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Investments in Associates

SME Par.IFRS SMEU.S. GAAP
Scope of this section
14.1 This section applies to accounting for associates in consolidated financial statements and in the financial statements of an investor that is not a parent but that has an investment in one or more associates. Paragraph 9.26 establishes the requirements for accounting for associates in separate financial statements. The term“equity-method investee” is used to describe what would be an associate under IFRS.
Associates defined
14.2 An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.  
14.3 Significant influence is the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies.
  1. If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the associate, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case.
  2. Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the associate, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.
  3. A substantial or majority ownership by another investor does not preclude an investor from having significant influence.
 First sentence – Same.
  1. Same with regard to incorporated investees. Unlike IFRS SMEs, however, the presumption of significant influence applies to investors that are either noncontrolling general partners or limited partners that own three to five percent or more of the limited partnership interest. The three to five percent threshold is also applied to investments in limited liability companies that maintain specific ownership accounts similar to a partnership capital account structure.
Measurement—accounting policy election
14.4 An investor shall account for all of its investments in associates using one of the following:
  1. the cost model in paragraph 14.5.
  2. the equity method in paragraph 14.8.
  3. the fair value model in paragraph 14.9.
 Unlike IFRS SMEs, the cost method is not permitted for investments in investees over which the investor has the ability to exercise significant influence.

Like IFRS SMEs, U.S. GAAP allows investors to elect to account for investments that would otherwise be accounted for under the equity method at fair value. Unlike IFRS SMEs, however, the election is made on an investee-by-investee basis. Also unlike IFRS SMEs, when the fair value option is elected, it must be applied to all of the investor’s financial interests in the same entity (equity and debt, including guarantees) that are eligible items.
 Cost model
14.5 An investor shall measure its investments in associates, other than those for which there is a published price quotation (see paragraph 14.7) at cost less any accumulated impairment losses recognised in accordance with Section 27 Impairment of Assets. See 14.4.
14.6 The investor shall recognise dividends and other distributions received from the investment as income without regard to whether the distributions are from accumulated profits of the associate arising before or after the date of acquisition. See 14.4.
14.7 An investor shall measure its investments in associates for which there is a published price quotation using the fair value model (see paragraph 14.9). Unlike IFRS SMEs, there is no requirement to use a fair value model for investments in investees over which the investor has significant influence and for which there is a published price quotation.
 Equity method
14.8 Under the equity method of accounting, an equity investment is initially recognised at the transaction price (including transaction costs) and is subsequently adjusted to reflect the investor’s share of the profit or loss and other comprehensive income of the associate.
  1. Distributions and other adjustments to carrying amount. Distributions received from the associate reduce the carrying amount of the investment. Adjustments to the carrying amount may also be required as a consequence of changes in the associate’s equity arising from items of other comprehensive income.
  2. Potential voting rights. Although potential voting rights are considered in deciding whether significant influence exists, an investor shall measure its share of profit or loss of the associate and its share of changes in the associate’s equity on the basis of present ownership interests. Those measurements shall not reflect the possible exercise or conversion of potential voting rights.
  3. Implicit goodwill and fair value adjustments. On acquisition of the investment in an associate, an investor shall account for any difference (whether positive or negative) between the cost of acquisition and the investor’s share of the fair values of the net identifiable assets of the associate in accordance with paragraphs 19.22–19.24. An investor shall adjust its share of the associate’s profits or losses after acquisition to account for additional depreciation or amortisation of the associate’s depreciable or amortisable assets (including goodwill) on the basis of the excess of their fair values over their carrying amounts at the time the investment was acquired.
  4. Impairment. If there is an indication that an investment in an associate may be impaired, an investor shall test the entire carrying amount of the investment for impairment in accordance with Section 27 as a single asset. Any goodwill included as part of the carrying amount of the investment in the associate is not tested separately for impairment but, rather, as part of the test for impairment of the investment as a whole.
  5. Investor’s transactions with associates. If an associate is accounted for using the equity method, the investor shall eliminate unrealised profits and losses resulting from upstream (associate to investor) and downstream (investor to associate) transactions to the extent of the investor’s interest in the associate. Unrealised losses on such transactions may provide evidence of an impairment of the asset transferred.
  6. Date of associate’s financial statements. In applying the equity method, the investor shall use the financial statements of the associate as of the same date as the financial statements of the investor unless it is impracticable to do so. If it is impracticable, the investor shall use the most recent available financial statements of the associate, with adjustments made for the effects of any significant transactions or events occurring between the accounting period ends.
  7. Associate’s accounting policies. If the associate uses accounting policies that differ from those of the investor, the investor shall adjust the associate’s financial statements to reflect the investor’s accounting policies for the purpose of applying the equity method unless it is impracticable to do so.
  8. Losses in excess of investment. If an investor’s share of losses of an associate equals or exceeds the carrying amount of its investment in the associate, the investor shall discontinue recognising its share of further losses. After the investor’s interest is reduced to zero, the investor shall recognise additional losses by a provision (see Section 21 Provisions and Contingencies) only to the extent that the investor has incurred legal or constructive obligations or has made payments on behalf of the associate. If the associate subsequently reports profits, the investor shall resume recognising its share of those profits only after its share of the profits equals the share of losses not recognised.
  9. Discontinuing the equity method. An investor shall cease using the equity method from the date that significant influence ceases.
    1. If the associate becomes a subsidiary or joint venture, the investor shall remeasure its previously held equity interest to fair value and recognise the resulting gain or loss, if any, in profit or loss.
    2. If an investor loses significant influence over an associate as a result of a full or partial disposal, it shall derecognise that associate and recognise in profit or loss the difference between, on the one hand, the sum of the proceeds received plus the fair value of any retained interest and, on the other hand, the carrying amount of the investment in the associate at the date significant influence is lost. Thereafter, the investor shall account for any retained interest using Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues, as appropriate.
    3. If an investor loses significant influence for reasons other than a partial disposal of its investment, the investor shall regard the carrying amount of the investment at that date as a new cost basis and shall account for the investment using Sections 11 and 12, as appropriate.
 First sentence – Same.
  1. Same.
  2. Same.
  3. Generally the same. However, unlike IFRS SMEs, goodwill is not amortized, but rather is subject to impairment testing at least annually. See Section 19, Business Combinations and Goodwill.
  4. Unlike IFRS SMEs, an equity-method investment is written down if its carrying amount is impaired only if that impairment is considered to be other than temporary.
  5. Same.
  6. Unlike IFRS SMEs, an investor may use financial statements of an investee that are as of a date no more than three months from the investor’s reporting date without demonstrating that it is impracticable to use financial statements as of the same date; adjustments are not made for the effects of significant events and transactions occurring between the investor’s and the investee’s accounting period ends.
  7. Unlike IFRS SMEs, an equity-method investee’s accounting policies need not be consistent with those of its investor. However, the financial statements of the investee must be prepared in accordance with U.S. GAAP.
  8. Generally the same, except that unlike IFRS SMEs, further losses also are recognized if the investee is expected to return to profitability imminently, or if a subsequent further investment in the investee is, in substance, the funding of such losses.
  9. First sentence — Same.
    1. Same.
    2. Unlike IFRS SMEs, if an investor loses significant influence over an equity-method investee, the deemed cost of the investment for the purpose of applying the investment standard is the investor’s retained interest in the carrying amount of the net assets of the investee at the date of the change of status of the investment. Dividends received by the investor in subsequent periods that exceed the investor’s share of earnings for such periods reduce the carrying amount of the investment.
    3. Same.
 Fair value model
14.9 When an investment in an associate is recognised initially, an investor shall measure it at the transaction price. Transaction price excludes transaction costs. Same.
14.10 At each reporting date, an investor shall measure its investments in associates at fair value, with changes in fair value recognised in profit or loss, using the fair valuation guidance in paragraphs 11.27–11.32. An investor using the fair value model shall use the cost model for any investment in an associate for which it is impracticable to measure fair value reliably without undue cost or effort. Unlike IFRS SMEs, the cost method is not permitted for investments in investees over which the investor has the ability to exercise significant influence. The U.S. GAAP fair value option is irrevocable, and there is no fall-back position in the event “it is impracticable” to measure fair value reliably.
Financial statement presentation
14.11 An investor shall classify investments in associates as non-current assets. Unlike IFRS SMEs, balance sheet classification of investments in associates as current or noncurrent is subject to general current/noncurrent classification guidance.
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