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Investments in associates and joint ventures - Coggle Diagram
Investments in associates and joint ventures
The objective of IAS 28 is to prescribe the accounting for investments in associated and sets out the requirements for the application of the equity method when accounting for investments in associates and JV
Associates
An entity over which the investor has significant influence and which is neither a subsidiary nor an interest in a joint venture is classed as a associate
The key criteria here is significant influence which is defined as the power to participate in the financial and operating policy decisions of the inestee but not to control or have joint control over those policies
Significant influence is assumed with a shareholder of 20% to 50%
In IAS 28, significant influence is evidenced in one or more of the following ways
Representation on the board of directors of the investee
Participation in the policy making process
Material transactions between investor and investee
Interchange of management personnel
Provison of essential technical information
Joint Ventures
Businesses often go into partnership with other businesses on profit raising ventures under joint ventures
A joint venture is a business arrangement whereby the parties that have joint control of the arrangement agree to pool their resources and expertise to achieve a particular goal
They have joint rights to the assets and obligations for the liabilities relating to the arrangement
The risks and rewards of the enterprise are also shared
Reasons behind the formation of a JV often include
Business expansion
Development of new products
Moving into new markets such as those overseas
IAS 28 Equity Method
Initially recongises the investment in an associate or JV in the investors SOFP at cost, it adjusts the carrying amount thereafter with the change in the investors share of post acquisition profit or loss
The value of the investment is cost plus the group's share of the investee's post acquisition profits or losses
Distributions received from an invested reduce the carrying amount of the investment as these are cash inflows
Changes in the invitees OCI that have not been included in profit or loss, such as a revaluation may also require adjustments to the carrying amount of the investment
The value of the investors share of the investor's P&L for the period is recognised in the investor's profit or loss
As associates and JVs are not controlled their financial statements may be prepared to a different date, but only up to a 3 month difference
Any transactions such as sales or purchases between group companies and the associate or JV are not normally wliminated
A loss making associate or JV will have a negative impact on the investors SOFP, any additional losses after the investor's interest is reduced to 0 are provided for and a liability is recognised only to the extent that the entity ha incurred legal or constructive obligations or made payments on behalf of the associate or JV