INVESTMENTS IN ASSOCIATES & JOINT VENTURES

There are basically, three levels of intercorporate investments to think about: temporary, portfolio and those where the investor exhibits significant influence.

 

This IAS section concerns itself with significant influence.

When is it appropriate to use and apply the equity method for investments in associates and joint ventures?

 

First, you need to evaluate all possibilities which give the investor influence into the management, financial and investing decisions of the company or group of companies.

 

Second, you need to know what the equity method is. The equity method is an accounting method that records an investment at cost and then adjusts that cost for any changes in the investor´s share of the investee´s net assets.

 

Joint control is easy to understand. It is stated in a contract that relevant decisions affecting the management, investing and financing activities of the entity are to be jointly made. The contract will also lay out the details of the rights relating to net asset ownership.

 

Significant influence is the power to participate in the financial and operating policies of the investee, but is neither control or joint control.

Generally, signifiant influence exists when the company holds at least 20%, but not more than 50% of the shares of another company; however, additional professional judgement is also excercised to determine if the management has the ability to influence the operating, financing and investing decisions of the investee company. This may be done by excercising options, presence on the board of directors, control over supply, logistics or human resources, etc.,.

 

By using the equity method, financial statement readers get an idea about the investor´s portion of the investee´s income on an accrual basis. This means, for dividends and net income or loss, a transaction is recorded and eventually reported.

 

 

 

 

 

 

When should you not apply the equity method to associate or joint venture arrangements other than when it is considered and classified as "Held For Sale"? Check current IAS for exemptions.

 

If there is any changes made to the ownership structure of consideration of control, then of course, the equity method needs to be re-evaluated, for other methods of valuation (eg. Fair Value, Gains and Losses).

 

Under the equity method, gains and losses are recorded in equity rather than an income account since Retained earnings would not be affected. Comprehensive income or gains and losses on sale of investments might be affected if there was some change to the status of the associate company or joint venture.

Theoretical approaches to consolidation — business combinations
Theoretical approaches to consolidation — business combinations

IAS 39 was created to also help answer the question, what if the associate or joint venture ceases to exist, what additional losses may be incurred. Additional impairment losses generally depend on the contract or agreements made previously.

 

Goodwill is not recognized, nor is it tested for impairment even if the investment itself if the investment itself is tested.