## **Learning Outcomes**

After reading this article, you will be able to explain the accounting for associates and joint arrangements under IAS 28 and IFRS 11, and describe the disclosure requirements set out by IFRS 12—including those for structured entities. You will understand key definitions, equity accounting, and how to identify and report investments in joint operations, joint ventures, and associates in accordance with ACCA SBR exam expectations.

## **ACCA Strategic Business Reporting (SBR) Syllabus**

For ACCA Strategic Business Reporting (SBR), you are required to understand the recognition, measurement, classification and disclosure of investments in associates and joint arrangements. This article specifically addresses:

- The criteria for significant influence and joint control
- Accounting for associates using the equity method (IAS 28)
- Identifying and classifying joint arrangements under IFRS 11
- Accounting for joint operations and joint ventures
- The disclosure requirements for interests in other entities, including structured entities, under IFRS 12
- Explaining the main features and risks of interests in structured entities

## **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 conditions must be met for an investor to have significant influence over an entity, and how should such an investment be accounted for in consolidated financial statements?
2. Distinguish between a joint operation and a joint venture under IFRS 11.
3. What are structured entities, and what key disclosures must be made regarding interests in them under IFRS 12?
4. Describe how an investor should account for transactions undertaken with an associate.

## **Introduction**

Entities often hold interests in other entities without having full control. It is common for companies to invest in or collaborate with other businesses, creating relationships such as associates, joint ventures, joint operations, or structured entities. The correct classification and disclosure of these arrangements is essential, both for accurate financial reporting and for meeting the expectations of investors and regulators.

IAS 28 and IFRS 11 set out the requirements for classification and initial and subsequent accounting measurement, while IFRS 12 specifies the necessary disclosures. This article guides you through the key technical knowledge and explains how to approach likely ACCA exam requirements, with practical examples and explanations.

## Associates

### Significant Influence and the Equity Method

An entity is an **associate** when the investor has significant influence but not control or joint control over its financial and operating policies. Significant influence is presumed if the investor holds at least 20% of the investee’s voting rights, unless it can be clearly demonstrated otherwise.

> **Key Term: Associate**
> An entity over which an investor has significant influence but not control or joint control.
>
> **Key Term: Significant influence**
> The power to participate in the financial and operating decisions of an investee, but not control those decisions.

Accounting for associates is done using the **equity method** in consolidated financial statements. Under the equity method, the investor initially recognises the investment at cost, then adjusts the carrying amount for its share of post-acquisition profits or losses and other comprehensive income. Dividends received reduce the carrying amount of the investment.

> **Key Term: Equity method**
> A method of accounting where the initial investment is recognised at cost and adjusted for the investor’s share of post-acquisition profits or losses and other movements in equity.

### Key Features of Accounting for Associates

- Investments in associates are shown as a single line in the group statement of financial position.
- The group’s share of profit or loss and other comprehensive income appears as a single line in the group profit or loss and OCI.
- Transactions and balances with associates are not eliminated in consolidation, but profits resulting from transactions with associates must be eliminated to the extent of the investor’s interest.

### **Worked Example 1.1**

_Beta owns 30% of Gamma’s voting shares and can appoint a board member, but does not have control. During the year, Gamma reports a profit of \$100,000. Beta received \$7,000 in dividends from Gamma. How should Beta account for its investment at year end, having initially recognised it at \$60,000?_

> **Answer:**
> Beta recognises its share of Gamma’s profit (\$100,000 × 30% = \$30,000) as an increase in the carrying amount of the investment. The carrying amount is decreased by the dividend received. The new carrying amount is \$60,000 + \$30,000 − \$7,000 = \$83,000.

## Joint Arrangements

### Identifying Joint Arrangements

IFRS 11 defines a **joint arrangement** as an arrangement where two or more parties have joint control. Joint control exists only when decisions about relevant activities require the unanimous consent of the parties sharing control.

> **Key Term: Joint arrangement**
> An arrangement where two or more parties have joint control of an economic activity.

Joint arrangements are classified as:

- **Joint operations**: Parties have direct rights to the assets and obligations for the liabilities.
- **Joint ventures**: Parties have rights to the net assets of the arrangement only.

> **Key Term: Joint operation**
> A joint arrangement where the parties have direct rights to assets and obligations for liabilities relating to the arrangement.
>
> **Key Term: Joint venture**
> A joint arrangement where the parties have rights to the net assets of the arrangement.

### Classification and Accounting

- **Joint operations**: Each party recognises its share of assets, liabilities, income, and expenses according to the contractual arrangement.
- **Joint ventures**: Each venturer recognises its interest using the equity method (like an associate).

### **Worked Example 1.2**

_Alpha and Delta set up a new entity, Omega, to produce a product. All major decisions require agreement by both parties, but Omega owns its assets in its own name and liabilities are settled only from Omega’s resources. Should this arrangement be classified as a joint venture or a joint operation, and how should Alpha account for its interest?_

> **Answer:**
> The separate legal entity and limitation of claims to Omega’s net assets indicate a joint venture. Alpha applies the equity method to its investment in Omega.

### **Exam Warning**

> Be careful not to assume that the structure (such as a separate legal entity) alone determines the classification. Always assess the actual rights to assets and obligations for liabilities.

## Disclosure Requirements (IFRS 12)

Investors must provide clear information about their interests in other entities, enabling users to assess risks, financial effects, and the nature of relationships. Disclosure is required for:

### Associates and Joint Arrangements

- Name, nature, and principal place of business
- Proportion of ownership and voting rights held
- Method of accounting for the investment
- Summarised financial information for individually material associates or joint ventures
- The nature and extent of significant restrictions (such as fund repatriation)
- Risks associated with interests in associates and joint ventures

### Structured Entities

A **structured entity** is designed so that voting rights are not the key factor in controlling the entity—such as securitisation vehicles and certain investment funds.

> **Key Term: Structured entity**
> An entity designed so that voting or similar rights are not the main factor in deciding control.

IFRS 12 requires disclosures of:

- How structured entities are established and operate
- The nature, purpose, size and activities of the entity
- The extent of interests held (including contractual and non-contractual arrangements)
- Risks to which the reporting entity is exposed as a result of those interests, such as liquidity support or credit risk

### **Worked Example 1.3**

_Company Zeta sponsors a securitisation vehicle, StructuredFund Ltd, which is not consolidated due to lack of control under IFRS 10. At year end, Zeta holds residual interests and provides credit support. What key information must Zeta disclose about StructuredFund Ltd?_

> **Answer:**
> Zeta must disclose the nature and purpose of StructuredFund Ltd, the extent of Zeta's interests, any support provided (including its obligations to StructuredFund Ltd), and the risks arising from its involvement, such as maximum exposure to loss.

### **Revision Tip**

> For each interest in an associate or joint arrangement, always check whether significant restrictions or risks need to be disclosed, even if the entity is not consolidated.

## **Summary**

Associates are entities over which significant influence is exercised—accounted for using the equity method. Joint arrangements are either joint operations (recognise share of assets and liabilities) or joint ventures (equity method). IFRS 12 requires extensive disclosures for all these arrangements and for interests in structured entities, ensuring users understand the financial impact and risk exposure.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and identify significant influence, associates, and joint arrangements
- Apply the equity method for accounting for associates and joint ventures
- Distinguish between joint ventures and joint operations under IFRS 11
- Identify and explain the key disclosure requirements for interests in associates, joint arrangements and structured entities under IFRS 12
- Recognise the importance of disclosing risks and constraints related to these interests

## **Key Terms and Concepts**

- Associate
- Significant influence
- Equity method
- Joint arrangement
- Joint operation
- Joint venture
- Structured entity

Associates and joint arrangements (ias 28/ifrs 11/ifrs 12) - Disclosure requirements including structured entities