Question

can you give me an overview for ias 28 and explain the equity method for ias 28 and how we use the equity method in ias 28?

Answer 1

IAS 28 prescribes how to apply the equity method when accounting for investments in associates and joint ventures. ... A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Equity method is used to account for investments in associates and joint-ventures. Simply put, the equity method is a simplified form of consolidation (IAS 28.27), with one major difference: financials are not added line-by-line, but a single asset (an investment in associate or joint-venture) is recognised in the statement of financial position and single lines are presented in P/L and OCI. To achieve this outcome, the investment in another entity is initially recognised at cost (e.g. price paid) and subsequently adjusted for the post-acquisition change in the investor’s share of the net assets. For example, the investor’s share of the profit or loss of the associate/ joint-venture is included in investor’s P/L as one additional line.IAS 28 was reissued in December 2003, applies to annual periods beginning on or after 1 Jan

Equity method is governed by IAS 28. As stated in paragraph IAS 28.26, many of the procedures that are appropriate for the application of the equity method are similar to the consolidation procedures described in IFRS 10. When more than one subsidiary holds interest in a associate/joint-venture, consolidated financial statements should take into account total interest held by the group. Specific aspects of application of equity method are discussed in subsequent sections.

Let’s start with a simplified introductory example on applying equity method:

Example: Simple illustration of application of equity method

Entity A acquired 25% interest in Entity B on 1 January 20X1 for a total consideration of $50m and accounts for it using the equity method. Entity B’s net assets as per its financial statements amounted to $150. Entity B’s assets include real estate with a carrying amount of $20m and fair value of $35m and remaining useful life of 15 years. For other assets and liabilities, the carrying amount approximates fair value. Deferred tax is ignored in this example.

At the date of acquisition, Entity A recognises the investment in Entity B at cost, that is at $50m. This amount can be broken down as follows:

$m
37.5	25% share in B's net assets as per its financial statements
3.75	25% share in fair value adjustment relating to real estate
8.75	Goodwill (not presented separately and not amortised)
50	Investment in Entity B at cost

Goodwill in the table above was calculated as shown below:

$m
200	Implicit consideration for 100% interest, taking into account $50m paid for 25% ($50m/25%)
150	Entity B's net assets as per its financial statements
15	Fair value adjustment on real estate
35	Total implicit goodwill of Entity B ($200m-$150m-$15m)
8.75	25% interest in implicit goodwill attributable to Entity A ($35m x 25%)

During the year ended 31 December 20X1, Entity B generated net income of $10m and paid dividends of $7m. Additionally, when applying the equity method, Entity A needs to account for the $0.25m of additional depreciation charge on the fair value adjustment on real estate. This is calculated as fair value adjustment on real estate / 15 years of remaining useful life *25% share of Entity A (i.e. $15m/15 years * 25% interest).

Entries made by Entity A at 31 December 20X1 are as follows:

1. Recognition of 25% share of B’s net income of $10m less 25% share in depreciation of fair value adjustment:

	DR	CR
Investments in associates	2.25
Share of profit of associates		2.25

2. Recognition of 25% share of $7m of dividends paid by Entity B:

	DR	CR
Cash	1.75
Investments in associates		1.75