Accounting Guideline GAP 7 Investments in Associates
GAP 7 Investments in Associates Contents 1. INTODUCTION... 3 2. SCOPE... 4 3. THE BIG PICTUE... 5 4. IDENTIFICATION... 6 4.1 Identifying an associate... 6 4.2 Establishing significant influence... 6 5. Equity method... 8 5.1 Applying the equity method... 8 5.2 Accounting treatment under the equity method... 9 5.3 Loss of significant influence... 14 5.4 Impairment losses... 17 6. SEPAATE FINANCIAL STATEMENTS... 20 7. DISCLOSUE... 22 8. SUMMAY OF KEY PINCIPLES... 26 8.1 Identification... 26 8.2 Equity method... 26 8.3 Loss of significant influence... 26 8.4 Separate financial statements... 26 8.5 Disclosure... 26 January 2014 Page 2
GAP 7 Investments in Associates 1. INTODUCTION This document provides guidance on the identification of associates, how the investment in an associate should be accounted for in the investor s financial statements by using the equity method of accounting and certain disclosures to be made. The contents should be read in conjunction with GAP 7, which forms part of the GAP eporting Framework (see Directive 5 Determining the GAP eporting Framework, issued by the ASB). For purposes of this guide, entities refer to the following bodies to which the standards of GAP relate to, unless specifically stated otherwise: Public entities Constitutional institutions Municipalities and all other entities under their control Parliament and the provincial legislatures Trading entities - only effective from 1 April 2013 Explanation of images used in manual: Definition Take note Management process and decision making Example January 2014 Page 3
GAP 7 Investments in Associates 2. SCOPE GAP 7 is applicable to all entities on the accrual basis of accounting 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 form of interest in the net assets. Accounting for controlled entities and jointly controlled entities are dealt with in GAP 6 and GAP 8 respectively. Accounting for transfer of functions and mergers and their effects on consolidation are not dealt with in GAP 7. An entity should refer to GAP 105, GAP 106 and GAP 107 on transfer of functions between entities under common control, transfer of functions between entities not under common control and mergers. January 2014 Page 4
GAP 7 Investments in Associates 3. THE BIG PICTUE Figure 1 January 2014 Page 5
GAP 7 Investments in Associates 4. IDENTIFICATION 4.1 Identifying an associate Associate is an entity over which the investor has significant influence and that is neither a controlled entity nor an interest in a joint venture. 4.2 Establishing significant influence Significant influence is the power to participate in the financial and operating policy decisions of an entity, but is not control or joint control over those policies. If an investor holds, directly or indirectly through controlled entities, 20% or more, but no more than 50%, of the voting power of the investee, it is presumed that the investor has significant influence. It should however be noted that less than 20% of the voting power or a substantial or majority ownership (e.g. more than 50%), does not necessarily preclude an investor from having significant influence. The existence of significant influence is usually evidenced by one or more of the following: epresentation on the board of directors or equivalent governing body of the investee; Participation in policy-making processes, including participation in decisions about dividends or similar distributions; Material transactions between the investor and investee; Interchange of managerial personnel; or Provision of essential technical information. An entity may have potential voting rights that, if exercised or converted, will have the potential to give the entity additional voting power or reduce another entity s voting power over the financial and operating policies of another entity. January 2014 Page 6
GAP 7 Investments in Associates Potential voting rights can be obtained by owning share call options, debt or equity instruments, share warrants or other similar instruments that are convertible into ordinary shares. When assessing whether an entity has significant influence, the existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, should be considered. If potential voting rights cannot be exercised or converted until a future date or until the occurrence of a future event, they are not currently exercisable or convertible, and will consequently not be taken into account when assessing significant influence. The entity examines all facts and circumstances (including the terms of exercise of the potential voting rights) that effects potential voting rights, in assessing whether such rights contribute to significant influence. However, the intention of management and the financial ability to exercise or convert potential voting rights must not be taken into account in assessing whether the rights contribute to significant influence. Example 1: Potential voting rights Entity A Entity B Entity C Entity D 5% 35% 35% 25% voting power voting power voting power voting power Entity E Entity A also owns call options that are exercisable at any time at the fair value of the underlying shares and if exercised will give it an additional 40% of the voting rights in Entity E and reduce Entity B's and Entity C's interests to 15% each. If the options are exercised, Entity A will have significant influence over Entity E. The existence of the potential voting rights that can be exercised at any time gives Entity A the power to participate in the financial and operating policy decisions, Entity E is an associate of Entity A. Also, take note that Entity E is also an associate of Entity D (if significant influence is evident). January 2014 Page 7
GAP 7 Investments in Associates 5. Equity method 5.1 Applying the equity method An investment in an associate should be accounted for using the equity method. Equity method is a method of accounting whereby the investment in an associate is initially recognised at cost and adjusted thereafter for post-acquisition changes 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. There is however exceptions to accounting for the investment using the equity method. These are: The investment is classified as held for sale in accordance with GAP 100; The exception in GAP 6 applies, allowing a controlling entity that also has an investment in an associate not to present consolidated financial statements (refer to accounting guideline GAP 6 for detail); or All of the following apply: o The investor is a wholly-owned controlled entity, and users of such financial statements prepared by applying the equity method are unlikely to exist or their information needs are met by its controlling entity s financial statements; or o The investor is a partially-owned 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; 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; and The ultimate or any intermediate controlling entity of the investor produces consolidated financial statements available for public use that comply with the standards of GAP. The equity method of accounting requires that: The investment in the associate is initially measured at cost and is increased or decreased to recognise the investor s share of the surplus or deficit of the investee. The investor s share of the surplus or deficit of the investee is recognised in the surplus or deficit of the investor. January 2014 Page 8
GAP 7 Investments in Associates Any distributions received by the investor from the investee reduce the carrying amount of the investment. Changes are also made to the carrying value of the investment for the investor s proportionate interest of changes in the investee s net assets that have not been taken to surplus or deficit, e.g. revaluations of property, plant and equipment. The investor s share of those changes is recognised directly in net assets of the investor. The investor s share of surplus or deficit and of changes in net assets of the investee is determined based on the present ownership interest and does not take into account any potential voting rights. 5.2 Accounting treatment under the equity method The following are some of the detailed requirements under the equity method: In applying the equity method, the financial statements of the associate should be the same reporting date as the investor s financial statements. When the associate has a reporting date different from that of the investor then appropriate adjustments should be made for the effect of significant transactions between that date and the reporting date of the investor. The investor s financial statements should be prepared using the same accounting policies for similar transactions and other events across all entities. If the associate uses accounting policies other than those of the investor, adjustments should be made to conform the associate s accounting policies to those of the investor. The investor s share in an associate is the aggregate share of the investor s and its controlled entities share of that associate. If an associate has controlled entities, associates or joint ventures, the surplus or deficit and net assets taken into account in applying the equity method are those recognised in the associate s financial statements (therefore includes the associate s share of surpluses and deficits and net assets in joint ventures, associates and controlled entities). The investor s share of inter-group (transactions between the investor and investee) transactions is eliminated. For example, the investor s share of the surplus/gain on sales of goods from an investor to an associate should be eliminated so that only the portion that can be realised to external parties, i.e. sold to unrelated third parties, remains in the consolidated accounts. Example 2: Elimination of inter-group transactions Entity A has a 30% shareholding in Entity B. During the current reporting period, Entity B sold inventory to Entity A at cost plus 15%. Total sales from Entity B to Entity A were 100,000 for the year. As at year-end Entity A had 20,000 worth of inventory on hand. The gross surplus made by Entity B is 15%. Entity A s share of this should be eliminated to the extent of inventory still on hand at January 2014 Page 9
GAP 7 Investments in Associates year-end (i.e. the unrealised portion of the surplus should be eliminated to the extent of the interest of Entity A in Entity B). Journal entries: The following journal entries will be made: 1. Year-end Debit Credit Share of surplus in associate (surplus or deficit) (100,000 x 30%) 30,000 Cost of sales (Entity A) 30,000 Eliminate inter-group sales for the year 2. Year-end Debit Credit Share of surplus in associate (surplus or deficit) (20,000 x 15/115 x 30%) 782.61 Inventory (Entity A) 782.61 Eliminate inter-group surplus in closing inventory If Entity A was selling to Entity B and given the same information as above, the journal entries will be as follows. Journal entries: The following journal entries will be made: 3. Year-end Debit Credit Sales (Entity A) (100,000 x 30%) 30,000 Share of surplus in associate (surplus or deficit) Eliminate inter-group sales for the year 30,000 4. Year-end Debit Credit Cost of sales (Entity A) (20,000 x 15/115 x 30%) 782.61 Investment in associate 782.61 January 2014 Page 10
GAP 7 Investments in Associates Eliminate inter-group surplus in closing inventory emember for the elimination of inter-group transactions that, whatever has been recorded against surplus, deficit in the associate s records would go against Share of surplus in associate and whatever has been recorded against assets, or liabilities in the associate s records would go against Investment in associate. On acquisition of the associate any difference between the cost of the investment in associate and the investor s share of the net fair value of the associate s assets and liabilities is recognised in surplus or deficit (in accordance with GAP 106 - Transfer of Functions between Entities Not under Common Control) or in accumulated surplus or deficit (under GAP 105 - Transfer of Functions between Entities under Common Control) (refer to accounting guideline GAP 105 and 106 for detail). If an investor s share of the deficits of an associate equals or exceeds the interest in the associate, the investor discontinues recognising its share of further losses. Once the investor s interest is zero, additional losses 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 makes surpluses, the investor should resume recognising its share of those surpluses, but only after its share of the surpluses equals the share of losses not recognised. Example 3: Accounting treatment under equity method Entity A acquired a 30% shareholding in Entity B on 1 April 2010 for 50,000. Entity A accounts for the investment in associate at cost and the year-end of both Entity A and Entity B is 31 March. The summarised statements of financial performance for Entity A and Entity B for the period ended 31 March 2011 are as follows: Entity A Entity B evenue 450,000 150,000 Other income 20,000 45,000 Expenditure (300,000) (120,000) Surplus 170,000 75,000 Included in revenue of Entity B is 10,000 pertaining to inventory sold to Entity A at cost plus 20%. Total sales from Entity B to Entity A were 10,000 for the year. At year-end Entity A still has the entire inventory at hand. Entity B has declared and paid a dividend of 5,000 on 31 March 2011 to all owners. Although Entity A has already received its share of the dividend, it has not yet recorded the transaction as it is unsure how to do so. The summarised statements of financial position for Entity A and Entity B for the January 2014 Page 11
GAP 7 Investments in Associates period ended 31 March 2011 are as follows: Entity A Entity B Assets Property, plant and equipment 200,000 50,000 Investment in Entity B 50,000 0 Current assets 50,000 51,000 Total assets 300,000 101,000 Liabilities and net assets Current liabilities 100,000 20,000 Ordinary shares 1,000 1,000 Accumulated surplus 199,000 80,000 Total liabilities and net assets 300,000 101,000 Calculations: Firstly, Entity A has to account for the dividend received from Entity B in its separate financial statements. The following journal entry will be made: 5. 31 March 2011 Debit Credit Current assets (5,000 x 30%) 1,500 Investment in Entity B 1,500 Account for share of dividend received Secondly Entity A s share of surplus or deficit of Entity B for the period needs to be calculated. Share of surplus or deficit of Entity B for period ending 31 March 2011: Surplus for the period 75,000 Share of surplus 22,500 (75,000 x 30%) January 2014 Page 12
GAP 7 Investments in Associates Journal entries: emember that these consolidation journals are not processed in the actual records of Entity A or Entity B; they are only processed on the consolidated financial statements each year and rolled forward. Following the steps as provided above, the following journal entries will be made: 6. 31 March 2011 Debit Credit Investment in Entity B 22,500 Share of surplus in associate (surplus or deficit) ecognising Entity A s share of surplus or deficit for the period 22,500 Lastly, Entity A s share in transactions and balances between Entity A and Entity B needs to be eliminated in full. Two inter-group transactions had occurred, the sale of inventory to Entity A and the dividend paid to Entity A. Entity A s share in the inter-group transaction should be eliminated. 7. Year-end Debit Credit Share of surplus in associate (surplus or deficit) (10,000 x 30%) 3,000 Cost of sales (Entity A) (10,000 x 30%) 3,000 Eliminate inter-group sales for the year Based on the information given Entity B made a gross surplus of 20% on the sale. Entity A s share of this should be eliminated to the extent of inventory still on hand at year-end. 8. 31 March 2011 Debit Credit Share of surplus in associate (surplus or deficit) (10,000 x 20/120 x 30%) Inventory (Entity A) 500 Eliminate inter-group surplus in closing inventory 500 The dividend received reduces the investment in Entity B (the journal is already provided above). No further journals are necessary for this transaction, since only Entity A s share in Entity B s surplus or deficit is recognised. January 2014 Page 13
GAP 7 Investments in Associates The summarised consolidated statement of financial performance for the period ended 31 March 2011 will look as follows: Entity A evenue 450,000 Other income 20,000 Expenditure (300,000-3,000) (297,000) Share of surplus in associate (22,500-3,000-500) 19,000 Surplus 192,000 The summarised consolidated statement of financial position for the period ended 31 March 2011 will look as follows: Assets Entity A Property, plant and equipment 200,000 Investment in Entity B (50,000-1,500 + 22,500) 71,000 Current assets (50,000 + 1,500-500) 51,000 Total assets 322,000 5.3 Loss of significant influence Liabilities and net assets Current liabilities 100,000 Ordinary shares 1,000 Accumulated surplus (199,000 + 22,500-3,000 + 3,000-500) 221,000 Total liabilities and net assets 322,000 A loss in significant influence happens with or without a change in ownership levels. An example would be when an associate becomes subject to the control of a government, court, administrator or regulator. It could also occur because of a contractual agreement. When an entity ceases to have significant influence over an associate, it should discontinue the use of the equity method. If there is a decrease in ownership interest, the investment should be accounted for in accordance with GAP 104 from that date of loss of significant influence. If there is an increase in ownership interest, the investment should be treated accordingly to what it has become, i.e. a controlled entity or a joint venture, as defined in GAP 6 and GAP 8 respectively. January 2014 Page 14
GAP 7 Investments in Associates If an investor loses significant influence over an associate, it should follow the steps below: 1) ecognise any investment retained at its fair value at the date when significant influence is lost. 2) ecognise in surplus or deficit any difference between: o The fair value of any retained investment and any proceeds from disposing of the interest portion in the associate. o The carrying amount of the investment at the date when significant influence is lost. 3) eclassify amounts to surplus or deficit (as a reclassification adjustment). Therefore, any gains or losses will be reclassified from net assets to surplus and deficit, if the gains and losses previously recognised in net assets is required to be reclassified to surplus or deficit on the disposal of assets and liabilities. elating to step 3 above, where changes in ownership interest in an associate does not result in a loss of significant influence, the investor should reclassify to surplus or deficit only the proportionate amount of the gain or loss previously recognised in net assets. Example 4: Change in ownership that does not result in loss of significant influence Entity A has a 30% shareholding in Entity B. In the current year the entity disposed of 5% of its interest to other investors for 6,000. As at date of disposal, Entity B s net assets amounted to 80,000. Entity A will retain significant influence over Entity B after the disposal. Assume that Entity A and Entity B are not under common control. Calculations: Fair value of consideration received 6,000 Net assets attributable to other investors 4,000 (80,000 x 5%) Gain on disposal of interest in associate (recognised in surplus or deficit) 2,000 Journal entries: The following journal entry will be made: 1. On disposal date Debit Credit Bank (cash) 6,000 Investment in Entity B 4,000 January 2014 Page 15
GAP 7 Investments in Associates Gain on disposal of interest in associate (surplus or deficit) Account for change in interest 2,000 In the following year, Entity A acquired 10% of the interest on Entity B for 15,000. Therefore, its interest in Entity B is now 35% (25% last year + 10% acquired). At the date of acquisition, Entity B s net assets amounted to 110,000. Entity A will retain significant influence over Entity B after the acquisition. Calculations: Fair value of consideration paid 15,000 Interest in net assets acquired 11,000 (110,000 x 10%) Loss on acquisition of interest in associate (recognised in surplus or deficit) 4,000 Journal entries: The following journal entry will be made: 2. On disposal date Debit Credit Bank (cash) 15,000 Investment in Entity B 11,000 Loss on acquisition of interest in associate (surplus or deficit) Account for change in interest The carrying amount of the investment at the date when significant influence is lost will be regarded as the cost on initial measurement as a financial asset in accordance with GAP 104. 4,000 Example 5: Calculating the gain or loss in change in ownership that does result in loss of significant influence Entity A has a 30% shareholding in Entity B. In the current year, the entity disposed of 25% of its interest to other investors for 30,000. As at date of disposal, the carrying amount of the investment in Entity B amounted to 35,000. Entity A will account for the remaining 5% interest as a financial asset in accordance with GAP 104. The fair value of the investment amounts to 8,000. Assume that Entity A and Entity B are not under common control. January 2014 Page 16
GAP 7 Investments in Associates Calculations: The gain or loss on disposal of investment should be calculated. Fair value of consideration received 30,000 Fair value of residual interest 8,000 Less carrying amount of investment derecognised 35,000 Gain on disposal of interest in associate (recognised in surplus or deficit) 3,000 The fair value of 8,000 will be regarded as the cost on initial recognition of the financial asset in accordance with GAP 104. efer to accounting guideline GAP 104 for details on how to account for investments in entities. 5.4 Impairment losses Journal entries: The following journal entry in the records of Entity A will be made: 3. On disposal date Debit Credit Bank (cash) 30,000 Investment in Entity B (associate) 35,000 Investment in Entity B (financial asset) 8,000 Gain on disposal (surplus or deficit) of interest in associate ecognise the disposal of 25% interest in Entity B and recognise the residual interest retained at fair value After the equity method has been applied, the investor applies GAP 104 to determine if an impairment of the investment should be raised. The investor applies the requirements in GAP 21 - Impairment of non-cash-generating assets or GAP 26 - Impairment of cash-generating assets whenever application of the requirements of GAP 104 indicates that the investment may be impaired. The same applies for any interest in the associate which does not constitute part of the net investment. If any such evidence exists, an impairment test is performed that compares the entire carrying value of the investment in the associate to the higher of fair value less costs to sell and value in use. Examples of evidence that could lead to a potential impairment include instances where the associate: 3,000 Is experiencing severe cash flow difficulties and is illiquid; January 2014 Page 17
GAP 7 Investments in Associates Has difficulty raising funding to fund ongoing operations; Is not solvent; Is facing a decline in its market share; and Is heavily dependent on a limited number of customers who themselves are facing financial difficulties. 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 on the ultimate disposal of the investment; or The present value of the estimated future cash flows expected to arise from dividends or similar distributions to be received from the investment and from its ultimate disposal. Under appropriate assumptions, both methods give the same result. The recoverable amount of an investment in an associate is assessed separately 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. In instances where an investment in an associate does not generate cash inflows independently from other assets, then that associate is grouped with the other assets to determine its recoverable amount. Example 6: Impairment loss Entity A has an investment in an associate, whereby it acquired a 30% interest in Entity B at 1 April 2010 at a cost of 90,000. At that date, the net assets of Entity B amounted to 300,000. Entity A accounts for impairment of its assets in accordance with GAP 26 - Impairment of Cash-generating Assets. The surplus of Entity B for the reporting period ending 31 March 2011 and 31 March 2012 amounted to 50,000 and 28,000 respectively. Entity B has not declared any dividends or similar distributions to its investors. As at 31 March 2012 the carrying amount of the investment in the associate will be: Cost of investment (equals net asset value at acquisition) Share in accumulated surplus or deficit (31 March 2011) 90,000 (300,000 x 30%) 15,000 (50,000 x 30%) Share in surplus or deficit (31 March 2012) 8,400 (28,000 x 30%) Carrying amount of the investment 113,400 A significant decrease in the surplus for the period ending 31 March 2012 occurred because of a crush in the market - i.e. indication of impairment in accordance with January 2014 Page 18
GAP 7 Investments in Associates GAP 104. Entity A consequently needs to test the investment for impairment by calculating the recoverable amount of the asset in accordance with GAP 26. The recoverable amount of an investment will be the higher of: Value in use: The investor s 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 on the ultimate disposal of the investment; or Value in use: The present value of the estimated future cash flows expected to arise from dividends or similar distributions to be received from the investment and from its ultimate disposal; and Fair value less costs to sell. It is estimated that Entity B will pay an annual dividend (or similar distribution) of 16,000 to its investors in the future. Assume that Entity B will not be liquidated in the near future and that a fair dividend (or similar distribution) return rate for an entity with a similar risk and growth profile is 8%. Based on the information given, we can calculate the value in use using the second method. Expected annual dividend 4,800 (16,000 x 30%) Fair dividend rate 8% Value in use 60,000 (4,800 / 0.08) Assume that the fair value less costs to sell is lower than the value in use. The recoverable amount is therefore less than the carrying amount, therefore an impairment loss will be recognised in the statement of financial performance amounting to 53,400 (113,400-60,000). The impairment loss will be recorded in the separate financial statements and group financial statements. Journal entries: The following journal entry in the records of Entity A will be made: 4. On disposal date Debit Credit Impairment loss 53,400 Investment in Entity B 53,400 ecognise the impairment loss on investment in associate January 2014 Page 19
GAP 7 Investments in Associates 6. SEPAATE FINANCIAL STATEMENTS Separate financial statements are those presented by an investor in an associate, in which the investment is accounted for on a basis of the direct interest in the net assets rather than on the basis of the reported results and net assets of the investee. Financial statements in which the equity method is applied are not separate financial statements. Separate financial statements are those presented in addition to financial statements in which investments are accounted for using the equity method. Where an investor is exempted from applying the equity method (refer to section 5.1 above), it may present separate financial statements as its only financial statements. Investments in controlled entities, associates and jointly controlled entities can be accounted for in the following two manners, for each category of investments, in the separate financial statements of the controlling entity: Cost; or In accordance with GAP 104. Note that above is an accounting policy choice in terms of GAP 3 and an entity should apply the same accounting for each category of investments. Where investments are accounted for at cost, the entity should following the provisions of GAP 100 when they are classified as held for sale (or included in a disposal group that is classified as held for sale). Investments in associates that are accounted for in terms of GAP 104 are not changed in such circumstances. Dividends, or other similar distributions, are recorded in surplus or deficit when the investor s right to receive the dividends, or other similar distribution, is established. Investments in associates that are accounted for in terms of GAP 104 need to be accounted for in the same way in the investor s separate financial statements. January 2014 Page 20
GAP 7 Investments in Associates Example 7: ecognising the investment in the separate financial statements Scenario one: Entity A has an investment in Entity B amounting to 250,000. It decides to account for the investment in its separate financial statements at cost. The investment will be recognised at 250,000 and only adjusted for any impairment losses recognised. Scenario two: Entity A has an investment in Entity B amounting to 250,000. It decides to account for the investment in its separate financial statements in accordance with GAP 104. In accordance with GAP 104, an investment in the residual interest of another entity should be accounted for at fair value, unless the fair value cannot be reliably determined. Investments at fair value will be recognised and measured under the financial assets at fair value category. The investment will be recognised at 250,000 and adjusted subsequently for any changes in fair value or impairment losses. An investment where the fair value cannot be reliably determined will be recognised and measured under the financial assets at cost category. The investment will be recognised at 250,000 and only adjusted for any impairment losses recognised. efer to accounting guideline GAP 104 for detail. January 2014 Page 21
GAP 7 Investments in Associates 7. DISCLOSUE Illustrative example on what should be disclosed, as a minimum, in the financial statements of the investor (refer to the standard for detail): Accounting policies 1.5 Investments in associates Investments in associates are carried at cost less any impairment losses. The cost of an investment is the aggregate of: The fair value of, at the date of acquisition or transfer of functions, of assets given, liabilities incurred or assumed, and equity instruments issued by the entity; and Any costs directly attributable to the purchase of the associate. Investments in associates are accounted for by using the equity method in the group financial statements. Extract from the Statement of Financial Position Entity Group Annual Financial Statements for the period ended... Statement of Financial Position Assets Non-current assets Note 20x1 20x0 Property, plant and equipment XX XX Investments in associates x XX XX... Current assets Trade and other receivables XX XX... Investments in associates should be classified as non-current and disclosed separately. Total assets XXX XXX January 2014 Page 22
GAP 7 Investments in Associates Liabilities Non-current liabilities Financial liabilities XX XX... Current liabilities Trade and other payables XX XX... Total liabilities XXX XXX Total net assets XXX XXX Net assets Share capital XX XX Accumulated suplus/(deficit) XX XX Extract from the Statement of Financial Performance Entity Group Annual Financial Statements for the period ended... Statement of Financial Performance Notes 20x1 20x0 evenue List all material classes of revenue x XX XX Other income x XX XX Total revenue XXX XXX Expenditure List all material classes of expenditure (e.g. employee related cost, repairs and maintenance etc.) x XX XX General expenses x XX XX Finance cost x XX XX Total expenses XXX XXX January 2014 Page 23
GAP 7 Investments in Associates The share of surplus or deficit of Share of surplus in associates associates should be presented x on the face of the statement of XX XX financial performance and Surplus/(deficit) for the period disclosed separately. XXX XXX Extract from the Notes to the Financial Statements Entity Group Annual Financial Statements for the period ended... Notes to the Annual Financial Statements Notes 20x1 20x0 7. Investments in associates Name Nature of activities Country of incorporation Ownership interest Entity A Provider of xxx South Africa 30% Investment in Entity A - carrying amount at beginning of period Share of total revenue and expenses XX XX Dividends or similar distributions (XX) (XX).. Investment in Entity A - carrying amount at end of period XX XXX XX XXX Disclose the fair value of investment in associate for which there are published price quotations. The entity s share of the summarised financial information of its associate is as follows: Total non-current assets XX XX Total current assets XX XX Total non-current liabilities (XX) (XX) Total current liabilities (XX) (XX) Share of associate s net assets XXX XXX Total revenue XX XX Total expenditure (XX) (XX) Share of associate s surplus XXX XXX January 2014 Page 24
GAP 7 Investments in Associates Other important disclosures to be made in the investor s financial statements include, but are not limited to: The reasons why the presumption that an investor does not have significant influence if it holds less than 20% of the voting or potential power, is rebutted, i.e. concludes that it does have significant influence; The reasons why the presumption that an investor has significant influence if it holds 20% or more of the voting or potential power, is rebutted, i.e. concludes that it does not have significant influence; The nature and extent of any significant restrictions on the ability of the associate to transfer funds to the investor in the form of cash dividends or similar distributions or to repay loans or advances; The unrecognised share of losses of an associate, both in the current period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate; Disclose, in accordance with GAP 19 - Provisions, Contingent Liabilities and Contingent Assets, the investor s share in contingent liabilities of an associate incurred jointly with other investors and those contingent liabilities that arise because the investor is severally liable for all or part of the liabilities of the associate. January 2014 Page 25
GAP 7 Investments in Associates 8. SUMMAY OF KEY PINCIPLES GAP 7 sets out the principles on the identification of associates and how the investment in an associate should be accounted for in the investor s financial statements by using the equity method of accounting and certain disclosures to be made. 8.1 Identification If an investor holds 20% or more of the voting powers of an investee, it is presumed to be an associate. An associate is an entity over which the investor has significant influence and that is neither a controlled entity nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of an entity, but is not control or joint control over those policies. 8.2 Equity method An investment in an associate should be accounted for using the equity method of accounting, unless it qualifies for exemption. Equity method is a method of accounting whereby the investment in an associate is initially recognised at cost and adjusted thereafter for 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. The investor s share in any inter-group transactions should be eliminated. The investor s share in surplus or deficit and net assets (investment in associate) should be separately presented in the statement of financial performance and statement of financial position respectively. If an investor s share of the deficits of an associate equals or exceeds the interest in the associate, the investor discontinues recognising its share of further losses. 8.3 Loss of significant influence The accounting treatment differs for a change in ownership interest which does not result in a loss of significant influence from where a change in ownership interest does result in a loss of significant influence. 8.4 Separate financial statements Investments in associates can be accounted for in the following two manners, for each category of investments, in the separate financial statements of the investor: Cost; or In accordance with GAP 104. 8.5 Disclosure Specific disclosures are required in the investor s financial statements. January 2014 Page 26