Review IAS
Subject
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IAS 28 Interest in Associates
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Objectives
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Equity
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Disclosures
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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.
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Measurement
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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.
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Recognition
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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.
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Nama : Fajar Rahmana
Kelas : 4EB17
NPM : 22211643
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