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IAS 28

Written By Fajar Rahmana on Saturday, June 06, 2015 | Saturday, June 06, 2015

Review IAS

IAS 28 Interest in Associates

Disclosure Requirements :

     1)      The fair value of investments in associates for which there are published price quotations;

     2)      Summarized financial information of associates, including the aggregated amounts of assets, liabilities, revenues, and profit or loss;

      3)      The reasons why the presumption that an investor does not have significant influence is overcome if the investor holds, directly or indirectly through subsidiaries, less than 20% of the voting or potential power of the investee but concludes that it has significant influence;

     4)      The reasons why  the presumption that an investor has significant influence is overcome if the investor holds, directly or indirectly through subsidiaries, 20% or more of the voting or potential voting power of the investee but concludes that is does not have significant influence;

     5)      The reporting date of the financial statements of an associate when such financial statements are used in applying the equity method and are as of a reporting date or for a period that is different from that of the investor, and the reasons for using a different reporting date or different period;

        6)      The nature and extent of any restrictions on the ability of associates to transfer funds to the investor in the form of cash dividends, repayment of loans or advances (i.e., borrowing arrangements, regulatory restraint, etc.);

        7)      The unrecognized share of net losses of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate.

Investments in associates accounted for using the equity method must be classified as long-term assets and disclosed as a separate item in the statement of financial position. The investor’s share of the after-tax profit or loss of such associates investments should be disclosed as a separate item in statement of comprehensive income. The investor’s share of any discontinuing operations of such associates also should be separately disclosed. Furthermore, the investor’s share of changes in the associate’s equity recognized directly in equity by the investor is to be disclosed in the statement of changes in equity required by IAS 1.

In general, significant influence is inferred when the investor owns between 20% and 50% of the investee’s voting shares. However, the 20% threshold stipulated in IAS 28 is not an absolute one. Spesific circumstances may suggest that significant influence may be absent despite a level of ownership above 20%. Therefore, the existence of significant influence in the 20% to 50% ownership range should be treated as are futable presumption.

In considering whether significant influence exist, IAS 28 identifies the following factors as evidence that such influence is present:

        1)      There is investor representation on the board of directors             or its equivalent,
         2)      The investor participates in the policy-making processes           of the investee,
         3)      There are material transactions that are undertaken                     between the investor and investee,
        4)      There is an interchange of managerial personel between             the investor and the investee; and
       5)      There is provision of essential technical information                    between the investor and the investee, which might not have           occurred under normal circumstances.

IAS 28 stipulates that the equity method should be employed by the investor for all investments in associates, unless the investment is acquired and held exclusively with a view to its disposal within twelve months from acquisition in which case it is accounted for in terms of IFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations.

The standard does distinguish between the accounting for investments in associates in consolidated financials and that in separate financials of the investor. IAS 28 provides that in the separate financials of the investor, the investment in the associate may be carried at either cost or in terms of IAS 39 (or IFRS 9 once it becomes effective). This is an accounting policy choice that the investor must make and apply consistently across all investments in associate companies that is holds.

Complexities in the use of the equity method may arise in two areas. First, the cost of the investment to the investor might not be equal to the fair value of the investor’s share of investee net assets; this is similar to the existence of goodwill in business combination under IFRS 3. Or the fair value of the investor’s share of the investor’s share of the investee’s net assets may bot be equal to the book value thereof.


The equity method of accounting is applied to investment situations where the investor is able to exercise significant influence over an investee. It was developed as a method of applying the concept of substance over form in the accounting for such investments. There was recognition that the actual determination of the existence of significant influence could be difficult and that, to facilitate such recognition, there might be a need to set out a bright line against which significant influence would be measured. To this end, a somewhat arbitrary, refutable presumption of such influence was set at a 20% voting interest in the investee. This has been held out as the de facto standard on assessing significant influence, and thus an investee accounts for such an investment as an associate unless it can prove otherwise.

More importantly, however the use of the cost method would simply not reflect the economic reality of the investor’s interest in an entity whose operations were indicative, in part at least, of the reporting entity’s (i.e., the investor’s) management decisions and operational skills. Thus, the clearly demonstrable need to reflect substance, rather than more form, made the development of the equity method highly desirable. This is in keeping with the thinking that is currently driving IFRS that all activities that have a potential impact on the financial position and performance of an entity must be reported, including those that are deemed to be off-balance sheet-type transactions.

The Equity method is important to recognize that the bottom-line impact on the investor’s financial statements is identical whether the equity method or full consolidation is employed; only the amount of detail presented within the statements will differ. An understanding of this principle will be useful as the need to identify the “goodwill” component of the cost of the investment is explained below.

Nama : Fajar Rahmana
Kelas  : 4EB17
NPM   : 22211643
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