IAS 8

 INVESTMENTS IN ASSOCIATES

IAS 8 Investments in Associates

• It deals with accounting for an interest in an associate in the books of the investor and in the consolidated financial statements.

• IAS 8 defines an associate as ‘an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture’.

SIGNIFICANT INFLUENCE

• Investor holds, directly or indirect ly, 20% or more of the voting rights of the investee, unless it can be clearly demonstrated that this is not the case.

• An investor may exercise significant influence in several ways: by representation on the board of directors; by partici pation in policy-making processes; material inter-company trans actions; interchange of managerial personnel; or dependency on technical information.

Potential Shares

• An investor may own warrants, share call options or convertible financial instruments that when exercised or converted will give the investor additional shares.

• To determine whether an investor has significant influence, the existence and effect of potential voting shares that are currently exercisable or convertible and the voting rights of existing shares should be considered.

• The entity should consider all facts and circumstances except management intention and financial ability when assessing whether these potential voting rights contribute to significant influence.

CONSOLIDATED FINANCIAL STATEMENTS 

• The associate is accounted for using the equity method except in the following situations:– The investment is classified as held for sale in accordance with FRS 5

Non-current Assets Held for Sale and Discontinued Operations; – The parent is exempted from presenting consolidated financial

statements; orWhen all of the following apply:– The investor itself is a wholly-owned subsidiary or a partially-owned

subsidiary and the other owners have been informed about, and do not object to, the parent not presenting consolidated financial statements.

– The investor’s debt or equity instruments are not traded in a public market (not a listed entity).

– The investor is not in the process of issuing in a public market its debt or equity instruments by filing its financial statements with the regulatory authorities like the securities commission.

– The ultimate or any other intermediate parent of the investor is incorporated in Malaysia and produces consolidated financial statements that comply with the Financial Reporting Standards.

EQUITY METHOD

• The investment in the associate is initially recorded at cost; and • the carrying amount is increased or decreased by the investor's

share of the post-acquisition profits or losses of the investee. • The investor’s share of the net profits is recognised in the

investor’s income statement. • Dividends and other distribu tions from the investee reduce the

carrying value of the investment.

Loss of Significant Influence

• Equity method is discontinued.• The investment is treated as a financial asset under IAS 39 provided

it does not become a subsidiary or a joint venture. • The investor is to measure the remaining investment in the former

associate at fair value. The difference between the carrying amount and the fair value is recognised in the profit or loss.

• The fair value of the investment at that date it ceases to be an associate is regarded as fair value on initial measurement as a financial asset, in accordance with IAS 39.

Accounting Techniques

• Determining goodwill– Goodwill or bargain purchase

• Depreciation adjustments– Appropriate adjustments are made for depreciation based on

the fair values of the associate's depreciable assets. • Inter-company transfer of assets (including sales)Examples 1 and 2 of text book

 Date of financial statements

• If the reporting dates are not the same, then adjustments are made for effects of significant transactions or events that occur between that date and the investor’s reporting date.

• However, the difference between the reporting dates of the associate and the investor should not exceed three months.

Accounting policies

Similar accounting policies are applied. If the associate uses different policies, the investor makes appropriate adjustments to the financial statements of the associate to conform to those of the investor.

Losses of associateIf the investor’s share of net losses of the associate equals or exceeds its interest in the associate, the investor should not recognise any more losses. Amounts owed by associateWhere the investor has some amount owing to it by the associate and there is no prospect of it being settled in the foreseeable future, then the amount due is treated as an extension of the entity’s investment in that associate. In other words, the amount due is part of the carrying amount of the investment in the associate. Such items include preference shares and long-term receivables or loans but do not include trade receivables, trade payables or any long-term receivables for which adequate collateral exists, such as secured loans.

Impairment losses• The associate should be tested for impairment after applying the

equity method in accordance with IAS 39. • The carrying amount of the investment is tested for impairment as a

single asset, by comparing its carrying amount with its recoverable amount (higher of value in use, and fair value less costs to sell) whenever there is an indication that the investment may be impaired.

Value in Use

• IAS 36 Impairment of Asset specifies that in determining the value in use an entity shall estimate:– Its share of the present value of the estimated future cash flow

expected to be generated by the associate, including the cash flow from operations of the associate plus the proceeds on the disposal of the investment; or

– The present value of the estimated future cash flows expected to arise from dividends to be received from the investment and proceeds from the disposal of the investment.

ACCOUNTING FOR ASSOCIATE IN SEPARATE FINANCIAL STATEMENTS

• IAS 8 requires the investor to account for the associate, which are not held for sale, at cost or in accordance with IAS 39.

• In the separate financial statement of the investor, the investment in associate which is not classified as held for sale, is accounted for as follows:– At cost, or– In accordance with IAS 39.