|Financial Reporting Standard 128|
Financial Reporting Standard 128 Investments in Associates replaces FRS 1282004 Investments in Associates and should be applied for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. The Standard also replaces the following Interpretations:
[Reason: MASB has not adopted SIC-3, SIC-20 and SIC-33.]
IASB's Reasons for Revising IAS 28
The International Accounting Standards Board developed the revised IAS 28 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.
For IAS 28 the IASB's main objective was to reduce alternatives in the application of the equity method and in accounting for investments in associates in separate financial statements. The IASB did not reconsider the fundamental approach when accounting for investments in associates using the equity method contained in IAS 28.
The Main Changes
The main changes from FRS 1282004 are described below.
The Standard does not apply to investments that would otherwise be associates or interests of venturers in jointly controlled entities held by venture capital organisations, mutual funds, unit trusts and similar entities when those investments are classified as held for trading and accounted for in accordance with FRS 139 Financial Instruments: Recognition and Measurement. Those investments are measured at fair value, with changes in fair value recognised in profit or loss in the period in which they occur.
Furthermore, the Standard provides exemptions from application of the equity method similar to those provided for certain parents not to prepare consolidated financial statements. These exemptions include when the investor is also a parent exempt in accordance with FRS 127 Consolidated and Separate Financial Statements from preparing consolidated financial statements (paragraph 13(b)), and when the investor, though not such a parent, can satisfy the same type of conditions that exempt such parents (paragraph 13(c)).
Potential voting rights
An entity is required to consider the existence and effect of potential voting rights currently exercisable or convertible when assessing whether it has the power to participate in the financial and operating policy decisions of the investee. This requirement was previously included in SIC-33, which has been superseded. [Reason: MASB has not adopted SIC-33.]
The Standard clarifies that investments in associates over which the investor has significant influence must be accounted for using the equity method whether or not the investor also has investments in subsidiaries and prepares consolidated financial statements. However, the investor does not apply the equity method when presenting separate financial statements prepared in accordance with FRS 127.
Exemption from applying the equity method
The Standard does not require the equity method to be applied when an associate is acquired and held with a view to its disposal within twelve months of acquisition. There must be evidence that the investment is acquired with the intention to dispose of it and that management is actively seeking a buyer. The words "in the near future" were replaced with the words "within twelve months". When such an associate is not disposed of within twelve months it must be accounted for using the equity method as from the date of acquisition, except in narrowly specified circumstances* .
The Standard does not permit an investor that continues to have significant influence over an associate not to apply the equity method when the associate is operating under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Significant influence must be lost before the equity method ceases to be applicable
FRS 5 Non-current Assets Held for Sale and Discontinued Operations removes this scope exclusion and now eliminates the exemption from applying the equity method when significant influence over an associate is intended to be temporary. See FRS 5 'IASB's Basis for Conclusions for further discussion.
Elimination of unrealised profits and losses on transactions with associates
Profits and losses resulting from 'upstream' and 'downstream' transactions between an investor and an associate must be eliminated to the extent of the investor's interest in the associate. The consensus in IASB SIC-3 has been incorporated into the Standard.
When financial statements of an associate used in applying the equity method are prepared as of a reporting date that is different from that of the investor, the difference must be no greater than three months.
Uniform accounting policies
The Standard requires an investor to make appropriate adjustments to the associate's financial statements to conform them to the investor's accounting policies for reporting like transactions and other events in similar circumstances. FRS 1282004 provided an exception to this requirement when it was "not practicable to use uniform accounting policies".
Recognition of losses
An investor must consider the carrying amount of its investment in the equity of the associate and its other long-term interests in the associate when recognising its share of losses of the associate. SIC-20 limited the recognition of the investor's share of losses to the carrying amount of its investment in the equity of the associate. Therefore, that Interpretation has been superseded. [Reason: MASB has not adopted SIC-20.]
Separate Financial Statements
The requirements for the preparation of an investor's separate financial statements are established by reference to FRS 127.