IAS 28: Accounting for Associates
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Powered by AITrading balances between a group and its associate are considered external to the group because associates are not part of the consolidated group structure. Consequently, payables and receivables resulting from such transactions remain in the consolidated financial statements. Sales or purchases between group companies and the associate aren’t eliminated in the consolidated figures, maintaining transparency by showing real economic activity. Only the investor’s share of any unrealized profits must be adjusted in the group’s share of the associate’s profit .
Unrealized profit adjustments impact group retained earnings by ensuring that profits from intra-group transactions, which have not been realized in an external sale, are not recognized. This requires adjusting the share of profits from associates to reflect only realized earnings. By debiting 'Share of Associate’s profit' and crediting 'Investment in associate,' the group’s retained earnings are corrected to exclude unrealized portions, maintaining the integrity of consolidated profits .
Non-controlling interest (NCI) represents the equity in a subsidiary not attributable to the parent company, but it does not typically play a role in accounting for associates as it does with subsidiaries. In the context of an associate, there is no NCI in the associate’s net assets because the associate is not consolidated line by line. Instead, the focus remains on appropriately reflecting the investor’s share of the associate's profit and net assets using the equity method .
When an investor holds a stake in an associate, personal company retained earnings should be adjusted to include the group’s percentage share of the associate's post-acquisition retained earnings. This incorporates the investor’s share of the associate’s profitability into the parent’s consolidated retained earnings while also accounting for any impairment losses relating to the associate .
Significant influence is defined as the power to participate in the financial and operating policy decisions of an investee but does not include control or joint control over those policies. In contrast, control involves the power to govern the investee’s financial and operating policies, whereas joint control is the contractually agreed sharing of control over an arrangement. Significant influence is typically assumed when an investor holds 20% to 50% of the voting power of the investee .
Equity accounting is significant in the context of IAS 28 as it is used to represent the investor's stake in an associate. Under this method, the investment is initially recorded at cost and subsequently adjusted for the investor’s share of post-acquisition changes in the associate’s net assets. This affects the consolidated financial statements by including an 'investment in associates' line in the non-current assets of the statement of financial position, which consolidates the cost of the investment and the group’s share of post-acquisition reserves. Additionally, the statement of profit or loss includes a line for 'share of profit of associates' that represents the group’s share of any associate’s profit after tax .
Dividends from associates are excluded from the consolidated statement of profit or loss. Instead, the consolidated financial statements include the group share of the associate’s profit. This approach reflects the net results of the associate’s operations rather than just the cash distributions received as dividends .
If there is a material difference between the fair value and the book value of an associate’s net assets at acquisition, adjustments should be made to align the net assets with the fair value. These adjustments are similar to those made for a subsidiary, ensuring that the recognized amount of net assets reflects the fair value at the acquisition date .
An entity is exempt from using the equity method for investments in associates if (1) the investment is classified as held for sale according to IFRS 5, or (2) the parent entity does not have to prepare consolidated financial statements because it qualifies as a wholly or partially owned subsidiary of another company, and this exemption is permitted by the relevant financial reporting framework .
Unrealized profits in inventory from transactions between a group and its associate must be eliminated to the extent of the investor’s interest. The process involves: (1) identifying the closing inventory related to sales to or from the associate, (2) using markup or margin to calculate the profit the selling company earned, and (3) making the necessary adjustments. These adjustments involve debiting the 'Share of Associate's profit' in the profit and loss statement and crediting the 'Investment in associate' in the statement of financial position .