Associate Company Vs Joint Venture

Hi Sylvia, thank you for that. It follows from the foregoing that the value of an associated company in the consolidated financial data of an entity does not necessarily correspond to its share of the net assets of that entity. A number of people in my organization tell me that, but I think they are wrong. For example, suppose we bought 25% of a business for $5 million, and that company had a net worth of $15 million when it was acquired. This transaction would generate goodwill of $1.25 million ($5 million – $15 million* 25%), which would actually be included in the partner`s costs (and would not be disclosed separately). Assuming no impairment is made, the value of this associated company would always be greater than the proportion of net assets due to the equity method. Conversely, in the case of a low-cost purchase, the carrying amount of the investment in associated enterprises would in fact correspond to the share of net assets. Let`s say we bought 25% of the company and paid only $3 million. The result is $750,000 that would be taken into account: Dr. Investment in Associate Cr P&L. The value of the investment in associated companies at the time of acquisition would then be $3.75 million, or the share of net assets ($15 million*25%). The associated value would then increase and decrease due to the change in the company`s net assets. Hello Silvia, when reviewing the depreciation of an investment in associated companies, do I need to assess the depreciation of the investment as a whole or its assets individually? Is an investment in the associated enterprise tested individually for depreciation or can it be part of a cash-generating unit? Thank you very much!! IAS 28 does not contain any information.

Instead, IFRS 12 Disclosure of Investments in Other Entities describes the information required for entities with joint control or significant influence over an investee. In September 2014, IAS 28 was amended by the sale or contribution of assets between a shareholder and its partner or joint venture (amendments to IFRS 10 and IAS 28). These amendments concerned conflicting accounting rules for the sale or transfer of assets to a joint venture or associated enterprise. In December 2015, the mandatory effective date of this amendment was extended indefinitely from the effective date of the amendments to IFRS 10 and IAS 28. Classification as a non-current asset. An investment in an associate or joint venture is generally classified as a non-current asset unless it is classified as held for sale in accordance with IFRS 5 Non-current assets held for sale and discontinued operations. [IAS 28(2011).15] Under the equity method, an investment in an associate or joint venture is recorded at cost when it is first recorded. The carrying amount is then increased or decreased to recognise the shareholder`s share in the subsequent profit or loss of the investee and to include that share of the investee`s profit in the shareholder`s profit. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary to take account of changes in the investor`s proportionate interest in the investee and other comprehensive income of the investee. A company is called a subsidiary when the parent company holds a majority stake, which is usually indicated by more than 50% of the shares. The acquisition method is used to account for the subsidiary`s finances.

An investment holding company would potentially invest more in associated companies than other types of companies. Such a company may have high profits but low operating cash flow. The equity method recognises the profits of associated companies in the income statement but excludes them in the cash flow statement, in particular if the partner does not pay dividends. Once the investor has acquired significant influence or joint control over a joint venture, the investor must apply the equity method. Changes in ownership shares. If an entity`s interest in an associate or joint venture is reduced, but the equity method continues to be applied, the entity classifies the portion of the gain or loss previously recognized in other comprehensive income in relation to that reduction in interests in the income statement.

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