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When an investment in an associate is acquired, any difference between the cost of the investment and the investor’s share of the net fair value of the associate’s net
assets and contingent liabilities is accounted for in accordance with IFRS 3. Thus, any goodwill relating to the associate will be included in the carrying value of the
investment.
IFRS 3 and, therefore, IAS 28 do not allow amortization of that goodwill. Negative goodwill is excluded from the carrying amount of the investment. This amount
should be included as income in determining the investor’s share of the associate’s profit or loss for the period in which the investment was acquired.
After acquisition, adjustments will be made to the investor’s share of the associates’ profits or losses for such events as impairment losses incurred by the associate.
In determining the investor’s share of profits or losses, the most recently available financial statements of the associate are used. If the reporting dates of the investor
and the associate are different, both should prepare financial statements as of the date as those of the investor unless it is impracticable to do so.
If financial statements are prepared to a different reporting date, then adjustments should be made for any significant transactions or events that occurred between the
date of the associate’s financial statements and the date of the investor’s financial statements. The difference between the reporting dates should not be more than three
months.
If the associate uses accounting policies that are different from those of the investor, the associate’s financial statements should be adjusted and the investor’s
accounting policies should be used.
If the investor’s share of losses of an associate equals or exceeds its interest in the associate, then the investor should not recognize its share of any further losses.
The interest in the associate is essentially the carrying amount of the investment using the equity method together with any other long-term interests that are
essentially part of the investor’s net investment in the associate. An example is a long-term loan from the investor to the associate. Long-term interests in this context do
not include trade receivables or payables or any secured long-term receivables. Losses recognized in excess of the investor’s investment in ordinary shares should be
applied to the other elements of the investor’s interest in the associate in the order of their priority in liquidation.
When the investor’s interest is reduced to zero, any additional losses are provided for and liabilities recognized only to the extent that the investor has a legal or
constructive obligation or has made payments on behalf of the associate. When the associate reports profits, the investor can recognize its share of those profits only
after its share of the profits equals the share of the losses not yet recognized.
PRACTICAL INSIGHT
November AG Gesellschaft fur Molekulare Medizin, a German company, accounted for an associate under the equity method. As a result of the
associate’s uncertain financing, the investment was written down to €1. The write-down was classified as depreciation but should have been treated as an
impairment loss in the statement of comprehensive income.
IMPAIRMENT LOSSES
Impairment indicators in IAS 39 apply to investments in associates. Because the goodwill is included in the carrying amount of the investment in an associate and is
not separately recognized, it cannot be tested for impairment separately by applying IAS 36. Instead the entire carrying amount of the investment is tested for
impairment under IAS 36 by comparing the recoverable amount with the carrying amount.
Each associate must be assessed individually regarding the recoverable amount of that investment unless the associate does not generate independent cash flows.
An investment in an associate is accounted for in the investor’s separate financial statements in accordance with IAS 27.
Facts
CASE STUDY 7
A acquired 30% of the issued capital of B for $1 million on December 31, 20X7. The accumulated profits at that date were $2 million. A appointed three
directors to the board of B, and A intends to hold the investment for a significant period of time. The companies prepare their financial statements to
December 31 each year. The abbreviated statement of financial position of B on December 31, 20X9, is
Sundry net assets $6 million
Issued share capital of $1 $1 million
Share premium $2 million
Retained earnings $3 million
B had made no new issues of shares since the acquisition of the investment by A. The recoverable amount of net assets of B is deemed to be $7 million.
The fair value of the net assets at the date of acquisition was $5 million.
Required