## **Learning Outcomes**

After reading this article, you will be able to:

- Explain the meaning of significant influence under IAS 28 and IFRS 11.
- Describe how to identify an associate and a joint venture.
- Apply the equity method to account for associates and joint ventures in consolidated financial statements.
- Calculate group adjustments for associates, including the treatment of post-acquisition profits, impairments, and unrealised profits from intra-group transactions.

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

For ACCA Financial Reporting (FR), you are required to understand the accounting treatment for associates and joint ventures in consolidated financial statements. In particular, revision should concentrate on:

- The definition of an associate and significant influence under IAS 28
- The identification and accounting treatment of joint ventures per IFRS 11
- The circumstances in which the equity method is required
- The mechanics of equity accounting for associates and joint ventures
- The inclusion and presentation of associates in the consolidated statement of financial position and consolidated statement of profit or loss
- The treatment of adjustments for impairments and unrealised profits arising from intra-group transactions

## **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. According to IAS 28, what level of shareholding normally gives rise to an associate relationship?
   a) 10%–30%
   b) Over 50%
   c) 20%–50%
   d) 50%–75%

2. Which of the following best describes the equity method of accounting?
   a) Line-by-line consolidation of assets and liabilities
   b) Fair value revaluation of the investment each year
   c) Recognising the cost of investment plus post-acquisition profits/losses
   d) Recognising all associate assets and liabilities at fair value

3. In consolidated financial statements, how are unrealised profits in inventory arising from transactions with an associate treated?
   a) Ignored
   b) Eliminated fully from group profits
   c) Eliminated to the extent of the investor’s interest in the associate
   d) Recognised in full as income

4. In which section of the consolidated profit or loss statement is the group’s share of associate profit presented?
   a) Within revenue
   b) As a separate line below group operating profit
   c) Within group administrative expenses
   d) Within group cost of sales

## **Introduction**

Associates and joint ventures often feature in group structures. Their correct treatment is essential for ACCA Financial Reporting (FR) exam success. These investments do not give rise to control, but instead significant influence or in some cases, joint control. They require specialised accounting under IAS 28 and IFRS 11.

Correctly identifying an associate or joint venture, and applying the equity method, ensures consolidated financial statements give a fair reflection of the group's financial interests. The treatment is tested both computationally and discursively in the exam.

> **Key Term: associate**
> An entity in which the investor has significant influence but neither control nor joint control, generally evidenced by ownership of 20%–50% of the voting power.
>
> **Key Term: significant influence**
> The power to participate in the financial and operating policy decisions of an investee, but not control or joint control of those policies.
>
> **Key Term: equity method**
> A method of accounting whereby the investment is initially recorded at cost and adjusted for the investor’s share of post-acquisition profits or losses, and reduced by any dividends received and impairment losses.
>
> **Key Term: joint venture**
> A joint arrangement where two or more parties have joint control of an arrangement and have rights to the net assets of the arrangement, typically evidenced by a contractual agreement.

## Identifying Associates and Joint Ventures

Associates arise when there is significant influence but not control over an investee. The most common indicator is holding between 20% and 50% of the voting shares, but other factors such as board representation, participation in decision-making, and significant commercial transactions can also indicate significant influence.

Joint ventures are arranged contractually, with two or more parties sharing joint control, and are accounted for similarly to associates under the equity method.

## Equity Method – Principles and Applications

Associates and joint ventures are not consolidated line-by-line. Instead, the _equity method_ is applied:

- Initially recognise the investment at cost, including transaction costs.
- In subsequent periods, adjust the carrying amount for the group’s share of post-acquisition profits or losses and for dividends received.
- Recognise impairments as required by IAS 28 and adjust carrying value accordingly.

In the consolidated statement of financial position, the associate or joint venture appears as a single line “investment in associate” under non-current assets. In the consolidated statement of profit or loss, the group’s share of the associate’s post-tax profit or loss is shown as a separate line, typically below group operating profit.

> **Key Term: post-acquisition profits**
> The associate’s profits or losses accrued since the date of acquisition, attributable to the group’s shareholding.

## Group Adjustments for Associates

When preparing group financial statements, the following adjustments are necessary:

- Exclude any intra-group dividends received from the associate, as these are not presented as group revenue.
- Adjust for unrealised profits in inventory arising from transactions between the group and the associate. Only adjust for the group’s share.
- Recognise group’s share of associate’s post-acquisition profit or loss, less any share of impairments and after making necessary fair value adjustments.

### **Worked Example 1.1**

_Zara Group owns 30% of Offset Ltd, acquired when Offset’s retained earnings were \$500,000. For the reporting year, Offset reports a profit after tax of \$150,000 and pays a dividend of \$20,000. At the reporting date, Offset’s retained earnings are \$580,000. Calculate the value of the associate to be shown in Zara Group’s consolidated statement of financial position and the amount to include for share of profit of associate in the consolidated profit or loss._

> **Answer:**
>
> Carrying amount of investment:
>
> - Initial cost: Assume $X (not required for working as group share of post-acq profits drives future changes)
> - Share of post-acquisition profits: 30% × (\$580,000 – \$500,000) = \$24,000 added to initial cost
> - Deduct share of dividends received: 30% × \$20,000 = \$6,000 (already included if earning reconciled through retained earnings)
> - If associate’s profit has already increased retained earnings, the share of post-acquisition profit is \$24,000.
>
> In the consolidated profit or loss, “share of profit of associate” is 30% × \$150,000 = \$45,000 (before any adjustments for PUP or impairment).

### **Worked Example 1.2**

_Coastal Plc owns 25% of Reef Ltd. During the year, Coastal sold goods to Reef Ltd for \$200,000 at a gross margin of 25%. At the year-end, Reef Ltd still holds 25% of these goods in inventory. What adjustment is required for unrealised profit, and how should it be presented?_

> **Answer:**
>
> - Total profit on sale: \$200,000 × 25/125 = \$40,000
> - Unrealised profit in inventory: 25% × \$40,000 = \$10,000
> - Group's share (25%): \$2,500 to eliminate
>
> Adjustment: Reduce the group’s share of profit of associate by \$2,500 and reduce the carrying amount of investment in the associate by \$2,500.

### **Exam Warning**

> In the FR exam, a frequent error is to eliminate _all_ profits on group transactions with an associate. You need to eliminate only the group’s share of any unrealised profit in inventory, not the full amount.

## Other Equity Method Adjustments

- If the associate or joint venture incurs a loss, reduce the carrying value of the investment. If the carrying amount falls to zero, the group discontinues recognising further losses unless there is a legal or constructive obligation.
- Impairment of the associate is reviewed and reflected in the investment carrying value. Any impairment charge is included in group profit.
- Any fair value adjustments relating to associate's net assets on acquisition must be amortised over the relevant periods and affect group profit.

## Presentation in Consolidated Financial Statements

- The carrying amount of investment in associates/joint ventures appears within non-current assets in the group’s statement of financial position.
- The group’s share of the profit after tax of associates/joint ventures is disclosed as a single line after group operating profit in the statement of profit or loss.
- Dividends received from the associate/joint venture do not form part of group revenue—they are eliminated for consolidation purposes.

## **Summary**

Associates and joint ventures represent investments with significant influence or joint control, not full control. IAS 28 and IFRS 11 require the equity method—recognising the investment at cost and adjusting for the share of post-acquisition profits or losses, less impairments and any share of unrealised profit adjustments. Intra-group profits and losses on transactions with associates/joint ventures are only eliminated to the extent of the group’s interest.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define an associate and joint venture according to IAS 28 and IFRS 11
- Identify significant influence (including indicators beyond shareholding)
- State when the equity method is used for associates and joint ventures
- Describe how to calculate the group's share of post-acquisition profits
- Explain and adjust for unrealised profits in transactions with associates
- Present the appropriate lines for associates/joint ventures in group accounts
- Recognise when to account for impairments in associates

## **Key Terms and Concepts**

- associate
- significant influence
- equity method
- joint venture
- post-acquisition profits

Associates and joint ventures (IAS 28/IFRS 11) - Significant influence and equity method