ACCOUNTING STANDARDS BOARD STANDARD OF GENERALLY RECOGNISED ACCOUNTING PRACTICE INVESTMENTS IN ASSOCIATES GRAP 7

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1 ACCOUNTING STANDARDS BOARD STANDARD OF GENERALLY RECOGNISED ACCOUNTING PRACTICE INVESTMENTS IN ASSOCIATES GRAP 7 1

2 Acknowledgement This Standard of Generally Recognised Accounting Practice (GRAP) is drawn primarily from the International Public Sector Accounting Standard (IPSAS) on Accounting for Investments in Associates issued by the International Federation of Accountants International Public Sector Accounting Standards Board (IPSASB). The International Federation of Accountants (IFAC) was founded in 1977 with its mission to develop and enhance the profession with harmonised standards. IPSASB has issued a comprehensive body of IPSASs, which will be used to produce future Standards of GRAP. Extracts of the IPSAS on Accounting for Investments in Associates are reproduced in this Standard of GRAP with the permission of the IPSASB. The approved text of the IPSASs is that published by the IFAC in the English language. The IPSASs are contained in the IFAC Handbook of International Public Sector Accounting Pronouncements and are available from: International Federation of Accountants 545 Fifth Avenue, 14 th Floor New York, New York USA Internet: Copyright on IPSASs, exposure drafts and other publications of the IPSASB are vested in IFAC and terms and conditions attached should be observed. This Standard has also drawn on the International Accounting Standards (IASs) issued by the International Accounting Standards Board (IASB). The approved text of the IAS and interpretations is that published by the IASB in the English language and are available from: IASB Publications Department 7 th floor, 166 Fleet Street London EC4A 2DY United Kingdom Internet: Copyright on IASs, exposure drafts and other publications of the IASB is vested in International Accounting Standards Committee Foundation (IASCF) and terms and conditions attached should be observed Accounting Standards Board P O Box Lynnwood Ridge 0040 Copyright 2005 by the Accounting Standards Board All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the Accounting Standards Board. Permission to reproduce limited extracts from the publication will not usually be withheld. 2

3 Contents Paragraphs Introduction Objective Scope Definitions Significant influence Equity method Application of the equity method Impairment losses Separate financial statements Disclosure Transitional provisions Effective date..59 Withdrawal of other pronouncements.60 Appendix A: Guidance on accounting for an acquisition of an investment in discrete steps Appendix B: Guidance on investee becoming an associate subsequent to initial acquisition Appendix C: Change from fair value accounting to equity accounting Appendix D: Elimination of inter-entity transactions and balances Appendix E: Decrease in ownership interest Comparison with the International Public Sector Accounting Standard on Accounting for Investments in Associates (May 2000) 3

4 Introduction The Accounting Standards Board (Board) is required in terms of the Public Finance Management Act, Act No. 1 of 1999, as amended (PFMA), to determine generally recognised accounting practice referred to as Standards of Generally Recognised Accounting Practice (GRAP). The Board must determine GRAP for: (b) (c) (d) (e) departments (national and provincial); public entities; constitutional institutions; municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality; and Parliament and the provincial legislatures. The above are collectively referred to as entities in Standards of GRAP. The Board has approved the application of Statements of Generally Accepted Accounting Practice (GAAP), as codified by the Accounting Practices Board and issued by the South African Institute of Chartered Accountants, to be GRAP for: (b) (c) (d) government business enterprises (GBEs) (as defined in the PFMA); trading entities (as defined in the PFMA); any other entity, other than a municipality, whose ordinary shares, potential ordinary shares or debt are publicly tradable on the capital markets; and entities under the ownership control of any of these entities. The Board believes that Statements of GAAP are relevant and applicable to financial statements prepared by all such entities, including those under their ownership control. Financial statements should be described as complying with Standards of GRAP only if they comply with all the requirements of each applicable Standard of GRAP and any related interpretation that may be issued in the future. Any limitation of the applicability of specific Standards is made clear in those Standards. The Standard of GRAP on Investments in Associates is set out in paragraphs All paragraphs in this Standard have equal authority. The authority of appendices is dealt with in the preamble to each appendix. This Standard should be read in the context of its objective, the Preface to Standards of GRAP and the Framework for the Preparation and Presentation of Financial Statements. Reference may be made to a Standard of GRAP that has not been issued at the time of issue of this Standard. This is done to avoid having to change the Standards already issued when a later 4

5 Standard is subsequently issued. Paragraph.12 of the Standard of GRAP on Accounting Policies, Changes in Accounting Estimates and Errors provides guidance on the sources to be used in the absence of a Standard of GRAP. Objective.01 This Standard prescribes the accounting treatment for investments in associates where the investment in the associate leads to the holding of an ownership interest in the form of a shareholding or other formal net asset structure. This Standard generally requires that investments in associates should be accounted for in consolidated financial statements of the investor by using the equity method only when an investor has significant influence in participating in the financial and operating policies of the associate..02 The purpose of this Standard is to prescribe the circumstances in which investors should use the equity method, how the equity method is to be applied and requires certain disclosures in respect of investments in associates. Scope.03 An entity that prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in accounting by an investor for investments in associates where the investment in the associate leads to the holding of an ownership interest in the form of a shareholding or other formal net asset structure. However, it does not apply to investments in associates held by: (b) venture capital organisations, or mutual funds, unit trusts and similar entities including investment-linked insurance funds that upon initial recognition are designated as at fair value through surplus or deficit or are classified as held for trading and accounted for in accordance with the Standard of GRAP on Financial Instruments: Recognition and Measurement. Such investments shall be measured at fair value in accordance with the Standard of GRAP on Financial Instruments: Recognition and Measurement, with changes in fair value recognised in surplus or deficit in the period of the change..04 This Standard provides the basis for accounting for ownership interests in associates. That is, the investment in the other entity confers on the investor the risks and rewards incidental to an ownership interest. The Standard applies only to investments in the formal net asset structure (or its equivalent) of an investee. A formal net asset structure means share capital or an equivalent form of unitised capital, such as units in a property trust, but may also include other net asset structures in which the investor s interest can be measured reliably. Where the equity structure is poorly defined, it may not be possible to obtain a reliable measure of the ownership interest..05 Some contributions made by entities may be referred to as an investment but may not give rise to an ownership interest. For example, an entity may make a substantial investment in the development of a hospital that is owned and operated by a non-profit organisation. Whilst such contributions are non-reciprocal in nature, they allow the entity to participate in the operation of the hospital, and the non-profit organisation is 5

6 accountable to the entity for its use of public monies. However, the contributions made by the entity do not constitute an ownership interest, as the non-profit organisation could seek alternative funding and thereby prevent the entity from participating in the operation of the hospital. Accordingly, the entity is not exposed to the risks nor does it enjoy the rewards that are incidental to an ownership interest. Definitions.06 The following terms are used in this Standard with the meanings specified: Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements. Accrual basis means a basis of accounting under which transactions and other events are recognised when they occur (and not only when cash or its equivalent is received or paid). Therefore the transactions and events are recorded in the accounting records and recognised in the financial statements of the periods to which they relate. The elements recognised under accrual accounting are assets, liabilities, net assets, revenue and expenses. Assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity. Associate is an entity in which the investor has significant influence and which is neither a controlled entity nor a joint venture of the investor. Consolidated financial statements are the financial statements of an economic entity presented as those of a single entity. Contributions from owners means future economic benefits or service potential that have been contributed to the entity by parties external to the entity that establish a financial interest in the net assets of the entity, provided that the contributions: (b) do not result in liabilities of the entity, and meet the following tests, that they: (i) (ii) convey entitlement both to distributions of future economic benefits or service potential by the entity during its life, such distributions being at the discretion of the owners or their representatives, and to distributions of any excess of assets over liabilities in the event of the entity being wound up; and/or can be sold, exchanged, transferred or redeemed. Control is the power to govern the financial and operating policies of another entity so as to benefit from its activities. Controlled entity is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the controlling entity). 6

7 Controlling entity is an entity that has one or more controlled entities. Cost method is a method of accounting whereby the investment is recorded at cost. The statement of financial performance reflects revenue from the investment only to the extent that the investor receives distributions from accumulated surpluses of the investee arising subsequent to the date of acquisition. Distributions to owners means future economic benefits or service potential distributed by the entity to all or some of its owners, either as a return on investment or as a return of investment. Economic entity means a group of entities comprising a controlling entity and one or more controlled entities. Equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor s share of net assets of the investee. The surplus or deficit of the investor includes the investor s share of the surplus or deficit of the investee. Expenses are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrences of liabilities that result in decreases in net assets, other than those relating to distributions to owners. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Government business enterprise means an entity which, in accordance with the PFMA as amended: (b) (c) is a juristic person under the ownership control of the national/provincial executive; has been assigned the financial and operational authority to carry on a business activity; as its principal business, provides goods or services in accordance with ordinary business principles; and (d) is financed fully or substantially from sources other than (i) (ii) the National or Provincial Revenue Fund; or by way of a tax, levy or other statutory money. Investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture. Joint control is the agreed sharing of control over an activity by a binding arrangement, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). 7

8 Joint venture is a binding arrangement whereby two or more parties are committed to undertake an activity that is subject to joint control. Liabilities are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential. Management comprises those persons responsible for the governance of the entity in accordance with legislation, including the accounting officers, however described in legislation. Net assets is the residual interest in the assets of the entity after deducting all its liabilities. Reporting date means the date of the last day of the reporting period to which the financial statements relate. Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets, other than increases relating to contributions from owners. Separate financial statements are those presented by a controlling entity, an investor in an associate or a venturer in a jointly controlled entity in which the investments are accounted for on the basis of the direct net asset interest rather than on the basis of the reported results and net assets of the investees. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control over those policies. Terms defined in other Standards of GRAP are used in this Standard with the same meaning as in those other Standards..07 Financial statements in which the equity method is applied are not separate financial statements, nor are the financial statements of an entity that does not have a controlled entity, associate or venturer s interest in a joint venture..08 Separate financial statements are those presented in addition to consolidated financial statements, financial statements in which investments are accounted for using the equity method and financial statements in which venturers interests in joint ventures are proportionately consolidated. Separate financial statements may or may not be appended to, or accompany, those financial statements..09 Entities that: are exempted from consolidation in accordance with paragraph.15 of the Standard of GRAP on Consolidated and Separate Financial Statements; are exempted from applying proportionate consolidation in accordance with paragraph.06 of the Standard of GRAP on Interests in Joint Ventures; or are exempted from applying the equity method in accordance with paragraph.21 (c) of this Standard; 8

9 may present separate financial statements as their only financial statements. Significant influence.10 If an investor holds, directly or indirectly (e.g. through controlled entities), 20 percent or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly (e.g. through controlled entities), less than 20 percent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence..11 Whether an investor has significant influence over the investee is a matter of judgment based on the nature of the relationship between the investor and the investee, and on the definition of significant influence in this Standard. This Standard applies only to those associates in which an entity holds an ownership interest..12 The existence of significant influence by an investor is usually evidenced in one or more of the following ways: (b) (c) (d) (e) (f) Representation on the board of directors or equivalent governing body of the investee. Participation in policy-making processes. Material transactions between the investor and the investee. Interchange of managerial personnel. Provision of essential technical information. The investor will be involved in decisions regarding strategic issues such as the expansion or contraction of the business, participation in other entities, products, markets and activities, and determining the balance between dividend and reinvestment..13 An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the entity additional voting power or reduce another party s voting power over the financial and operating policies of another entity (i.e. potential voting rights). The existence, and the effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether or not an entity has significant influence. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event..14 In assessing whether or not potential voting rights contribute to significant influence, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other arrangements whether considered individually or in combination) that affect potential rights, except the intention of management and the financial ability to exercise or convert. 9

10 .15 An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee. The loss of significant influence can occur with or without a change in absolute or relative ownership levels. It could occur, for example, when an associate becomes subject to the control of a government, court, administrator or regulator. It could also occur as a result of an agreement..16 Indications that an investor may be unable to exercise significant influence over the operating and financial policies of an investee include: (b) (c) (d) (e) opposition, by the investee, such as litigation or complaints to government regulatory authorities, challenges the investor's ability to exercise significant influence; the investor and investee sign an agreement under which the investor surrenders significant rights as a shareholder; majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor; the investor needs or wants more financial information to apply the equity method than is available to the investee's other shareholders (for example, the investor wants quarterly financial information from an investee that publicly reports only annually), tries to obtain that information, and fails; and the investor tries and fails to obtain representation on the investee's board of directors. Equity method.17 Under the equity method, the investment in an associate is initially recorded at cost and the carrying amount is increased or decreased to recognise the investor s share of surplus or deficit of the investee after the date of acquisition. The investor s share of the surplus or deficit of the investee is recognised in the investor s surplus or deficit. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for alterations in the investor s proportionate interest in the investee arising from changes in the investee s net assets that have not been included in the statement of financial performance. Such changes include those arising from the revaluation of property, plant, equipment and investments, from foreign exchange translation differences. The investor s share of those changes is recognised directly in net assets of the investor..18 When potential voting rights exist, the investor s share of surpluses or deficits of the investee and of changes in the investee s net assets is determined on the basis of present ownership interests, and does not reflect the possible exercise or conversion of potential voting rights..19 In applying the equity method, the investor s share of post-acquisition surpluses or deficits of the associate should be determined after adjustments for: distributions to preference net asset holders; 10

11 (b) revisions in revenues and expenses resulting from: (i) (ii) discount on acquisition; and/or differences between the fair values of the identifiable assets and liabilities of the associate at acquisition date and the carrying amounts of assets and liabilities recognised by the associate in its own financial statements; (c) (d) different accounting policies; and unrealised surpluses or deficits arising on inter-entity transactions..20 In applying the equity method in the case of an associate that is a controlling entity, the investor s share of the post- acquisition movement in the net assets of the associate should be based on the net assets recognised in the associate s consolidated financial statements. Application of the equity method.21 An investment in an associate shall be accounted for using the equity method except when: (b) (c) the investment is classified as held for sale in accordance with the Standard of GRAP on Non-current Assets Held for Sale and Discontinued Operations; the exception in paragraph.15 of the Standard of GRAP on Consolidated and Separate Financial Statements, allowing a controlling entity that also has an investment in an associate not to present consolidated financial statements, applies; or all of the following apply: (i) (ii) The investor is a wholly-owned controlled entity, or is a partiallyowned controlled entity of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method. The investor s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets). (iii) The investor did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation, for the purpose of issuing any class of instruments in a public market. (iv) The ultimate or any intermediate controlling entity of the investor produces consolidated financial statements available for public use that comply with Standards of GRAP. 11

12 .22 Investments described in paragraph.21 shall be accounted for in accordance with the Standard of GRAP on Non-current Assets Held for Sale and Discontinued Operations..23 When an investment in an associate previously classified as held for sale no longer meets the criteria to be so classified, it shall be accounted for using the equity method as from the date of its classification as held for sale. Financial statements for the periods since classification as held for sale shall be amended accordingly..24 The recognition of revenue on the basis of distributions received may not be an adequate measure of the revenue earned by an investor on an investment in an associate because the distributions received may bear little relationship to the performance of the associate. In particular, where the associate has non-profit objectives, investment performance will be determined by factors such as the cost of outputs and overall service delivery. Because the investor has significant influence over the associate, the investor has a measure of responsibility for the associate s performance and, as a result, the return on its investment. The investor accounts for this stewardship by extending the scope of its consolidated financial statements to include its share of surpluses or deficits of such an associate.. As a result, the application of the equity method provides more informative reporting of the net assets and surplus or deficit of the investor..25 An investor shall discontinue the use of the equity method from the date that it ceases to have significant influence over an associate and shall account for the investment in accordance with the Standard of GRAP on Financial Instruments: Recognition and Measurement from that date, provided the associate does not become a controlled entity or a joint venture as defined in the Standard of GRAP on Interests in Joint Ventures..26 The carrying amount of the investment at the date that it ceases to be an associate shall be regarded as its cost on initial measurement as a financial asset in accordance with the Standard of GRAP on Financial Instruments: Recognition and Measurement..27 Many of the procedures appropriate for the application of the equity method are similar to the consolidation procedures set out in the Standard of GRAP on Consolidated and Separate Financial Statements. Furthermore, the broad concepts underlying the consolidation procedures used in the acquisition of a controlled entity are adopted on the acquisition of an investment in an associate..28 An economic entity s share in an associate is the aggregate of the holdings in that associate by the controlling entity and its controlled entities. The holdings of the economic entity s other associates or joint ventures are ignored for this purpose. When an associate has controlled entities, associates, or joint ventures, the surpluses or deficits and net assets taken into account in applying the equity method are those recognised in the associate s financial statements (including the associate s share of the surpluses or deficits and net assets of its associates and joint ventures), after any adjustments necessary to give effect to uniform accounting policies (see paragraphs.33 and.34)..29 Surpluses and deficits resulting from upstream and downstream transactions between an investor (including its consolidated controlled entities) and an associate are recognised in the investor s financial statements only to the extent of unrelated investors interests in the associate. Upstream transactions are, for example, sales of assets from 12

13 an associate to the investor. Downstream transactions are, for example, sales of assets from the investor to an associate. The investor s share in the associate s surpluses and deficits resulting from these transactions is eliminated..30 An investment in an associate is accounted for using the equity method from the date on which it becomes an associate. On acquisition of the investment any difference (whether positive or negative) between the cost of the investment and the investor s share of the net fair value of the associate s identifiable assets, liabilities and contingent liabilities is accounted for in accordance with the Standard of GRAP on Entity Combinations. Therefore: (b) goodwill relating to an associate is included in the carrying amount of the investment. However, amortisation of that goodwill is not permitted and is therefore not included in the determination of the investor s share of the associate s surpluses or deficits; and any excess of the investor s share of the net fair value of the associate s identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment and is instead included as revenue in the determination of the investor s share of the associate s surplus or deficit in the period in which the investment is acquired. Appropriate adjustments to the investor s share of the surpluses or deficits after acquisition are also made to account, for example, for depreciation of the depreciable assets, based on their fair values at the date of acquisition. Similarly, appropriate adjustments to the investor s share of the associate s surpluses or deficits after acquisition are made for impairment losses recognised by the associate, such as for goodwill or property, plant and equipment..31 The most recent available financial statements of the associate are used by the investor in applying the equity method. When the reporting dates of the investor and the associate are different, the associate prepares, for the use of the investor, financial statements as of the same date as the financial statements of the investor unless it is impractical to do so..32 When, in accordance with paragraph.31, the financial statements of an associate used in applying the equity method are prepared as of a different reporting date from that of the investor, adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the investor s financial statements. In any case, the difference between the reporting date of the associate and that of the investor shall be no more than three months. The length of the reporting periods and any difference in the reporting dates shall be the same from period to period..33 The investor s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances..34 If an associate uses accounting policies other than those of the investor for like transactions and events in similar circumstances, adjustments shall be made to conform the associate s accounting policies to those of the investor when the associate s financial statements are used by the investor in applying the equity method. 13

14 .35 If an associate has outstanding cumulative preference shares that are held by parties other than the investor and classified as net assets, the investor computes its share of surpluses or deficits after adjusting for the dividends on such shares, whether or not the dividends have been declared..36 If an investor s share of deficits of an associate equals or exceeds its interest in the associate, the investor discontinues recognising its share of further deficits. The interest in an associate is the carrying amount of the investment in the associate under the equity method together with any long-term interests that, in substance, form part of the investor s net investment in the associate. For example, an item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity s investment in that associate. Such items may include preference shares and long-term receivables or loans but do not include trade receivables, trade payables or any long-term receivables for which adequate collateral exists, such as secured loans. Deficits recognised under the equity method in excess of the investor s investment in ordinary shares are applied to the other components of the investor s interest in an associate in the reverse order of their seniority (i.e. priority in liquidation)..37 After the investor s interest is reduced to zero, additional deficits are provided for, and a liability is recognised, only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate. If the associate subsequently reports surpluses, the investor resumes recognising its share of those surpluses only after its share of the surpluses equals the share of deficits not recognised. Impairment losses.38 After application of the equity method, including recognising the associate s deficits in accordance with paragraph.36, the investor applies the requirements of the Standard of GRAP on Financial Instruments: Recognition and Measurement to determine whether it is necessary to recognise any additional impairment loss with respect to the investor s net investment in the associate..39 The investor also applies the requirements of the Standard of GRAP on Financial Instruments: Recognition and Measurement to determine whether any additional impairment loss is recognised with respect to the investor s interest in the associate that does not constitute part of the net investment and the amount of that impairment loss..40 Because goodwill included in the carrying amount of an investment in an associate is not separately recognised, it is not tested for impairment separately by applying the requirements for impairment testing goodwill in the Standard of GRAP on Impairment of Assets. Instead the entire carrying amount of the investment is tested under the Standard of GRAP on Impairment of Assets for impairment, by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, whenever application of the requirements in the Standard of GRAP on Financial Instruments: Recognition and Measurement indicates that the investment may be impaired. In determining the value in use of the investment, an entity estimates: its share of the present value of the estimated future cash flows expected to be generated by the associate, including the cash flows from the operations of the associate and the proceeds from the ultimate disposal of the investment; or 14

15 (b) the present value of the estimated future cash flows expected to arise from dividends to be received from the investment and from its ultimate disposal. Under appropriate assumptions, both methods give the same result. Under appropriate assumptions, both methods give the same result. Any resulting impairment loss for the investment is allocated in accordance with the Standard of GRAP on Impairment of Assets. Therefore, it is allocated first to any remaining goodwill (see paragraph.30)..41 The recoverable amount of an investment in an associate is assessed for each associate, unless the associate does not generate cash inflows from continuing use that are largely independent of those from other assets of the entity. Separate financial statements.42 An investment in an associate shall be accounted for in the investor s separate financial statements in accordance with paragraphs of the Standard of GRAP on Consolidated and Separate Financial Statements..43 This Standard does not mandate which entities should produce separate financial statements available for public use. Disclosure.44 The following disclosures shall be made: (b) (c) (d) (e) (f) The fair value of investments in associates for which there are published price quotations; Summarised financial information of associates, including the aggregated amounts of assets, liabilities, revenues and surplus or deficit; The reasons why the presumption that an investor does not have significant influence is overcome if the investor holds, directly or indirectly through controlled entities, less than 20 per cent of the voting or potential voting power of the investee but concludes that it has significant influence; The reasons why the presumption that an investor has significant influence is overcome if the investor holds, directly or indirectly through controlled entities, 20 per cent or more of the voting or potential voting power of the investee but concludes that it does not have significant influence; The reporting date of the financial statements of an associate, when such financial statements are used in applying the equity method and are, as of a reporting date or for a period that is different from that of the investor, and the reason for using a different reporting date or different period; The nature and extent of any significant restrictions (eg resulting from borrowing arrangements or regulatory requirements) on the ability of associates to transfer funds to the investor in the form of cash dividends, or repayment of loans or advances; 15

16 (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) The unrecognised share of deficits of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of deficits of an associate; The associate s legal name, country of incorporation (if not South Africa) and principal activities; The ownership interest at both associate s and investor s reporting dates, if different; Proportion of voting power held in associate, if different from ownership interest; The carrying amount of investments in associates; The amount of any interest in net assets of the investor held by the associate; The fact that the associate s financial statements reporting date has changed from that used in previous years and the effect of the changes in the investor s financial statements, if appropriate; The legal name of any entity that became an associate in current year and the corresponding date; The legal name of any entity that ceased to be an associate during the current year and the corresponding date; The fact that an associate is not accounted for using the equity method in accordance with paragraph.21; and Summarised financial information of associates, either individually or in groups, that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues and surplus or deficit..45 The following information shall be disclosed on an aggregate basis: (b) (c) (d) (e) Amounts committed for future capital expenditure; The amount of liabilities of associates for which the investor is jointly and severally liable; The movements in carrying value (beginning and end of the period), new investments, disposals, share of total revenue and expenses, dividends and other movements; The financial effects of events or transactions which occurred after the associate s reporting date and which could materially affect the financial position or operating performance of that associate for the subsequent accounting period; and Where adjustments to eliminate the effect of different accounting policies cannot be made, the nature of the differences. 16

17 (f) (g) (h) Gross amount of goodwill at the end of the period (including impairment). The amount of goodwill or other asset written down due to impairment. The amount of any reversal of goodwill or other assets previously written down due to impairment..46 Investments in associates accounted for using the equity method shall be classified as non-current assets and disclosed as a separate item in the statement of financial position. The investor s share of the surpluses or deficits of such investments shall be disclosed as a separate item in the statement of financial performance. The investor s share of any discontinuing operations shall also be separately disclosed..47 The Standard of GRAP on Presentation of Financial Statements also requires the share of surpluses or deficits of associates accounted for using the equity method of accounting to be presented on the face of the statement of financial performance..48 The investor s share of changes recognised directly in the associate s net assets shall be recognised directly in net assets by the investor and shall be disclosed in the statement of changes in net assets as required by the Standard of GRAP on Presentation of Financial Statements..49 In accordance with the Standard of GRAP on Provisions, Contingent Liabilities and Contingent Assets, the investor shall disclose: (b) (c) its share of the contingent liabilities of an associate incurred jointly with other investors; those contingent liabilities that arise because the investor is severally liable for all or part of the liabilities of the associate; and its share of the contingent assets of an associate. Transitional provisions.50 The accounting policies required by this Standard shall be applied as at the beginning of the reporting period to which the Standard is first implemented..51 The carrying amount of investments in associates shall be adjusted, as at the beginning of the reporting period to which the Standard is first implemented, to that amount which would have been the carrying amount had the requirements of this Standard been applicable from the date of acquisition of the investment in associate..52 The accumulated share of results since acquisition shall be adjusted against the opening balance of accumulated surpluses or deficits..53 Increases or decreases in reserves of associates other than accumulated surpluses or accumulated deficits shall be adjusted against the reserves of the investor. 17

18 .54 Where an investment in an associate is recognised at a revalued amount, the revaluation reserve and the carrying amount shall be adjusted to remove the effects of the revaluation prior to implementing this Standard..55 If, in the above case, the revaluation reserve has been used, the adjustment shall be made against opening balance of accumulated surpluses or deficits to which this Standard first applies..56 Comparative figures are not required in the first year of implementation of this Standard..57 Entities that had previously applied accounting principles under another accounting framework, other than those contained in Standards of GRAP, shall apply the equity method of accounting from the date of acquisition. Any differences as a result of applying the equity method shall be adjusted against the opening balance of accumulated surpluses or deficits..58 Where an associate at the beginning of the period in which this Standard is first implemented was or was not consolidated at the end of the previous period and such an associate is required under this Standard to be consolidated, the carrying amounts of the relevant identifiable assets and liabilities of the consolidated financial statements and any of the goodwill included in the consolidated financial statements at the end of the period immediately prior to that in which this Standard is first implemented must be adjusted to be in line with the accounting principles of Standards of GRAP, as at the beginning of the period in which this Standard is first implemented. Any net amount of this adjustment shall be recognised in the statement of changes in net assets as an adjustment against the opening balance of accumulated surpluses or deficits at the beginning of the period in which this Standard is first implemented and relevant portions of this amount must be included in any components of net assets that are separately disclosed. Effective date.59 An entity shall apply this Standard of GRAP for annual financial statements covering periods beginning on or after a date to be determined by the Minister of Finance in a regulation to be published in accordance with section 91(1) (b) of the Public Finance Management Act No. 1, as amended. Withdrawal of other pronouncements.60 When this Standard becomes effective for annual financial statements covering periods beginning on or after (date to be determined by the Minister of Finance), it will supersede the Standard of Generally Accepted Municipal Accounting Practice (GAMAP) on Accounting for Investments in Associates (April 2004). 18

19 Appendix A Guidance on accounting for an acquisition of an investment in discrete steps This appendix is illustrative only and does not form part of the Standard. The purpose of the appendix is to illustrate the application of the Standard and to assist in clarifying its meaning. When acquiring an investment in an associate in discrete steps, the following treatment should be applied: Account for the investment as a financial asset in accordance with the Standard of GRAP on Financial Instruments: Recognition and Measurement until the date on which the investment qualifies as an investment in an associate. Thereafter, calculate the carrying amount of the investment by applying the equity method in respect of each separate branch, at the acquisition date of each separate branch. Decrease in an investor s ownership interest With a decrease in an investor s ownership interest, the following should be applied: (b) (c) the carrying amount should be adjusted to reflect the decrease; any deficit or surplus on the decrease in ownership interest should be recognised in the statement of financial performance; and the component of the investor s net assets arising from recognition of the investor s share of the associate s post-acquisition revenues and expenses should be adjusted to reflect the decrease in ownership interest and reclassified in the investor s net assets. Increase in an investor s ownership interest With an increase in investor s ownership interest, the following should be applied: (b) the carrying amount should be increased by any cost of acquisition of the increase in ownership interest; equity method should be applied, with reference to the date the increase in ownership interest is obtained, as follows: (i) (ii) up until that date based on the ownership interest held prior to that date; and subsequent to that date based on the increased level of ownership interest held from that date. 19

20 Appendix B Guidance on investee becoming an associate subsequent to initial acquisition This appendix is illustrative only and does not form part of the Standard. The purpose of the appendix is to illustrate the application of the Standard and to assist in clarifying its meaning. This appendix illustrates the adjustment required when an investee becomes an associate subsequent to the initial acquisition of an ownership interest by the investor. An investor acquired a ten percent interest in an investee on 1 April 20X1 for R76,000. As at this date the fair value of the net assets of the investee was R700,000 and comprised contributed capital of R500,000, asset revaluation reserve of R100,000 (arising from revaluation made as at 31 March 20X0) and retained surpluses of R100,000. A further fifteen percent interest was acquired on 31 March 20X3 for R168,000. Significant influence is achieved on 31 March 20X3. At this date, the fair value of the net assets of the investee was R920,000 and comprised contributed capital R500,000, asset revaluation reserve R200,000 and retained surpluses R220,000. The investor had applied the cost method to account for its investment made at 1 April 20X1. The investee, which had revalued its non-current assets as at 31 March 20X2, reported surpluses of R80,000, R60,000, and R100,000 in the years ended March 20X1, 20X2 and 20X3. Dividends from post-acquisition surpluses received by the investor were R4,000 in each year. The amount of the adjustment to the carrying amount of the investment made at 31 March 20X3 would be determined as follows: Acquisition of 10% interest: 1 April 20 X1 Consideration paid R76,000 Share of net assets acquired R70,000 Goodwill R6,000 (b) Acquisition of 15% interest: 31 March 20X3 Consideration paid R168,000 Share of net assets acquired (R920, 000 x 15%) R138,000 Goodwill R30,000 20

21 At 31 December 20X3, the carrying amount of the investment in the financial statements of the investor would be R244,000 (R76,000 + R168,000) under the cost method. For the purposes of accounting in the consolidated financial statements, or in additional financial statements of the investor if it is not a controlling entity, the carrying amount would be adjusted as follows: Debit R Credit R Investment 22,000 Revenue 12,000 Asset Revaluation Reserve 10,000 The change in the carrying amount of the investment arises from: restating recognised revenues as an adjustment to investments in associates Dividends received or receivable R(12,000) (b) recognition of the share of surpluses post-acquisition of tranche 1, now to be equity accounted R240,000 (20x1:R80 +20x2:R60 +20x3:R100 ) x 10% R24,000 Net adjustment to statement of financial performance R12,000 (c) recognition of the share of movement in asset revaluation reserve occurring post-acquisition of tranche 1, now to be equity accounted R100,000 (20x3:R200-20x1:R100 ) x 10% R10,000 Total increase in the equity accounted carrying amount of the investment R22,000 21

22 Appendix C Change from fair value accounting to equity accounting This appendix is illustrative only and does not form part of the Standard. The purpose of the appendix is to illustrate the application of the Standard and to assist in clarifying its meaning. This appendix illustrates the adjustment and disclosure required where an investee has become an associate subsequent to the initial acquisition of an ownership interest by the investor in circumstances where the initial ownership interest has been accounted by the investor on a fair value basis in accordance with the Standard of GRAP on Financial Instruments: Recognition and Measurement. Following are the statements of financial positions and share prices of Investee Ltd at various dates. All assets and liabilities are recognised at fair values. Equity 1/4/20X0 31/3/20X1 31/3/20X2 R 000 R 000 R 000 contributed capital (100 shares R2) retained earnings revaluation reserve Assets Liabilities (600) (700) (800) Share price R4.50 R5.20 R6.40 Investor Ltd purchases 10% of the shares in Investee Ltd on 1/4/20X0 (at R4.50 each) for R45 and purchases a further 30% of the shares in Investee Ltd on 31/3/20X2 (at R6.40 each) for R