounting Using the Equity Method

Initial Recognition

• Investment is recognized at cost.

• Include transaction costs directly attributable to acquisition.

Journal Example:

Subsequent Measurement

• Increase investment for share of profit

• Decrease investment for share of losses and dividends received

Equity Method Formula:

Investment Carrying Amount=Cost+Share of Post-Acquisition Profits/Losses−Dividends Received

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📊 4. Example 1 – Associate Profit Share

Scenario:

• Investor holds 30% in Associate A

• Associate A reports net profit = $200,000

• Dividend paid by Associate = $50,000

Calculation:

• Share of profit = 30% × $200,000 = $60,000

• Dividend received = 30% × $50,000 = $15,000

Journal Entries:

1. Record share of profit:

2. Record dividend received:

Carrying amount of investment increases by net $45,000 ($60k – $15k).

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🔄 5. Impairment

• If investment’s recoverable amount falls below carrying amount → recognize impairment loss (IAS 36 rules apply).

• Impairment loss cannot be reversed if using the equity method, except if recoverable amount increases later.

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🧩 6. Joint Ventures

• Accounted for using the equity method in the investor’s financial statements.

• Similar to associates, the investor recognizes share of profit or loss and dividends received.

Example 2 – Joint Venture

• Investor owns 40% of Joint Venture B

• Net profit JV B = $100,000

• Dividend = $20,000

Journal Entries:

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🔀 7. Losses Beyond Investment

• If share of losses exceeds carrying amount, investment is reduced to zero.

• Investor discontinues recognition of further losses unless they have legal or constructive obligation to fund the associate/joint venture.

Example 3:

• Investment carrying amount = $50,000

• Share of loss = $60,000 → investment = $0

• Remaining $10,000 loss not recognized unless obligation exists.

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📈 8. Special Adjustments

1. Fair Value Adjustments: Only if investment is measured at fair value under IFRS 9 for financial instruments (optional for listed associates).

2. Acquisition of additional interest: Adjust carrying amount; no remeasurement of previously held interest.

3. Disposal of interest: Recognize gain or loss in profit or loss.

Example 4 – Disposal:

• Investment carrying amount = $200,000

• Sold 50% for $120,000

• Gain = $120,000 – $100,000 (50% of carrying amount) = $20,000

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🧾 9. Disclosure Requirements

Entities must disclose:

• Name and nature of significant associates/joint ventures

• Percentage of ownership interest

• Summarized financial information (assets, liabilities, revenue, profit)

• Nature and extent of restrictions on ability to transfer funds (e.g., dividends)

• Reconciliation of carrying amounts at start and end of period

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🧩 10. Summary Table

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🎯 11. Key Points

• Significant influence ≈ 20–50% voting power

• Equity method = recognize share of profit/loss + dividends received

• Losses beyond carrying amount → stop recognizing unless obligated

• Joint ventures also use equity method

• Disclosure required for transparency