IAS 28 – Investments in Associates
Objective: To prescribe the investor's accounting for investment in associates.
Applies to all investments in which the investor has a significant influence unless the investor is:
1. Venture Capital Firm.
2. Mutual Funds.
3. Unit Trust.
Investor must use the equity method for all investments in associates over which it has significant influence, A Significant Influence will be if investment held, directly or indirectly, has more than 20% of the associate. Under the equity method, the investment is initially recorded at cost, and it is subsequently adjusted by the investors share of the investees' post acquisition change in net assets, When loss or profit reflects in the investor's income statement.
Associates accounting policies must be the same as those of the investor. Equity accounting is required in the separate financial statement of the investor even if consolidated accounts are not required, however the investor does not apply the equity method when presenting separate financial statement then the investment will be either at cost or fair value.
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The Differences and Similarities between US GAAP Law and IFRS
Significant Differences:
IFRS | US Law GAAP | |
The definition of an associate is based on significant influence, which is the power to exercise significant influence over the financial and operating policies of entity. | Like IFRS significant influence is the ability to significantly influence the operating and financial policies of an investee. The term "equity-method investee" is used to describe what would be an associate under IFRS. | Definition of Associate is: |
IFRS | US Law GAAP | |
Associates generally are accounted for using the equity method | Like IFRS Equity-method investees are accounted for using the equity method, or Fair value unlike IFRS. | Measurement |
An associate's or jointly controlled entity accounting policies must be consisted with those of its investor. | Unlike IFRS an equity-method investee's or jointly controlled entity's accounting policies do not needed to be consistent with those of its investor | Accounting Policies |
The reporting date of an associate may not differ from the investor's more than three months. Adjustment are made for the effects of significant events and transaction between the two dates | Like IFRS the reporting date of an associate may not differ from the investor's more than three months. Adjustment are made for the effects of significant events and transaction between the two dates | The Reporting Date |
When an equity accounted investee incurs losses, the carrying amount of the investor's interest is reduced to zero. Further losses are recognized by the investor only to the extent that the investor has an obligation to fund losses. | Like IFRS when equity method investee incurs losses, the carrying amount of the investor's is reduced to zero. Like IFRS further losses are recognized by the investor only to the extent that the investor has an obligation to fund losses. However unlike IFRS further losses are recognized if the investee is expected to return to profitability imminently or if a subsequent further investment in the investee is made. | Associate Losses |
Unrealized profit or losses on transaction with associates are eliminated to the extent of the investor's interest in the investee. | Like IFRS unrealized profit or losses on transaction with associates are eliminated to the extent of the investor's interest in the investee. | Transaction between the Associate and the Investor |
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