An entity with joint control of an investee shall account for its investment in a joint venture using the equity method except when that investment qualifies for exemption in IAS 28.
The exemptions include:
- if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in paragraphs 4(a) of IFRS 10 Consolidated Financial Statements; or
- all of the following apply:
- the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not applying the equity method;
- the entity’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);
- entity 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 parent of the entity produces consolidated financial statements available for public use that comply with IFRSs.
Where the investments or a portion of an investment in a joint venture is classified as held for sale, the entity shall apply IFRS 5 Non-current assets held for sale and discontinued operations. Any retained portion of an investment in a joint venture that has not been classified as held for sale shall be accounted for using the equity method until disposal of the portion that is classified as held for sale takes place. After the disposal takes place, an entity shall account for any retained interest in the joint venture in accordance with IFRS 9 Financial Instruments unless the retained interest continues to be a joint venture, in which case the entity uses the equity method.
When an investment in a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure investments in those joint ventures at fair value through profit or loss in accordance with IFRS 9.
Under the equity method, the investment in a joint venture is initially recorded at cost.
Subsequently, the carrying amount of the investment is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the profit or loss of the investee is recognised in the investor’s profit or loss.
The following transactions will have an impact on the carrying amount of the investment:
- distributions received from an investee reduce the carrying amount of the investment; and
- adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other comprehensive income. The investor’s share of those changes is recognised in the investor’s other comprehensive income.
After the entity’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the joint venture. If the joint venture subsequently reports profits, the entity resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.
IAS 28 states that the entity’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances. Therefore, if a joint venture uses accounting policies that differ from those of the entity, adjustments are required for consistency.
Dissimilar reporting periods
The most recent available financial statements of the joint venture are used in applying the equity method. If the reporting periods of the joint venture and the entity differ, the joint venture prepares, for the use of the entity, financial statements as of the same date as the financial statements of the entity unless it is impracticable to do so. Adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the entity’s financial statements.
In any case, the difference between the end of the reporting period of the joint venture and that of the entity shall be no more than three months. The length of the reporting periods and any difference between the ends of the reporting periods shall be the same from period to period.
Discontinuation of the equity method
An entity shall discontinue the use of the equity method from the date when its investment ceases to be a joint venture as follows:
- If the investment becomes a subsidiary, the entity shall account for its investment in accordance with IFRS 3 Business Combinations and IFRS 10.
- If the retained interest in the former joint venture is a financial asset, the entity shall measure the retained interest at fair value. The fair value of the retained interest shall be regarded as its fair value on initial recognition as a financial asset in accordance with IFRS 9. The entity shall recognise in profit or loss any difference between:
- the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture; and
- the carrying amount of the investment at the date the equity method was discontinued.
- When an entity discontinues the use of the equity method, the entity shall account for all amounts previously recognised in other comprehensive income in relation to that investment on the same basis as would have been required if the investee had directly disposed of the related assets or liabilities.
If an investment in an investment in a joint venture becomes an investment in an associate, the entity continues to apply the equity method and does not remeasure the retained interest.
After application of the equity method, including recognising the joint venture’s losses, the entity determines whether it is necessary to recognise any additional impairment loss with respect to its net investment in the joint venture. The entity also determines whether any additional impairment loss is recognised with respect to its interest in the joint venture that does not constitute part of the net investment and the amount of that impairment loss.
An investment in a joint venture shall be accounted for in the entity’s separate financial statements at cost, in accordance with IFRS 9 or the equity method described in IAS 28 (see Accountiung policy election in Separate financial statements).