5.6 Investments in Associates and Joint Ventures

Investments in associates and joint ventures are accounted for using the equity method in accordance with International Financial Reporting Standards (IFRS). The equity method is applied when an investor has significant influence over an investee but does not have control over it. Here are some key points regarding investments in associates and joint ventures:

1. Associates: An associate is an entity in which the investor has significant influence, generally evidenced by the investor owning between 20% and 50% of the voting rights. The investor’s significant influence is typically determined by factors such as representation on the board of directors, participation in policy-making processes, and material intercompany transactions.
2. Joint Ventures: A joint venture is a contractual arrangement in which two or more parties undertake an economic activity that is subject to joint control. Joint control exists when the strategic financial and operating decisions related to the activity require unanimous consent from the parties involved.
3. Equity Method: Under the equity method, the investor initially recognizes its investment in an associate or joint venture at cost. Subsequently, the investor adjusts its investment to reflect its share of the investee’s post-acquisition changes in net assets or equity. The investor’s share of the investee’s profits or losses is recognized in the investor’s income statement.
4. Equity Method Adjustments: The investor’s equity method adjustments include its share of the investee’s profit or loss, dividends received from the investee, and any impairment losses recognized on the investment. These adjustments are recorded as changes in the carrying amount of the investment and recognized in the investor’s income statement.
5. Reporting and Disclosures: The investor should present its investments in associates and joint ventures separately in the financial statements. The investor’s share of the investee’s assets, liabilities, revenues, and expenses should be disclosed in the relevant financial statement captions. Additional disclosures are required to provide information about the nature and extent of the investor’s interests in associates and joint ventures, including any contingent liabilities or commitments.
6. Reversal of Equity Method Adjustments: If there is a decrease in the investor’s share of the investee’s net assets, the investor does not recognize losses beyond its investment carrying amount unless it has incurred legal or constructive obligations to support the investee. However, if the reasons for the decrease reverse in subsequent periods, the investor resumes applying the equity method.