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Wiley lFRS: Practical Implementation Guide and Workbook
S. EXCEPTIONS TO THE EQUITY METHOD
An investment in an associate should be accounted for using the eq uit y method except in these
three exceptional circumstances:
( I) Wh ere the investment is classified as held for sale in accordance with IFRS 5
(2)
Where a parent does not have to present co nso lida ted fin anci al stateme nts because of the
exemption in lAS
27
(3)
The inve stor need not use the eq uity met hod if
all
of these criteria apply:
(a) The investor is a who lly owned subsid iary or is a partiall y owned subsidiary of anot he r
entity and its own er s ha ve been informed about and do not object to the investo r not
applyi ng the equity met hod . The owners in th is case are all of those entitled to vote .
(b) The investor' s debt or equity instrumen ts are not traded in a public market.
(c) The inves tor did not file , nor is it in the process of filing, its financial stateme nts with a
securi ties commissio n or other reg ulatory body fo r the pu rpose of issuin g any cl ass of
financi al instrument in a public market.
(d) The ultimate or any inte rme diate parent of the investor produces co nso lida ted financial
statements that are available for public use and that comply with IFRS.
6. INVESTOR CEASES TO HAVE SIGNIFICANT INFLUENCE
6.1
If the investor ceases to have significa nt influence over an ass oc iate, then the equity method
sho uld not be used and the investme nt should be accounted for using lAS
39,
provided that the as–
sociate does not become a subsidiary or a joint venture.
6.2
The carry ing amount at the date that the investment ceases to be regarded as an associate sha ll
be treated as cost on its initial measurement as a fin ancial ass et und er lAS
39.
Case Study 4
Facts
Company X owns 22% of Company Y and is entitled to appoint two directors to the board, which con–
sists of eight members. The remaining 78% of the voting rights are held by two other companies, each of
which is entitled to appoint three directors. The board makes decisions on the basis of a simple majority.
Because board meetings are often held at very short notice, Company X does not always have represen–
tation on the board. Often the suggestions of the representative of Company X are ignored, and the deci–
sions of the board seem to take little notice of any representations made by the director from Company
X.
Required
What is the relationship between Company X and Company Y?
Solution
Company X is unable to exercise significant influence as its directors seem to be ignored at board meet–
ings. Therefore, the equity method should not be used.
7. ACQUISITION OF AN ASSOCIATE AND ACCOUNTING TREATMENT
7.1 When an investment in an associate is acquired, any diffe rence between the cost of the invest–
ment and the investor' s share of the net fair valu e of the associate 's net asset s and contingent li–
abi lities is accounted for in accorda nce with IFRS 3. Thus, any goodwill relati ng to the associate
wi ll be included in the carryi ng value of the investment.
7.2 FRS 3 and, therefore, lAS 28 do not allow amortization of that goodw ill. Nega tive goodwill
is excl uded from the carrying amount of the investment. Th is amount should be included as income
in dete rmining the inves tor's share of the associate 's profit or loss for the period in whi ch the in–
ves tme nt was acquired.
7.3 After acq uisition , adj ustme nts will be made to the investor ' s share of the associates' profits or
losses for such events as imp airment losses incurred by the associate .