## **Learning Outcomes**

After reading this article, you will be able to explain the accounting treatment of associates and joint ventures under IAS 28 and IFRS 11. You will learn how to apply the equity method, identify and account for necessary adjustments (including for unrealised profits and fair values), recognise impairment losses, and correctly handle dividends in consolidated financial statements.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand the equity accounting of associates and joint ventures. In particular, revision should focus on:

- The definition and identification of associates and joint ventures under IAS 28 and IFRS 11
- Applying the equity method in consolidated financial statements
- Accounting for adjustments such as fair value differences and unrealised profits on transactions
- Recognising and measuring impairment of investments in associates and joint ventures
- Correct treatment of dividends received from associates and joint ventures

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the defining feature that distinguishes an associate from a subsidiary?
2. How is the carrying amount of an associate adjusted under the equity method?
3. When a parent sells goods to an associate and the goods remain unsold at year end, how is the unrealised profit treated?
4. If an associate incurs a loss and the investment is impaired, what entries should be made in the consolidated accounts?
5. Are dividends received from an associate shown as group revenue in consolidated profit or loss? Briefly explain.

## **Introduction**

Many groups do not control all their investments. Some investments represent associates, where the parent has significant influence, or joint ventures, where there is joint control. These investments are accounted for using the equity method according to IAS 28 and IFRS 11 rather than full consolidation. Applying this method involves more than just updating for profit or loss. Adjustments must be made for fair value differences at acquisition, unrealised profits from group transactions, impairment losses, and the correct treatment of dividends, all of which may affect both the carrying value of the investment and the group’s consolidated results.

> **Key Term: associate**
> An entity over which the investor has significant influence but not control or joint control. This is typically evidenced by a holding of 20% or more of the voting power.
>
> **Key Term: joint venture**
> A contractual arrangement where two or more parties have joint control and rights to the net assets rather than individual assets and liabilities.
>
> **Key Term: equity method**
> A method of accounting whereby the investment is initially recognised at cost, then adjusted for the post-acquisition share of the associate or joint venture’s profit or loss, other comprehensive income, and relevant accounting adjustments.

## Equity Method of Accounting

The equity method involves initially recording an associate or joint venture at cost. Subsequently, the investment is increased or decreased by the investor’s share of post-acquisition profit or loss, other comprehensive income, and reduced by any impairments or certain distributions.

Changes in the associate’s reserves or profits must be included in the group’s consolidated statement of profit or loss and statement of financial position, with adjustments made for any fair value differences or unrealised profits on intra-group transactions.

> **Key Term: unrealised profit**
> The portion of profit arising from transactions between the group and the associate or joint venture that remains in inventory or non-current assets at the reporting date. For consolidation purposes, only the investor’s share of such profit is eliminated.

### **Worked Example 1.1**

Cyrus Co owns 30% of Egmont Co, with significant influence established. Cyrus Co’s carrying amount of the investment at the start of the year is \$600,000. Egmont’s profit after tax for the year is \$200,000, and during the year Egmont paid a dividend of \$40,000. During the year, Cyrus sold goods to Egmont for \$50,000 at a 25% markup, and \$12,000 of these goods are still in Egmont’s inventory at year end.

**What is the carrying amount of the investment in Egmont Co at year end in Cyrus Group’s consolidated statement of financial position?**

> **Answer:**
>
> - Start with opening carrying amount: \$600,000
> - Add group share of profit: 30% × \$200,000 = \$60,000
> - Subtract group share of dividend received: 30% × \$40,000 = \$12,000
> - Eliminate group share of unrealised profit:
>   - Total profit in closing inventory: \$12,000 × 25/125 = \$2,400
>   - Group share: 30% × \$2,400 = \$720
> - Closing carrying amount: \$600,000 + \$60,000 − \$12,000 − \$720 = \$647,280

## Adjustments in the Equity Method

### Fair Value Adjustments

At acquisition, the investor must identify any fair value adjustments to the associate’s or joint venture’s net assets. The group’s share of post-acquisition profits is based on the fair value of net assets, not just those recorded in the associate’s own financial statements. Depreciation or amortisation on these fair value uplifted amounts needs to be adjusted for annually.

### Unrealised Profit on Transactions

When goods or assets are sold by the group to the associate or joint venture and remain unsold at the reporting date, any unrealised profit attributable to the group must be eliminated to the extent of the investor’s share.

If the associate sells to the group and profit remains unrealised, eliminate the group’s share from the share of profit of the associate (i.e., reduce group earnings).

### **Worked Example 1.2**

Ananda Co owns 25% of Basil Co. This year Ananda sold inventory worth \$80,000 to Basil at a 20% markup. At year end, Basil still holds 40% of these goods unsold.

**Calculate the adjustment for unrealised profit required in Ananda Group’s statements.**

> **Answer:**
>
> - Profit on sale: \$80,000 × 20/120 = \$13,333
> - Profit in closing inventory: \$13,333 × 40% = \$5,333
> - Group share to eliminate: \$5,333 × 25% = \$1,333
> - Reduce group’s equity-accounted profit and carrying value of the investment by \$1,333.

### **Exam Warning**

In ACCA exam questions, forgetting to adjust for only the investor’s share of unrealised profit on sales between the group and the associate is a common error. Remember: eliminate only your percentage, not the full amount.

## Impairment of Investment in Associates and Joint Ventures

The group must assess at each reporting date whether there is objective evidence of impairment for the investment in an associate or joint venture. If the recoverable amount falls below the carrying value, the impairment is written off directly against the investment and is also reflected in the group’s consolidated profit or loss.

Where the group’s share of an associate or joint venture’s losses equals or exceeds the carrying value of the investment, no further losses are recognised unless the group has an obligation to make payments on behalf of the investee. Any recovery in future profits is recognised only once eliminated losses have been recovered.

### **Worked Example 1.3**

Doran Co owns 40% of Vesta Co. At the start of the year, the investment is held at \$290,000. During the year, Vesta Co reports a loss after tax of \$100,000, and an impairment review indicates that the recoverable amount of the investment at year end is only \$230,000.

**How should Doran Group account for the loss and impairment?**

> **Answer:**
>
> - Share of loss: 40% × \$100,000 = \$40,000 (reduce investment and group profit)
> - After loss, carrying amount: \$290,000 − \$40,000 = \$250,000
> - Impairment to recoverable amount: \$250,000 − \$230,000 = \$20,000 (additional reduction, also charged to profit)
> - Closing carrying amount: \$230,000

## Dividends from Associates and Joint Ventures

Dividends received from associates or joint ventures are not shown as group revenue or income in the consolidated statement of profit or loss. Instead, they reduce the carrying amount of the investment, as their economic effect is already included in the group’s share of profit recognised under the equity method.

### **Revision Tip**

When performing group accounting for associates and joint ventures, always check for: fair value adjustments, intra-group unrealised profits, impairment indicators, and dividend receipts each period.

## **Summary**

For associates and joint ventures, apply the equity method according to IAS 28/IFRS 11. Adjust for fair value differences at acquisition and for unrealised profits on intra-group transactions. Recognise group share of profit or loss, making impairment adjustments when required, and reduce the carrying value for dividends received. Only the group's share of results and relevant adjustments are presented in the consolidated accounts, providing a faithful representation of group influence.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define associates and joint ventures and recognise when significant influence or joint control exists
- Explain the equity method, including initial cost and post-acquisition adjustments
- Describe how to account for fair value differences at acquisition in group accounts
- Calculate and eliminate the group’s share of unrealised profits on transactions with associates or joint ventures
- Identify and process impairment losses on such investments within group accounts
- Explain the treatment of dividends from associates and joint ventures under the equity method

## **Key Terms and Concepts**

- associate
- joint venture
- equity method
- unrealised profit

Associates and joint ventures (IAS 28/IFRS 11) - Adjustments, impairment, and dividends