Presentation1

Ind AS 28Investment in

Associates

Scope

• Applied to all accounting for investment in associates • but does not apply to investments in associates held by

those entities where these investments upon initial recognition are designated at FVTPL or classified as Held for trading and accounted for in accordance with Ind AS 39.

• For example Venture capital organization, a mutual fund, a unit trust, investment linked insurance funds

Definitions• Associates: An entity in which an investor has significant influence but which is

neither a subsidiary nor an interest in a joint venture.• Significant influence: Power to participate in the financial & operating policy

decisions of the investee but not to control them.• Equity method: A method of accounting by which an investment is initially

recognized at cost and adjusted thereafter to reflect the post-acquisition change in the investor's share of the net assets of the investee. The profit or loss attributable to the investment is included in the investor's income statement.

• Interest in Associates: It includes carrying amount of the investment using the equity method + any other long term interest. eg. Long term loan to associate.

Clarification on Significant influence

• SI presumed if investor holds, directly or indirectly, ≥20% of voting power of associate, unless clearly demonstrate this is not the case

• conversely, if the investor holds <20%... • a majority ownership by another investor does not

preclude an investor from having SI

Clarification on Significant influence (cont..)

• Significant influence is normally created in one of these ways – Potential voting rights Representation on the board of directors or equivalent governing

body Participation in policy-making processes, including participation in

decisions about dividends or other distributions Material transaction between the investor & the investee Interchange of managerial person Providing essential technical information

Clarification on Significant influence (cont..)

• Significant influence is lost when the investor loses the power to participate in the financial and operating policy decisions of the investee.

• This can occur without loss of voting power or without a change in the ownership levels.

• For example, where the associate is subject to government control or regulation as the result of a contractual agreement

Cessation of Significant influence

• On the cessation of significant influence over an associate, then equity method should not be used and,

• the investment should be accounted for using Ind AS 39, provided that the associate does not become a subsidiary or a joint venture.

• the carrying amount at the date that the investment ceases to be regarded as an associate shall be treated as cost on its initial measurement as a financial asset under Ind AS 39.

Equity Method• The investment in the associate is recognized initially at cost.• Subsequently, carrying amount is adjusted for the

distributions received or through changes in the investor's interest in the investee or changes arising from the revaluation of PP&E

• The investor's share of profit or loss of the associate is recognized in the income statement.

• **Goodwill in an associate is not separately recognized. The entire carrying amount is tested for impairment.

Equity Method (exceptions)• Investment is classified as Held for sale (Ind AS 105)• Where parent is exempt to present the consolidated financial statement (Ind AS

27)• The investor need not to apply equity method if –

The investor is wholly owned subsidiary or partially owned subsidiary of another entity and its owners have been informed about and do not object;

Investor's debt or equity instruments are not traded in a public market; Investor did not file, nor in the process of filing, it financial statements with SEBI or other

regulatory body for the purposes of issuing any class of financial instrument in the market; The ultimate or any intermediate parent of the investor produces CFS that are available to

public use and comply with Ind AS.

Acquisition of an Associate• 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 & contingent liabilities is accounted for in accordance with Ind AS 103.

• Any Goodwill relating to associate will be included in the carrying value of the investment and Ind AS 28 do not allow amortization of that goodwill.

• Negative goodwill is excluded from the Carrying amount of the investment and 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 investment was acquired.

• Any excess of the entity's share of the net fair value of the investee's identifiable assets and liabilities over the cost of the investment is recognized directly in equity as capital reserve in the period in which the investment is acquired.

Acquisition of an Associate (cont..)

• 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, unless impracticable.

• 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 transaction or event that occurred between the reporting dates. The difference between the reporting date should not be more than 3 months, unless impracticable.

Acquisition of an Associate (cont..)

• 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.

• Losses recognized in excess of the investor's investment in ordinary shares should be applied to the other elements of the investor's interest like Long term loans etc. in the associates in the order of their priority in liquidation.

• 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.

Impairment Losses

• Impairment indicators in Ind AS 39 apply to investment in associates.

• Because Goodwill is included in the carrying amount of the investment in associate and is not separately recognized, it cannot be tested for impairment separately.

• Instead the entire carrying amount of investment is tested for impairment for individual associate unless the associate does not generate independent cash flows.

Disclosures• Fair value of investment in associates• Summarized financial information of associates• Reporting date of the financial statements of an associate and if

different from that of the investor, then reasons• Reason why an associate is not accounted for using the equity method• Nature & extent of any significant restrictions on the ability of the

associate to transfer funds to the investor in the form of cash dividends, repayment of loans & advances.

Thank You!!!

Prepared By –CA Lalit GurnaniContact Number - 9899880399