IFRS – Investments in Associates (IAS 28) – Comprehensive Study Notes

Equity Method Overview

Associates & joint ventures accounted for using equity method per IAS 28.
Initial recognition: at cost (purchase consideration + directly attributable transaction costs).
Subsequent carrying amount =
- Add: investor’s share of the associate’s net income ("equity income").
- Deduct: investor’s share of the associate’s net loss.
- Deduct: dividends declared/received from associate.
Equity method nick-named “one-line consolidation” because entire interest is presented in a single Investment in Associate line item on SFP.

Base share: \text{Associate\, net\, income} \times \text{Ownership\, \%}.
Adjust for acquisition FV differentials (amortization):
- If FV > BV for a depreciable/amortizable asset → subtract extra depreciation to arrive at adjusted equity income.
- If FV < BV → add difference’s amortization.
Realized intercompany profits/gains from prior periods: reverse previous eliminations (add back profits, subtract losses) once realized.
Unrealized intercompany profits/gains in current period inventory: eliminate portion still in inventory (see formula below).

Required whenever investor & associate trade with one another.
Eliminate at period-end: \text{Sales in ending inventory}\times\text{Gross profit \%}\times\text{Investor ownership \%}.
- Result reduces equity income (if unrealized profit) or increases (if unrealized loss).

When significant influence exists under Canadian ASPE:
- Choice of equity method or cost method.
If investee’s shares are publicly traded with a quoted price:
- Choice of equity method or fair value through profit or loss.

Power to participate in financial/operating policy decisions without control.
Presumed when investor holds ≥ 20 % of voting shares, absent contrary evidence.
Presence of significant influence → must apply equity method under IFRS.

Capitalized as part of the investment’s cost (contrast with FV-through-P&L securities where costs are expensed).

Acquisition differential = difference between cost and investor’s proportionate share of book value (BV) of associate’s net assets.
\text{Acquisition price} - \left(\text{BV of associate’s net assets} \times \text{ownership \%}\right)
Two possible sources:
1. Fair-value (FV) differentials: specific assets/liabilities have FV ≠ BV at acquisition.
2. Goodwill: residual premium paid for expected superior future performance.
Allocation process:
1. Determine FV of all identifiable net assets (including unrecorded items like internally-generated intangibles).
2. Compute FV differentials for each item: \text{FV differential}=\text{BV}-\text{FV} (assets positive, liabilities negative).
3. Multiply each differential by ownership %.
4. Remainder after allocating all FV differentials = goodwill (if positive) or part of bargain purchase (if negative).
Goodwill not recorded separately; stays inside Investment in Associate carrying amount.

Investor’s SFP shows a single line for Investment in Associate encompassing:
- Share of associate’s BV net assets.
- Share of unamortized FV differentials.
- Goodwill (or minus bargain purchase gain already recognized).

FV differentials create temporary differences; DIT arises and reverses with amortization.
For simplicity, many educational examples ignore DIT; real practice must recognize per IAS 12.

Occurs when cost < investor’s share of FV of identifiable net assets.
Steps:
1. Calculate acquisition differential after allocating FV differentials.
2. If residual is negative, recognize immediate gain in P&L.
Journal entry:
- DR Investment in Associate (to FV of net assets × %).
- CR Cash (cost paid).
- CR Gain on Purchase of Associate (profit or loss).

Total investment cost: 200{,}000+1{,}000=\$201{,}000.
Investor’s share of Kay BV: 400{,}000\times30\% = \$120{,}000.
Acquisition differential: 201{,}000-120{,}000 = \$81{,}000.
FV differential on land: (80{,}000-100{,}000) = -\$20{,}000.
- Investor’s 30 % share: -20{,}000\times30\% = -\$6{,}000 (negative because FV > BV for an asset).
Residual goodwill: 81{,}000 - (-6{,}000) = 75{,}000.

Significant influence presumed (30 % ownership).
Goodwill (75,000) embedded in the investment account.
Land FV differential will be amortized (none if land not depreciated; if depreciable, adjust equity income accordingly).

Accurate identification of FV differentials & goodwill critical to prevent misstatement of future equity income.
Bargain purchase gains require robust valuation evidence; otherwise risk of earnings manipulation.
Decision between equity, cost, or FV methods under ASPE affects reported profit volatility and transparency.