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Joint arrangements, associates and equity accounting (Equity method (The…
Joint arrangements, associates and equity accounting
Businesses often go into partnership with other business on profit raising ventures which may be narrow in scope or limited in timescale
Joint arrangements
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The parties are bound by a contractual arrangement and the contractual arrangement gives two or more of those parties joint control
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Sometimes entities may have investments in other companies where they have significant influence but not control or joint control, usually with a voting right investment of between 20% and 50%
In the case of a joint operation, the reporting entity is exposed to specific assets, liabilities, income and expenses and therefore accounts for those exposures. A joint operator therefore recognised in relation to its interest in a joint operation
Its assets, including its share of any assets held jointly
Its liabilities, including its share of any liabilities incurred jointly
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Its expenses, including its share of any expenses incurred jointly
In the case of a joint venture an investing entity is exposed to the net returns in the business of the joint arrangements. A joint banterer must recognise its interest in a joint venture as an investment and account for it using the equity method in accordance with IAS 28
Associates
There are situations where entities wish to take a strategic long term stake in other entities without having control
In some circumstances the investor’s holding is large enough, and their involvement in the investee is great enough, that the investor has a level of influence that is greater than for a more minor, arms’ length investment. Usually the voting rights level of such an investment is between 20% and 50% and these investments, where there is a significant influence, are classed as associates.
Accounted for using the equity method: the investment is initially recognised at cost and adjusted thereafter for the post acquisition change in the investors share of the investee's net assets
The existence of significant influence by an entity is usually evidenced in one or more of the following ways
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Participation in policy making processes including participation in decisions about dividends or other distributions
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Equity method
The investment in an associate or joint venture is recognised at cost and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date of acquisition
The investor's share of the investor's profit or loss is recognised in the investor's profit or loss
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As associated and joint ventures are not controlled, their financial statements may be prepared a=to a different date to that of the investor. The standard allows for differences in the year end, but only up to a three month difference. If the year ends are more than that length apart, special accounts would be required from the associate or joint venture
If the associate or joint venture is loss making, this will have a negative impact on the amount shown by the investor in its balance sheet. After the investor's interest is reduced to zero, additional losses are provided for and a liability is recognised only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture
If the associate or joint venture subsequently reports profits the investor will resume recognised its share of those profits only after its share of the profits equals the share of losses not recognised