5.3 Accounting treatment of investments in subsidiaries, associates and jointly controlled entities in the financial statement of the investor (Separate financial statements)

The accounting treatment of investments in subsidiaries, associates, and jointly controlled entities in the separate financial statements of an investor is outlined in various accounting standards, primarily International Financial Reporting Standards (IFRS). Here’s a general overview of how these investments are accounted for:

Subsidiaries: A subsidiary is an entity that is controlled by the investor, usually through ownership of more than 50% of the voting rights. In the investor’s separate financial statements, a subsidiary is typically accounted for using the cost method or the equity method, depending on the accounting framework being followed.
- Cost Method: Under the cost method, the investment is initially recognized at cost and subsequently carried at cost less any accumulated impairment losses.
- Equity Method: Under the equity method, the investor initially recognizes the investment at cost and subsequently adjusts the carrying amount to reflect the investor’s share of the investee’s net assets and income. The investor’s share of the investee’s profits or losses is recognized in the investor’s income statement.
Associates: An associate is an entity in which the investor has significant influence, generally with ownership of 20% to 50% of the voting rights. In the separate financial statements, associates are usually accounted for using the equity method.
- Equity Method: Similar to subsidiaries, the equity method involves recognizing the investment at cost and then adjusting the carrying amount based on the investor’s share of the associate’s net assets and income. The investor’s share of the associate’s profits or losses is included in the investor’s income statement.
Jointly Controlled Entities: Jointly controlled entities are those over which the investor has joint control with one or more other parties. These are typically accounted for using proportionate consolidation, equity method, or cost method, depending on the circumstances.
- Proportionate Consolidation: In this method, the investor includes its share of the assets, liabilities, income, and expenses of the jointly controlled entity in proportion to its ownership interest in the entity.
- Equity Method: Similar to associates, if the investor has significant influence over the jointly controlled entity, it accounts for its investment using the equity method.
- Cost Method: If the investor does not have significant influence, it may account for its investment using the cost method.