IFRS 28 applied by investor organizations with direct participation in the shared creation of objects or in case of significant influence on this process. About the features of use IFRS 28 we'll tell you further.
When should IFRS 28 be applied?
IFRS 28, effective from 02/09/2016 in the version of the text attached to the order of the Ministry of Finance of Russia dated 12/28/2015 No. 217n, is devoted to the issues of accounting for investments made when there is a significant influence on the investment object or when it is created under joint control. Until 02/09/2016, this standard was applied in the wording put into effect by Order of the Ministry of Finance of Russia dated 07/18/2012 No. 106n.
Thus, IFRS 28 necessary for organizations that have:
- a significant (20% or more, although exceptions to this rule are possible) share of influence on decision-making on the investment object in the absence of real participation in it;
- joint investments, rights and common control over the investee.
Signs of influence on the investment object
The presence of significant influence of the organization on the investment object occurs in the following cases:
- its participation in the process of managing the investment object;
- participation in the development of political decisions regarding it, including in the distribution of profits (dividends);
- the presence of active mutual business transactions, including the exchange of personnel and technical information;
- ownership of shares or the rights to purchase them, the presence of debt obligations or equity participation, which, in the absence of restrictions on the timing of their sale (conversion), can serve as security for the emergence of additional voting rights.
In reality, an organization can:
- have real leverage over the investee even with a share of influence estimated at less than 20%;
- not have such influence even with a significant share of rights to participate in the object.
Loss of influence while maintaining a share of participation in an object can occur when the right to participate in decision-making regarding it disappears, for example, due to:
- the emergence of control by the state, court, administrative or regulatory body;
- conclusion of an agreement.
Features of equity participation in the object
In both situations (both in the presence of significant influence and in the case of joint participation in investments), the organization associated with such an object uses the equity method to reflect its presence in its activities. This method assumes that:
- initial investments in an object are accounted for at their original cost;
- further changes in the value of the object depend on the profits or losses brought by the object attributable to the investor, while the profit received from the object reduces its book value;
- adjustments to the value of an object related to its revaluation or exchange rate differences do not affect the value of the object and are included in other income and expenses;
- the reflection of potential rights to an object occurs in proportion to the share of ownership of them, while it is possible to take into account circumstances that serve as security for additional voting rights, but then these security cannot be accounted for as financial instruments (i.e., according to the rules of IFRS 9);
- An investment object not intended for further sale is considered a non-current asset.
When is the equity method not used?
An organization has the right not to use the equity method when:
- it is the parent company, but is not required to prepare consolidated statements (subparagraph “a”, paragraph 4 of IFRS 10);
- it is a subsidiary, wholly or partially owned by another organization, and its owners do not object to the non-use of this method;
- its debt or equity obligations are not publicly traded;
- it does not submit reports or prepare them for submission to the securities commission or other authority for the purpose of placing financial instruments on open markets;
- its parent organization prepares financial statements for public placement in accordance with IFRS requirements.
An entity may elect to measure an investment at fair value or through profit or loss (under IFRS 9) if:
- it itself specializes in investing in new businesses, represents one of the types of investment funds (mutual, unit trust, insurance) or owns the rights to the object through a similar organization;
- ownership of part of the investment in the object is realized through an organization specializing in investments in new businesses or through one of the types of investment funds, regardless of the significance of the share of influence of these organizations on the object.
In the second case, she must apply the equity method to the remaining part of the investment in this object, regardless of its size.
Nuances of accounting for an object that has changed its purpose
If the object (or its share) is initially intended for sale, it is accounted for according to the rules of IFRS 5. For the part not intended for sale, the equity method is used until disposal of the sold part. After disposal, depending on the further purpose of the remainder of the object, it can be accounted for as:
- a non-current asset that continues to exist and continues to be subject to the equity method;
- financial instrument using the rules of IFRS 9.
In the event that an object that was accounted for as intended for sale changes its purpose and begins to be recognized as an object of non-current assets, it is necessary to make adjustments in its accounting and financial statements from the date of formation of this object, reflecting the data related to it using the equity method.
When do you stop using the equity method?
An organization needs to stop using the equity method when:
- the investment object becomes its subsidiary - then the rules for business combinations (IFRS 3) and the formation of consolidated statements (IFRS 10) begin to apply;
- the remainder of the participation interest in the object is equivalent to the concept of a financial asset - it must be measured at fair value from the moment of recognition as such an asset (IFRS 9), while attributing to profit or loss the difference either between the fair value of this share and the proceeds from the disposal of part of the investment, or between the balance sheet the value of investments on the date of completion of the use of the equity method.
When you discontinue using the equity method, all amounts attributable to the item previously recognized in other profit or loss must be accounted for as related to the disposal of the non-current asset. A similar operation must be performed when reducing the share of participation in an object for which the need to use the equity method remains. Such an operation will not be necessary if the method of participation in the object changes (significant influence is replaced by joint investments or vice versa), but the object does not cease to be an investment object.
Features of procedures for objects of equity participation
The transactions carried out in relation to equity assets are largely similar to the consolidation procedures contained in IFRS 10. In particular, they are used when purchasing investments.
The share of investments made up of the participation of organizations included in the group is assessed as a total value for the group, while the participation of each of them separately is not taken into account.
If the investment object itself has subsidiaries or its own investment objects, then the components of the final financial result for it must be formed after bringing all accounting indicators into compliance with the rules of the unified accounting policy.
Profits and losses from mutual transactions between the investor and the object of his investment are accounted for separately from the investment object only when these transactions are not related to it. The investor's share in profits and losses from transactions performed by the investment object is excluded from accounting. The investor must recognize losses on such transactions if they result in an impairment of the asset, either in full (if it sells something to the investee) or in part (if it is a reverse sale).
By analogy with mutual transactions, the contribution of a non-monetary (non-monetary) asset to obtaining a share in the capital of the investee is taken into account. The exception here would be investments that do not have a commercial purpose. Profits and losses on them are not recognized either in the overall financial result of the organization or in investments in the investee. If, in addition to the share in the capital of the investee, the organization additionally receives any asset from it, then it fully recognizes in the financial result the result of the asset exchange transaction, taking into account its share of participation in the investee.
For investments acquired, the difference between the purchase price and fair value is accounted for as:
- part of the book value of the object that is not subject to depreciation - if we are talking about goodwill;
- the investor's share income from participation in the investment object for the period of acquisition of the investment - if the organization's share in the fair value of the investment exceeds the cost of the investment.
Necessary adjustments are made to bring the investor's interest into line with fair value after acquiring depreciable or depreciating property.
The investor receives the accounting data necessary for using the equity method from the financial statements of the investee, which must be adjusted to the reporting dates necessary for the investor. In this case, for the time interval between reporting dates, the events that occurred during it are taken into account. In addition, these data must be adjusted in accordance with the accounting policies applied by the investor.
If the investee has cumulative preferred shares in the equity capital of which the investor is not the owner, he calculates his profits and losses after calculating dividends on these shares, regardless of whether they were declared for payment.
When an entity's interest in an investee equals the loss from that involvement, the entity must cease accounting for its participation in those losses. Although it may continue to invest certain assets in the investee. The organization's obligations in relation to the investment object are limited only to those that it has legally assumed. When the profitability of an investment object resumes, the investor can begin to recognize income from it after covering with his share of the profit all losses previously incurred by him from this object, including unrecognized ones.
In terms of investments in investees, the organization must prepare special separate financial statements (clause 10 of IFRS 27).
Accounting for losses from impairment of an asset
Impairment losses on an interest in an investment are recognized under the rules of IFRS 39. The entire carrying amount of the investment is tested for impairment and compared either to the asset's value in use or to its fair (market) value less costs to sell.
Results
An organization making investments is required, in accordance with IFRS rules, to apply certain procedures to record and report on transactions on investees.
According to IFRS No. 27, consolidated financial statements must be prepared by companies (parent companies) that control the activities of other companies (subsidiaries). The standard is also used when accounting for investments in subsidiaries, jointly controlled and associated entities in cases where the entity presents separate financial statements.
Consolidated financial statements– financial statements of a group that are presented as if they were prepared by a single entity.
Parent organization– an organization that has one or more subsidiaries.
Subsidiary organization– an organization controlled by another (parent) organization.
The process of generating consolidated reporting– line-by-line addition of data from the financial statements of companies included in the group, while simultaneously excluding intra-group transactions from the final indicators.
Options preparation of consolidated statements:
- IFRS statements are prepared for each group company. The data from these statements is then summarized and adjusted to obtain consolidated statements;
- The indicators of Russian reporting of all companies are added up. The group's aggregated Russian financial statements are then transformed in accordance with IFRS and adjusted for consolidation purposes.
Consolidation– adding up the reporting lines of the group companies and making adjustments necessary for the preparation of consolidated reporting.
Stages of preparation of consolidated statements:
- collection and analysis of information from subsidiaries;
- exclusion of intra-group turnover and balances;
- calculation of basic amendments;
- calculation of inflation adjustments;
- collection and analysis of all amendments and preliminary versions;
- preparing information for disclosure;
- release of reports with explanations.
The consolidated financial statements must disclose: the fact of consolidation of the organization; the nature of the relationship between the subsidiary and parent organizations; the date of preparation of the financial statements of the subsidiary, if these statements are required in the preparation of consolidated financial statements and were prepared on a date that does not coincide with the reporting date of the parent organization.
When a parent that has an interest in a jointly controlled entity prepares separate financial statements, the statements must disclose the fact that the statements are separate financial statements.
Subsidiaries are defined as being under the control of another company, called the parent. Control is a set of circumstances that creates the ability of a parent company to determine the financial and operating policies of a subsidiary in order to obtain benefits from its activities. Control is generally considered to exist when a parent company, itself or through its subsidiaries, owns more than half of the voting shares of the entity. Even when a parent company owns less than half of the voting shares, its control over a subsidiary is subject to one of the following conditions:
- the parent company, by agreement with other investors, receives the right to control more than half of the voting shares of the subsidiary;
- the parent company, in accordance with the charter or by agreement with another (subsidiary) company, has the authority to determine its financial and business policies;
- The parent company, on the basis of legal legal documents, has the opportunity to: a) have a majority of votes at a meeting of the board of directors, supervisory board or other similar governing body of the subsidiary; b) can appoint (remove) a majority of the members of the board of directors.
- a subsidiary is acquired with a view to selling it in the near future;
- the subsidiary is subject to conditions that significantly and permanently limit its ability and ability to transfer funds to the parent company.
In the financial statements of the parent company, as an independent organization with the rights of a legal entity, investments in subsidiaries can be accounted for: a) at actual cost, at market value in accordance with the general methodology for accounting for investments; b) using the participation method, which is also used to account for investments in associated companies.
The equity method of accounting for investments is that investments accepted for accounting at the investor's actual costs are adjusted at the end of each reporting period to the change in the investor's share in the net assets of the company being the investment object. Using its share of the investee's net assets, the investor revaluates the book value of the investment and accordingly changes the financial result of the reporting year. The investor reduces the revalued carrying amount of the investment by the amount of income received from the investee.
The equity method is not used to account for an investment in an associate if the investing company is itself a parent, which is not required to constitute a consolidated liability in accordance with the requirements of IAS 27 Consolidated and Separate Financial Statements. A company is not required to prepare consolidated financial statements if it:
- is itself a subsidiary and there is agreement of the shareholders of the parent company not to prepare consolidated statements, or the parent company has 100% participation in it;
- does not have publicly traded securities and has not submitted financial statements for the purpose of placing its securities on the stock market, and also if its parent company presents consolidated financial statements in accordance with IFRS.
a) determine the fair value of the associate’s identifiable assets;
b) based on their share owned by the investor, determine the difference between the acquisition cost and the fair value of the identifiable assets belonging to him. The identified positive difference is taken into account as the value of goodwill, and the negative difference is included in income when determining the investor’s share of the profit in the associated company.
Associated companies belonging to the group of a given investor are distinguished by the fact that the latter can exercise significant influence over their financial and business activities, regardless of the fact that such companies cannot be classified as subsidiaries or joint ventures.
The standard (IAS 28) defines that significant influence arises if an investor, alone or through its subsidiaries, owns more than 20% of the voting shares of the investee. If its share in voting shares is less than 20%, then such a company is not included in the number of associates. Both must be confirmed by certain circumstances, including:
- representation of the investor on the board of directors or other similar management body or the opportunity to participate in the development of the financial and economic policy of the associated company;
- major transactions between the investor and the investee;
- exchange of management personnel or provision of important technical information.
Example. The Alpha joint-stock company invested 850 million rubles to acquire 30% of the voting shares of the Sigma joint-stock company. The latter showed in its annual report a net profit of 200 million rubles, half of which was distributed as dividends to the owners of voting shares.
Joint Stock Company "Alpha" reflects the amount of initial investments in JSC "Sigma" in the debit of the "Long-term financial investments" account and the credit of cash accounts - 850 million rubles. At the end of the reporting year, Alpha JSC has the right to reflect in its balance sheet 30% of the net profit of Sigma JSC, which is: 200 x 30: 100 = 60 million rubles. This amount will be recorded in the debit of the “Long-term financial investments” account and in the credit of the profit account under a separate item “Share of profit of associated companies”.
Dividends received by Alpha JSC from Sigma JSC in the amount of 30 million rubles. will be recorded in the debit of the cash or settlement accounts and in the credit of the “Long-term financial investments” account. As a result of the considered entries, investments in associated companies will be reflected in the balance sheet of Alfa JSC, based on the following calculation:
Actual investment costs are 850 million rubles.
Attached share of net profit 60 million rubles.
Amount of dividends received (30) million rubles.
Investments in associated companies
at the end of the reporting year 880 million rubles.
In the profit and loss statements, the total amount of profit should be increased by 60 million rubles. as a share of the profits of associated companies.
Investments in associates are reflected in the investor's financial statements at cost unless the investor considers them to be investments in associates because he acquired the shares solely for the purpose of selling them in the near future. The application of the cost method of accounting for investments assumes that the income received by the investor is recognized only in the amount of dividends and other income from the net income of the investee that the latter received and recognized after the date of acquisition of the shares. Other gains should be recorded as a reduction in the carrying amount of the investment.
Investment property is an investment in real estate that is not expected to be used in the business of the entity or for sale in the ordinary course of business. It includes land plots, buildings or parts of buildings that are at the disposal of the owner or tenant under a financial lease (leasing) agreement, used to receive rental payments, income from the increase in property value, but not involved in the production and sale of goods, works, services ; not used for administrative purposes; not intended for sale in the normal operations of the organization.
The new edition of IAS 40 establishes an unambiguous rule regarding the inclusion in investment property of property received under operating leases. It may be classified as investment property provided that all requirements for the definition of investment property are met and the leased assets are recognized at their fair value. Each leased property must be accounted for and classified separately. At the same time, since property items received under operating lease and classified as investment property are accounted for at fair value, all other investment property items must also be measured at fair value.
Unlike investment property, IAS 40 treats owner-occupied property. It includes property at the disposal of the owner or lessee under a financial lease agreement, intended for the production and sale of goods, work, services, for ordinary sale or for the management of an organization.
Cash flows generated by investment property are largely unrelated to the rest of the organization's assets. While the cash flows generated by fixed assets in the production and sales processes also apply to other property used for these purposes. The same applies to any property treated as owner-occupied property.
Individual objects, such as buildings, may be used partly for rental or capital gains, and partly for generating income from the production and sale of goods or services. In this case, the property is classified as investment property if the cost of services or other revenue represents a relatively small portion of the total income. The best option is when the building can be valued in parts and, accordingly, the value of the building attributable to investment value or owner-occupied property is taken into account separately.
Example. The organization owns the hotel, rents out rooms and receives rent. Such an object can well be considered an investment property. But a hotel is a complex that provides all kinds of services to guests: food, service, entertainment. Their value is so significant that the hotel building should be recognized as owner-occupied property and reflected accordingly in the organization's balance sheet.
The hotel owner can lease out a restaurant, sports and cultural complex, and guest service services to other organizations or individuals. The hotel as a complex will generate income mainly from rent. Her building will need to be classified as investment property.
Classification of investment properties
| Refers to investment property | Does not qualify as investment property |
| Land intended to generate income from capital appreciation | Renewable natural resources, forest lands, etc. |
| Land whose purpose is not defined | Subsoil, minerals, other non-renewable natural resources (except land) |
| Buildings and structures (owned or received under financial lease) provided for operating lease | Buildings and structures intended for sale, or unfinished construction projects for the same purpose |
| Unoccupied buildings and structures intended for operating rental or income from capital appreciation | Construction in progress of buildings and structures or their reconstruction on behalf of third parties, or intended for future use as investment value |
| Buildings and structures used as investment property that are being renovated for subsequent use for the same purposes | Buildings (structures) used in production, commercial or administrative activities; reconstructed for the same purposes, intended for disposal, as well as occupied by company employees, regardless of the amount of rent for use |
Reclassification of objects of investment value,
that is, their inclusion in or exclusion from this category is made according to the actual purpose of a particular item of property of the organization.
The transfer of a property from an investment property to a property for sale occurs when it begins to be renovated in preparation for sale. But if a decision is made to sell an investment property without reconstruction, it continues to be included in the investment property until it is disposed of as a result of the sale.
The object is included in investment property:
- after completion of construction or reconstruction;
- after the end of its use in production, management, commercial operations;
- after transferring the operating lease to a third party. An object is excluded from investment property:
- with the beginning of its use in production, management or commercial operations;
- with the beginning of reconstruction as a preparatory pre-sale operation.
The initial valuation of investment property is made at the cost of its acquisition or construction, not excluding construction by economic means.
The cost of acquiring investment value includes the price of the object and direct costs of the transaction (legal, consulting services, registration, etc.). Interest for deferred payment is not included in the cost price; it is included in periodic expenses during the term of the loan. Facilities built by contractors are valued in accordance with the contract price.
The cost of investment property built economically is determined by the sum of all costs on the date of completion of construction of the facility. Costs of unfinished objects are taken into account like any other costs of capital construction. Separate accounting for investment property begins on the date of completion of construction and acceptance of the property into operation.
The cost of excess consumption of materials and other resources consumed during the construction or reconstruction of objects is not included in their initial cost. Expenses associated with the commissioning of an investment property are not included in its cost, with the exception of those expenses that are necessary to bring the object into working condition. But initial losses associated with temporary difficulties in attracting tenants and other similar losses are written off as expenses for the reporting periods in which they arose.
Subsequent additional expenses are charged to increase the carrying amount of the investment property if they increase the profitability of the investment property. In all cases where losses in profitability are reflected in the original price of the property, their recovery through modernization or other subsequent expenses should be reflected in an increase in the book value of the property. Other subsequent expenses are not capitalized. They should be written off as expenses for the period in which they arose.
This model differs from accounting at revalued amounts, which is widely used to account for material assets.
Models for subsequent assessment of the value of investment property. IAS-40 allows the following to be used for accounting for investment property: fair value, and its changes reflected in profit and loss; The original cost of acquisition at which the investment property is carried on the balance sheet at its residual value, that is, less accumulated depreciation and impairment losses. The use of historical acquisition cost does not eliminate the need to disclose the fair value of investment property in the notes to the financial statements.
assets, in that the excess of the revalued value over the original book value is recognized in capital accounts as an increase in the value of property. The fair value model assumes that all changes in value are recognized in profit or loss only.
The difficulties of determining fair value for many objects of investment value are also obvious. The fair value of investment property should reflect market conditions and actual market and other conditions at the reporting date and not at any other date. Changing market conditions lead to changes and uncertainties in fair value measurements. For many investment properties, it is impossible to rely on active market prices; tariff factors of rent also influence them.
Each organization is obliged to apply the selected valuation procedure for all investment properties. Often, for objective reasons, it is impossible to ensure that all existing assets are assessed at fair value.
Reclassification is measured using one of two models: cost or fair value. When measured at historical cost, any reclassification of investment property does not cause any change in its carrying amount and therefore does not require any accounting for variances. On the contrary, when valuing investment property at fair value, deviations arise that require accounting and reporting in financial statements.
Reclassification of investment property into property, plant and equipment, inventory or other categories of “owner-occupied property” is made at fair value, which is recognized as the carrying amount of the items when their use in the entity changes.
Disposal of investment property occurs through their sale or financial lease under a leasing agreement. The sale price of an object is determined by its fair value at the date of alienation. When providing a commercial loan or installment payment plan, the difference between the actual consideration and the fair value (price) is recorded separately as interest income received. The resulting profits (losses) are reflected in the profit and loss account.
| 1. Fixed assets and land are reclassified as investment property |
|
| 2. Commissioning of an investment property after reconstruction or construction using an economic method | 2. Deviations between the fair and book value of the item are included in the profit and loss account for the reporting period |
Upon final decommissioning (write-off) of an object of investment value, the possible amount of losses is reflected as a loss in the reporting period in which the write-off of the object was recorded.
Legal entities can invest in other legal entities through the acquisition of a block of shares. The acquisition of more than 50% of the shares with voting rights of the invested object allows the investor to establish control over this object (the right to determine the financial and other policies of the partnership in order to obtain benefits from its activities). Control is effective when an investor owns, directly or indirectly through subsidiaries and affiliates, more than 50% of the shares of an investee, unless such ownership is clearly shown to not constitute control.
In accordance with SBU No. 13:
Subsidiary business partnership - it is a partnership that is controlled by another (master) partnership.
Main business partnership - This is a partnership that has one or more subsidiary partnerships.
When establishing control, the investor is recognized as the main business partnership, and the invested object is recognized as a subsidiary business partnership. The main business partnership and all its subsidiary partnerships form group.
Users of the master partnership's financial statements are interested not only in information about the financial position and results of operations of the master partnership, but also of the entire group. This need is met by consolidated financial statements. ( Consolidated financial statements- separate financial statements of the group presented as the statements of one partnership.)
Consolidated financial statements include a consolidated balance sheet, a consolidated income statement, a consolidated statement of cash flows and an explanatory note.
A master business partnership must present consolidated financial statements, with the exception of the following master partnerships:
A master business partnership that is in turn a wholly or substantially owned subsidiary of another business partnership (where the master partnership owns 90% or more of the voting power) may not file consolidated financial statements unless required by its master partnership and has consent of the owners of the minority share.
A master business partnership that does not present consolidated financial statements discloses in its separate financial statements:
- v the reason why consolidated financial statements are not presented;
- v the method used in accounting to account for investments in a subsidiary;
- v the name and registered office of the parent partnership that presents the consolidated financial statements.
A parent business partnership must include all of its domestic and foreign subsidiaries in its consolidated financial statements unless:
- v the subsidiary was acquired for the purpose of sale;
- v the subsidiary operates under strict long-term restrictions.
The financial statements of the parent partnership and its subsidiaries are combined on an item-by-item and line-by-line basis by summing assets, liabilities, equity, income, and expenses. The financial statements of the parent partnership and its subsidiaries included in the consolidated statements are generally prepared as of the same date. In cases where this is not feasible, financial statements prepared for different reporting dates may be used, provided that the difference is no more than three months.
The financial statements of the parent partnership and its subsidiaries included in the consolidated statements are generally prepared using uniform accounting policies for similar transactions and operating events. In cases where a group member uses accounting policies that differ from those adopted in the consolidated financial statements, appropriate adjustments are made to its financial statements upon consolidation.
The operating results of a subsidiary are included in the consolidated financial statements for acquired subsidiaries from the date of acquisition and for disposed subsidiaries until the date of disposal.
In the separate financial statements (the statements of each member of the group subject to consolidation) of the parent partnership, investments in subsidiaries included in the consolidated financial statements or accounting treatment for long-term investments. If the main partnership has dependent business partnerships, investments in which are accounted for using the equity method, investments in subsidiary partnerships must be accounted for using the same method.
Some companies make significant investments in other companies, which, however, do not provide complete control over them and thus these companies do not become subsidiaries. If the investing group can exercise significant influence over the financial and operating policies of the company, then the group will have an active interest in its net assets and results.
The nature of the relationship between the investor and the company will differ from simple investing, i.e. passive investing.
To ensure that an investor correctly reflects investments in associates in financial statements, International Financial Reporting Standard 28 “Accounting for Investments in Associates” is applied.
Including the value of an investment in a group's accounts will not provide an objective representation of its nature.
To ensure that the nature of the investment is fairly reflected in the group's accounts, it is necessary to show the group's share of the net assets and financial results of the company, which is called an associate, in the consolidated accounts. This approach is called the equity method of accounting.
IAS 28 uses the following definitions to define intragroup relationships:
An associate is a company over which the investor has significant influence, but which is neither a subsidiary nor a joint venture;
Significant influence is the ability to participate in decisions regarding the company's financial or operating policies, but not to control such policies;
Control - (for IFRS 28) is the authority to manage the financial and business policies of a company in order to obtain benefits from its activities;
A subsidiary is a company that is under the control of another company (called the parent company);
The equity method of accounting is an accounting method in which investments are initially recorded at cost and then adjusted for post-acquisition changes in the investor's share of the investee's net assets. The income statement reflects the investor's share of the investee's results of operations;
The cost method of accounting is a method of accounting where investments are recorded at cost. Investment income is reported in the income statement only to the extent that the investor receives dividends from the investee's accumulated net income arising after the date of acquisition.
Significant Impact
If an investor owns, directly or indirectly through other subsidiaries, at least 20% of the voting shares of an investee, the investor will be considered to have significant influence, unless the contrary can be clearly demonstrated. Conversely, if an investor owns, directly or indirectly through subsidiaries, less than 30% of the voting shares of the investee, the investor does not have significant influence unless such influence can be clearly demonstrated. Ownership of a major or controlling interest by another investor does not necessarily preclude the investor from having significant influence.
Significant influence by an investor is usually demonstrated in one or more of the following ways:
Representation on the board of directors or similar management body of the investee;
Participation in the policy development process;
Major transactions between the investor and the investee;
Exchange of management personnel;
Providing important technical information.
The associated company is not part of the group. The group includes parent and subsidiary companies. An associate is an investment of the group.
Equity accounting method
Under the equity method of accounting, investments are initially recorded at cost and their carrying amount is increased or decreased by the investor's recognized share of the investee's profits or losses after the acquisition date. The income received from the investee reduces the carrying amount of the investment. Adjustments to the carrying amount may also be necessary to reflect changes in an investor's interest in the investee that result from changes in the investee's equity that were not included in the income statement. Such changes include those that arise as a result of the revaluation of fixed assets and investments, as a result of exchange rate differences when translating financial statements into foreign currencies and as a result of adjustments that take into account differences arising from a business combination.
Cost accounting method
Under the cost method of accounting, an investor records his investment in the investee company at cost. An investor recognizes income only to the extent that it receives proceeds from the investee's accumulated net income after the acquisition date. Income received in excess of such profits is considered a consideration of the investment and is recorded as a reduction in the value of the investment.
Consolidated financial statements
An investment in an associate shall be accounted for in the consolidated financial statements using the equity method of accounting, unless the investment is acquired and held solely with a view to selling in the near future, in which case it shall be accounted for under the cost method.
Income recognition based on proceeds received may not be consistent with the income earned by an investor on an investment in an associate because the proceeds received may have little relationship to the performance of the associate. Because the investor has significant influence over the associated company, it bears part of the responsibility for the results of its operations and, therefore, for the profitability of the investment. The investor takes this into account when expanding its consolidated financial statements to show its share of the results of operations of such associate and thus allows for an analysis of profits and investments in which
More useful coefficients can be calculated. As a result, the application of the equity method of accounting provides more detailed information about the investor's net assets and net income.
An investment in an associate is accounted for using the cost method when the company operates under long-term constraints that significantly reduce its ability to transfer funds to the investor. Investments in associates are also accounted for using this method when the investment is acquired and held solely with the intention of selling in the near future.
An investor must cease using the equity method of accounting as of the date on which:
He ceases to have significant influence over the associate but retains some or all of his investment; or
The use of the equity method of accounting is no longer appropriate because the associate operates under strict long-term restrictions that significantly reduce its ability to transfer funds to the investor.
The carrying amount of the investment at that date should subsequently be treated as cost.
Separate forms of investor financial statements
An investment in an associate that is included in the separate financial statements of the investor preparing the consolidated financial statements and is not an investment made solely with a view to being realized in the near future must:
Accounted for using the participation method;
Recorded as an available-for-sale financial asset as described in IAS 39 Financial Instruments: Recognition and Measurement, i.e. at fair value.
The preparation of consolidated financial statements does not in itself mean that the investor is required to prepare separate forms of financial statements.
An investment in an associate included in the financial statements of an investor that does not prepare consolidated financial statements must:
Reflected at actual cost;
Account for using the participation method as described in the standard if the participation method is applicable to the associate and if the investor prepares consolidated financial statements; or
Be accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement as an available-for-sale financial asset or a financial asset held for use in securities market transactions, as defined in the standard.
An investor with an investment in an associate may not prepare consolidated financial statements because it does not have any subsidiaries. It is appropriate for such an investor to provide the same information about its investments in associates as it does in the companies that prepare consolidated financial statements.
Investment Accounting Display
in the reporting of the investor company
Balance
An investment in an associate included in an investor's own financial statements that also prepares consolidated financial statements should be accounted for:
Using the equity method of accounting;
At cost; or
As a financial asset available for sale as defined in IAS 39 Financial Instruments: Recognition and Measurement, i.e. at fair value.
In the investor company's own balance sheet, such an investment is usually shown at cost.
Profit and Loss Statement
The investor company's own income statement will show the dividend income received and receivable from the investee.
Investment Accounting Display
in group reporting
IAS 28 rule states that an investment in an associate should be accounted for in the consolidated financial statements using the equity method of accounting unless the investment is acquired and held solely with a view to selling in the near future (in which case it should be accounted for at cost).
Investment accounting
using the equity method of accounting
In the group's financial statements, associated companies are accounted for using the equity method.
Consolidation of an associated company does not occur on an item-by-item basis. Instead, part, for example, of group “A” in the net assets is included in the net assets of the entire associated company, and is recorded as one item in the consolidated balance sheet, the same transactions are carried out in the preparation of the consolidated income statement, that is, belonging to group “A” the part of the profit remaining after paying all taxes is indicated in the report as one item.
Investment Accounting Display
in the consolidated balance sheet
The investment shown on the investor's own balance sheet must be replaced by the group's portion of Group A's net assets at the reporting date plus the residual (unamortized) value of goodwill arising at the time of acquisition.
The group's reserves must include Group H's portion of Group A's reserves created after the acquisition date (in the same way as in the case of a subsidiary).
Having excluded the investment shown in the investor’s own balance sheet, we include in the consolidated balance sheet the investor’s portion of the acquired net assets of group “A” (at fair value). The difference between them is business reputation (goodwill).
The calculation of the net assets of group A and reserves arising from the date of acquisition is carried out using the same methodology as in the case of a subsidiary.
Amount to be included in the balance sheet
at the reporting date =
Part of net assets owned by the group +
Unamortized goodwill (1)
The portion of net assets owned by the group is calculated using the following formula:
Proportion of net assets held by the group = Percentage share of the group's net assets in the associate
Ѕ Net assets of “A” associate
company at the reporting date
Note that IFRS 28 contains a different formula for calculating the carrying value of an investment, namely:
Book value of investment =
Costs + Unallocated reserves arising from the date of acquisition -
Amortized portion of goodwill (2)
When comparing the first and second formulas, we can conclude that the desired value
(the book value of the investment) can be calculated using data on part of the net assets, since the cost is nothing more than the value of the part of the net assets at the acquisition date plus goodwill.
Investment Accounting Display
in a consolidated
income statement
The approach used is consistent with the methodology used in the consolidated balance sheet.
Group A's portion of after-tax profits is included in the consolidated income statement in lieu of dividend income from Group A investments, which appears on the investor's own income statement.
Item-by-line summation of income and expenses is not carried out.
If the acquisition of group “A” occurred during the year, the distribution is carried out on a time-proportional basis.
Application of the accounting method
by equity participation
when accounting for investments
Many of the procedures appropriate for applying the equity method of accounting are similar to the reduction procedures set out in IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries. Moreover, the general concepts underlying the consolidation procedures used in the acquisition of a subsidiary apply when acquiring an investment in an associate.
An investment in an associate is accounted for using the equity method of accounting from the date on which it qualifies as an associate. When an investment is acquired, any difference (whether positive or negative) between the acquisition cost and the investor's share of the fair value of the net identifiable assets of the associate is accounted for in accordance with IAS 22 Business Combinations. Appropriate adjustments to the investor's share of post-acquisition profits and losses are made to account for:
Depreciation of assets based on their fair value;
The amortization of the difference between the cost of an investment and the investor's share of the fair value of the net identifiable assets.
To apply the equity method of accounting, the investor uses the most recent available financial statements of the associate; it is usually prepared as of the same date as the investor's financial statements. When the reporting dates of the investor and the associated company differ, the latter often prepares, specifically for the investor, reports as of the investor's reporting date. If this is not practical, financial statements that are dated differently may be used. The principle of consistency dictates that the length of reporting periods and any differences between reporting dates should remain the same from period to period.
When financial statements as of different dates are used, adjustments are made to account for the impact of any significant events or transactions between the investor and the associate that occurred between the date of the associate's financial statements and the date of the investor's financial statements.
An investor's financial statements are typically prepared using uniform accounting policies for similar transactions and events that occur under similar conditions. In many cases, if an associate uses different accounting policies than those adopted by the investor for similar transactions and events occurring under similar conditions, the financial statements of the associate are adjusted accordingly when the investor uses the equity method of accounting. If it is practically impossible to calculate such adjustments, this fact is usually disclosed.
If an associate has cumulative preferred shares outstanding that are owned by third parties, the investor calculates its share of profits and losses after making an adjustment to take into account dividends on the preferred shares, whether declared or not.
If, under the equity method of accounting, an investor's share of an associate's losses equals or exceeds the carrying amount of the investment, the investor generally ceases to report its share of future losses. The investment is shown in the report as zero. Additional losses are covered in that
the extent to which the investor has incurred obligations or made payments on behalf of the associate to satisfy the latter's obligations guaranteed by the investor or otherwise agreed upon. If the associate subsequently reports a profit, the investor resumes recording its share of the profit only after it equals its share of the unrecognized net loss.
To reliably reflect investments in an associated company, it is necessary to take into account the provisions of the interpretation of PKI-20 “Equity Accounting Method - Recognition of Losses”
In accordance with paragraph 11 of IFRS 1 (1997 Edition) Presentation of Financial Statements, financial statements shall not be presented as conforming to IFRSs unless they comply with all of the requirements of each applicable Standard and each applicable Interpretation issued by the Standing Interpretations Committee. The CRP interpretations are not intended to apply to non-material items.
In some cases, an investor may have several financial interests in an associated company or joint venture, which are reported using the equity method. For example, an investor's financial interests may include common or preferred stock, loans or advances, debt securities, options to purchase common stock, or accounts receivable.
Under IAS 28, an investor will generally cease to recognize its share of the associate's losses in the income statement if, using the equity method, the investor's share of the associate's losses equals or exceeds the carrying amount of the investment. However, additional losses must be recognized to the extent that the investor has incurred obligations or made payments on behalf of the associate to satisfy the latter's obligations that are guaranteed by the investor or for which it is otherwise liable.
When using the equity method, the following questions arise:
What financial interests should be included in the carrying amount of the investment in the associate;
Whether an investor's share of losses in an associate in excess of the carrying amount of the related investment should be recognized if the investor has a financial interest in the associate that is not included in the carrying amount of the investment.
Based on a study of materials on this issue, a consensus was reached according to which the book value of an investment should include the book value of only those instruments that provide:
Unlimited rights to share in profits or losses;
A share in the equity balance of the investee.
Accounting for financial investments in an investee that are not included in the carrying value of investments in accordance with the rules of the Interpretation is carried out in accordance with other International Financial Reporting Standards, in particular IFRS 39.
Continued losses of an investee is objective evidence of impairment of both financial investments included in the carrying value of investments in accordance with paragraph 5 of this Interpretation, and other forms of financial investments. The decrease in the carrying amount of investments is determined after adjusting the carrying amount for the amount of losses using the equity method.
If an investor, as a result of guarantees issued or otherwise, has obligations to the investee or obligations to settle the latter's liabilities, the investor, while continuing to recognize a share of the investee's losses, should consider whether to establish a provision in accordance with IAS 37.
IFRIC 20 requires an investor to disclose a portion of losses in the notes to the financial statements.
The unrecognized amount (on an aggregate and per period basis) of the investor's share of the associate's losses must be disclosed in the notes to the financial statements.
The basis for the conclusions was the following:
IAS 28 provides a description of the equity method and guidance on its application, including in determining cost and subsequently recognizing the investor's share of profit or loss. This guidance should also be applied by a joint venturer when using the equity method under IAS 31;
IFRS 28 states that losses of an investee are recognized in respect of instruments that represent the investor's interest in the net assets of the investee. Other forms of financial investments in the investment object are not included in the balance sheet
the cost of investments and are reflected in accordance with other International Financial Reporting Standards;
Under IAS 28, additional losses must be recognized to the extent that the investor has incurred obligations or made payments on behalf of the investee to satisfy the investee's obligations that are guaranteed by the investor or for which it is otherwise liable. The obligation to the investment object and the transfer of funds to it to pay off obligations for which the investor is liable, including as a result of issued guarantees, in its economic content completely coincides with the investor’s obligation and the corresponding payments to settle obligations on behalf of the investment object. Therefore, losses must also be recognized when the investor assumes a liability to the investee and finances it in any form, for example, in the form of a loan or advance to the investee;
If there are indications that the value of an investment in an associate may be impaired under IAS 28, the entity is required to consider whether to recognize an impairment loss under IAS 36 Impairment of Assets for investments accounted for under the equity method. For investments accounted for under IAS 39, an entity is required to determine at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. If such evidence exists, an entity should assess the appropriateness of the impairment test in accordance with IAS 39. Continued losses of an investee indicate a possible impairment, so additional tests are required to determine the potential impairment loss;
IAS 37 addresses the recognition and measurement of provisions, including provisions for guarantees, and legal or constructive liabilities. When measuring the provision, the investee's losses previously recognized under the equity method are taken into account. Thus, it is possible to prevent losses previously recognized under the equity method from being re-included in reserves;
Under IAS 28, if the investee subsequently reports a profit, the investor resumes recording its share of those profits only after it reaches its share of unrecognized net losses. Disclosure of the size of an investor's unrecognized share of an investee's losses is necessary to understand the health of the investment.
The interpretation is effective on 15 July 2000. Changes in accounting policies must be accounted for in accordance with the transition provisions of IFRS 8.46.
Impairment losses
If there is an indication that the investment in an associate may be impaired, the reporting entity applies IAS 36 Impairment of Assets. When determining the value in use of an investment, the company evaluates:
Its share of the present value of the estimated future cash flows expected to be generated by the investee company as a whole, including the cash flows from its operations and the proceeds from the ultimate disposal of the investment;
The present value of the estimated future cash flows expected to arise from the dividends received from the investment and from its eventual sale.
With the right assumptions, both methods produce the same results. When an impairment loss occurs, it is allocated in accordance with IAS 36 such that the loss is primarily attributed to goodwill.
The recoverable amount of an investment in an associate is assessed on an individual basis unless the particular associate generates cash inflows from continuing use that are largely independent of the cash inflows generated by the reporting entity's other assets.
To determine an impairment loss, an entity examines whether goodwill that relates to the cash-generating unit is recognized in the financial statements. If so, a top-down review needs to be done. If an entity has been unable to allocate the carrying amount of goodwill on a reasonable and consistent basis, it should conduct a second step of the top-down test, i.e. the entity should:
Determine the smallest cash-generating unit that includes the cash-generating unit in question and to which the carrying amount of goodwill can be allocated on a reasonable and consistent basis (that is, the “larger” unit);
Then compare the recoverable amount of the larger cash-generating unit to its carrying amount (including the carrying amount of goodwill) and recognize an impairment loss.
Example test “bottom up”
A lending institution called "K" is a wholly owned subsidiary of its parent company. Organization "K" has three divisions - "X", "Igrek" and "Z".
There are indicators of impairment of Igrek, and credit institution K has estimated the cost of its recovery at CU230 million.
The Parent Company calculated the value of Entity K to be CU1,380 million.
The goodwill recorded in the group financial statements in relation to Entity K can be allocated on a reasonable and consistent basis. Goodwill allocation data is presented in Table 1.
Table 1
Assigning goodwill on a reasonable and consistent basis
Goodwill was distributed in the same proportion as exists among net assets.
The carrying amount to be compared with the recoverable amount is CU240 million, as shown
in table 2.
Table 2
Conducting a bottom-up test
Cases when the fractional method
not applicable
An investment in an associate is accounted for at cost when the associate operates under long-term restrictions that significantly impede the transfer of funds to the investor.
Investments in associates are also carried at cost when they are acquired and held solely with a view to selling in the near future.
Investors who do not prepare consolidated statements
An investment in an associate included in the own financial statements of an investor that does not prepare consolidated statements shall be accounted for:
Using the equity method;
At cost;
As a trading financial asset or a financial asset held for trading as defined in IAS 39 Financial Instruments: Recognition and Measurement.
Internal turnover
with associated company
Internal trading operations
Group entities may carry out purchase and sale transactions with an associated company. As a result, receivables and payables will appear in the statements of individual companies.
Internal turnover with associated companies should not be excluded.
The associated company is not part of the group. Therefore, the debt of an associated company to the group is an asset, and the debt of the group to that company is a liability.
In the consolidated balance sheet, receivables and payables for transactions with company A must be shown separately.
Dividends
Dividends are included in the consolidated balance sheet in full.
To do this you need to do the following:
Ensure that dividends payable and receivable are fully accounted for by individual companies;
Include dividends receivable by the group from associated companies in the dividends item of the consolidated balance sheet.
Domestic dividend balances should not be eliminated.
Dividends are reflected automatically in the consolidated income statement. Dividends received from associates should not be included in the consolidated income statement. When using the equity method, Company H's portion is automatically accounted for in the associate's pre-dividend profits.
Including dividends from an associate in the consolidated income statement would result in them being re-recognized.
Unrealized profit
If Company H sells securities or another asset to Company A and they are still held by Company A at the end of the year, their carrying amount will include the profit earned and recorded by Company H. This profit, included in the book value of the assets, will be reflected in the calculation of the net assets of company A (profit not realized) and in the income statement of company N.
If Company A sells the assets of Company H, a similar situation arises, only now the profit will go to Company A's income statement and Company H's assets.
To avoid re-accounting under the equity method, these unrealized gains must be eliminated.
To reliably reflect transactions in financial statements, it is necessary to take into account the provisions of the interpretation of PKI-3 “Exclusion of unrealized profits and losses on transactions with associated companies.”
In considering these issues, a consensus was reached:
Unrealized gains are eliminated to the extent of the investor's interest in the associate;
Unrealized losses are not eliminated to the extent that the transaction indicates impairment (decrease in value) of the transferred asset.
The approach described above is similar to the rules in IFRS 31 for jointly controlled entities that are accounted for using the equity method.
To eliminate unrealized gains (regardless of the direction of the sale transaction), it must be subtracted from Company A's pre-tax earnings and from retained earnings in the calculation of net assets before Company A is included in the consolidated statements. using the equity method.
An example of eliminating unrealized profits in trading operations
Organization "N" owns 40% of the shares of associated company "A".
Entity N sold assets to Company A for CU150 that initially cost CU100 to N. At the end of the year, all these assets are held by Company A.
To show how unrealized profits will be accounted for in the consolidated statements, it is necessary to carry out the procedure for eliminating them.
To eliminate unrealized profits you must:
Subtract CU50 from the profit of reporting “A” before taxes in the income statement;
Subtract CU50 from retained earnings as of the reporting date based on the net assets of company A.
Then the share in net assets and profit after acquisition using the equity method will be CU20. (50 CH 40%) below.
Loss of significant influence
An investor must cease using the equity method on the date on which:
He ceases to have significant influence over the associate but retains some or all of his investment;
The use of the equity method is no longer appropriate because the associate operates under strict long-term restrictions that significantly reduce its ability to transfer funds to the investor.
The carrying amount of the investment from that date must equal cost.
These rules are similar to those that apply when control of a subsidiary is lost.
Income taxes
Income taxes arising from investments in associates are accounted for in accordance with IFRS 12 Income Taxes.
Conditional Events
In accordance with IFRS 10 Events after the reporting date, the investor shows:
Its share of the contingent events and investment obligations of the associated company for which it also bears obligations under the contingent events;
Those contingent events that result from the investor being strictly liable for all of the obligations of the associated company.
Disclosure
The disclosure required by IAS 28 must include the following information:
A relevant list and description of significant associated companies, including ownership interest and percentage of total shares entitled to vote, if these two amounts are different;
Methods used to account for such investments.
Investments in associates accounted for using the equity method of accounting should be classified as non-current assets and disclosed as a separate line item on the balance sheet.
The investor's share of profits or losses from such investments must be disclosed as a separate line item in the income statement.
The investor's share of extraordinary or prior period items must also be disclosed separately.
Example of drawing up a consolidated balance sheet
For example, the following conditions are accepted: group “P” owns 80% of the shares of company “S” and 40% of the shares of company “A”.
The balance sheets of the three credit institutions as of December 31, 2002 are shown in Table 3 (presented in aggregate form for better understanding).
Table 3
Group P acquired a shareholding in Company S many years ago when the retained earnings of Company S were CU520. Group P acquired a shareholding in Company A two years ago when Company A's retained earnings were CU400.
Goodwill is subject to write-off within five years.
The preparation of the consolidated balance sheet as of December 31, 2002 is carried out according to the following scheme.
1. The structure of the group is determined, since from the conditions of the example we see the presence of an associated and subsidiary company.
2. We calculate the net assets of companies “S” and “A” as of the date of acquisition and as of the date of reporting, the data is presented in tables 4 and 5.
3. We calculate the goodwill of companies “S” and “A”.
4. Minority interest is calculated only for the subsidiary
Only "S" - (20% ½ 3,800) = 760.
5. Retained earnings (calculation in table 8).
Table 8
Calculation of retained earnings
6. Investment in an associated company (Table 9).
Table 9
Investment calculation
to an associated company
Based on the data obtained during the calculations, we can draw up a consolidated balance sheet of the organization (Table 11), which includes a subsidiary and an associated company.
Using this example, we can trace all the provisions of IFRS 28, PKI-3 and PKI-20, which explain the use of the equity method of accounting and define the company as an associate. In addition, this example allows you to compare the differences in the methods of reporting in the financial statements of a subsidiary and an associated company and see that “Reporting and accounting for investments in subsidiaries” and the equity method have much in common, since they were developed within the framework of a single concept of consolidation procedures. Accounting for equity method investments begins when the investee can be identified as an associate and ends when significant influence over the investee ceases or there are severe long-term restrictions on the transfer of funds to the investor.
Summarizing the issues under consideration, the equity method procedure can be presented in stages, which is presented in Table 12.
