The International Accounting Standard (IAS) 28, which deals with the accounting for investments in associates and joint ventures, was originally issued by the International Accounting Standards Committee (IASC) in 1989. The standard has since undergone multiple revisions to ensure its relevance and alignment with contemporary financial reporting needs, particularly under the governance of the International Accounting Standards Board (IASB).
Key Events
- 1989: Initial issuance by IASC.
- 2003: Revised by IASB to address several technical aspects.
- 2011: Latest significant amendment to align with IFRS 11 on joint arrangements.
Types/Categories
IAS 28 mainly covers the following:
- Associates: Entities over which the investor has significant influence.
- Joint Ventures: Jointly controlled entities where the parties have rights to the net assets.
Detailed Explanations
Equity Method
IAS 28 specifies that investments in associates and joint ventures should be accounted for using the equity method unless specified otherwise. Under the equity method:
- Initial Recognition:
- Investment is recognized at cost.
- Subsequent Measurement:
- The carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee.
- Dividends received from the investee reduce the carrying amount of the investment.
Mathematical Formula
To compute the carrying amount of the investment using the equity method:
Chart in Mermaid Format
graph TD;
A[Initial Recognition at Cost]
B[Investor's Share of Profit or Loss]
C[Dividends Received]
D[Carrying Amount at End]
A --> D
B --> D
C -.-> D
Importance and Applicability
Importance
IAS 28 ensures that financial statements provide a true and fair view of the investor’s interests in associates and joint ventures. It promotes consistency, comparability, and transparency in financial reporting across jurisdictions.
Applicability
IAS 28 applies to entities with investments in associates and joint ventures, ensuring these entities follow a consistent method of accounting for such investments in their financial statements.
Examples
- Example 1: Company A owns a 30% stake in Company B, which is considered an associate. Company A uses the equity method to recognize its share of Company B’s profits and losses.
- Example 2: Two companies form a joint venture to collaborate on a large project. They use the equity method to account for their respective shares in the joint venture.
Considerations
Advantages
- Provides a clear picture of the investor’s net position and performance.
- Ensures significant influence is accounted for appropriately.
Disadvantages
- Can be complex to apply, especially for investors with multiple associates/joint ventures.
- Potential for volatility in financial statements due to the proportionate share of investee’s profit/loss.
Related Terms
- IFRS 11: Standard for joint arrangements, closely related to IAS 28.
- Significant Influence: The power to participate in the financial and operating policy decisions of the investee.
Comparisons
- Equity Method vs. Cost Method: Equity method updates the investment’s carrying amount based on investor’s share of investee’s results, whereas the cost method maintains the investment at cost unless impaired.
Interesting Facts
- IAS 28 allows for different accounting treatments if the investor’s shareholding in the investee changes.
- Significant influence is generally presumed to exist with ownership of 20% or more of the voting power of the investee.
Inspirational Stories
One notable story involves a multinational conglomerate that successfully streamlined its investment accounting procedures by rigorously applying IAS 28, leading to more transparent and reliable financial reporting.
Famous Quotes
“Accuracy is the twin brother of honesty; inaccuracy, of dishonesty.” – Nathaniel Hawthorne
Proverbs and Clichés
- “Keep your accounts clear, and your conscience will be so too.”
- “Transparency breeds trust.”
Jargon and Slang
- Carrying Amount: The value at which an investment is reported in the financial statements.
- Pro-rata Share: The investor’s proportionate share of profits or losses.
FAQs
Q1: What is the primary objective of IAS 28?
Q2: When does significant influence typically exist?
Q3: How does the equity method differ from the cost method?
References
- International Financial Reporting Standards (IFRS) by IASB
- IFRS Foundation website
Summary
IAS 28 is an essential accounting standard that governs the equity method of accounting for investments in associates and joint ventures. By ensuring accurate and transparent financial reporting, it helps stakeholders make informed decisions. The standard’s detailed provisions, mathematical formulations, and practical examples make it a cornerstone of international accounting practices.
