IFRS for SMEs® Standard (2015) + Q&As

IFRS® Foundation—Supporting Material for the IFRS for SMEs Standard

Module 14—Investments in Associates

IFRS for in Associates
 IFRS® Foundation
Supporting Material
for the IFRS for SMEs® Standard
including the full text of
Section 14 Investments in Associates
of the IFRS for SMEs Standard
issued by the International Accounting Standards Board in October 2015

with extensive explanations, self-assessment questions and case studies

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This module has been prepared by IFRS Foundation (Foundation) education staff. It has not been approved by the International Accounting
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Contents

INTRODUCTION __________________________________________________________ 1
Which version of the IFRS for SMEs Standard? __________________________________ 1
This module ______________________________________________________________ 1
IFRS for SMEs Standard ____________________________________________________ 2
Introduction to the requirements_______________________________________________ 2
What has changed since the 2009 IFRS for SMEs Standard ________________________ 3
REQUIREMENTS AND EXAMPLES ___________________________________________ 4
Scope of this section _______________________________________________________ 4
Associates defined _________________________________________________________ 4
Measurement—accounting policy election _______________________________________ 9
Financial statement presentation _____________________________________________ 22
Disclosures ______________________________________________________________ 23
SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 28
Classification ____________________________________________________________ 28
Measurement ____________________________________________________________ 29
COMPARISON WITH FULL IFRS STANDARDS ________________________________ 31
TEST YOUR KNOWLEDGE ________________________________________________ 32
APPLY YOUR KNOWLEDGE _______________________________________________ 37
Case study 1 ____________________________________________________________ 37
Answer to case study 1 ____________________________________________________ 38
Case study 2 ____________________________________________________________ 42
Answer to case study 2 ____________________________________________________ 43

IFRS Foundation: Supporting Material for the IFRS for SMEs® Standard (version 2019–07)
Module 14—Investments in Associates

The accounting requirements applicable to small and medium-sized entities (SMEs)

discussed in this module are set out in the IFRS for SMEs Standard, issued by the
International Accounting Standards Board (Board) in October 2015.
This module has been prepared by IFRS Foundation education staff.
The contents of Section 14 Investments in Associates of the IFRS for SMEs Standard are
set out in this module and shaded grey. The Glossary of terms of the IFRS for SMEs
Standard (Glossary) is also part of the requirements. Terms defined in the Glossary are
reproduced in bold type the first time they appear in the text of Section 14. The notes and
examples inserted by the education staff are not shaded. These notes and examples do
not form part of the IFRS for SMEs Standard and have not been approved by the Board.

INTRODUCTION
Which version of the IFRS for SMEs® Standard?

When the IFRS for SMEs Standard was first issued in July 2009, the Board said it would
undertake an initial comprehensive review of the Standard to assess entities’ experience of the
first two years of its application and to consider the need for any amendments. To this end, in
June 2012, the Board issued a Request for Information: Comprehensive Review of the IFRS for SMEs.
An Exposure Draft proposing amendments to the IFRS for SMEs Standard was subsequently
published in 2013, and in May 2015 the Board issued 2015 Amendments to the International
Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs Standard).
The document published in May 2015 only included amended text, but in October 2015, the
Board issued a fully revised edition of the Standard, which incorporated additional minor
editorial amendments as well as the substantive May 2015 revisions. This module is based on
that version.
The IFRS for SMEs Standard issued in October 2015 is effective for annual periods beginning on
or after 1 January 2017. Earlier application was permitted, but an entity that did so was
required to disclose the fact.
Any reference in this module to the IFRS for SMEs Standard refers to the version issued in
October 2015.

This module

This module focuses on the general requirements for accounting for investments in associates
applying Section 14 Investments in Associates of the IFRS for SMEs Standard. It introduces the
subject and reproduces the official text along with explanatory notes and examples designed
to enhance understanding of the requirements. The module identifies the significant
judgements required in accounting for investments in associates. In addition, the module
includes questions designed to test your understanding of the requirements and case studies
that provides a practical opportunity to apply the requirements to account for investments in
associates applying the IFRS for SMEs Standard.
Upon successful completion of this module, you should, within the context of the IFRS for SMEs
Standard, be able to:
 identify when an entity has significant influence over another entity;

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 measure investments in associates on initial recognition and subsequently;

 apply the cost model, equity method and fair value model;
 present and disclose investments in associates in financial statements; and
 demonstrate an understanding of the significant judgements that are required in
accounting for investments in associates.

IFRS for SMEs Standard

The IFRS for SMEs Standard is intended to apply to the general purpose financial statements of
entities that do not have public accountability (see Section 1 Small and Medium-sized Entities).
The IFRS for SMEs Standard is comprised of mandatory requirements and other non-mandatory
material.
The non-mandatory material includes:
 a preface, which provides a general introduction to the IFRS for SMEs Standard and explains
its purpose, structure and authority;
 implementation guidance, which includes illustrative financial statements and a table of
presentation and disclosure requirements;
 the Basis for Conclusions, which summarises the Board’s main considerations in reaching
its conclusions in the IFRS for SMEs Standard issued in 2009 and, separately, in the 2015
Amendments; and
 the dissenting opinion of a Board member who did not agree with the issue of the
IFRS for SMEs Standard in 2009 and the dissenting opinion of a Board member who did not
agree with the 2015 Amendments.
In the IFRS for SMEs Standard, there are appendices to Section 21 Provisions and Contingencies,
Section 22 Liabilities and Equity and Section 23 Revenue. These appendices provide
non-mandatory guidance.
The IFRS for SMEs Standard has been issued in two parts: Part A contains the preface, all the
mandatory material and the appendices to Section 21, Section 22 and Section 23; and Part B
contains the remainder of the material mentioned above.
Further, the SME Implementation Group (SMEIG), which assists the Board with supporting
implementation of the IFRS for SMEs Standard, publishes implementation guidance as
‘questions and answers’ (Q&As). These Q&As provide non-mandatory, timely guidance on
specific accounting questions raised with the SMEIG by entities implementing the IFRS for SMEs
Standard and other interested parties. At the time of issue of this module (September 2018) the
SMEIG has not issued any Q&As relevant to this module.

Introduction to the requirements

The objective of general purpose financial statements of a small or medium-sized entity is to

provide information about the entity’s financial position, performance and cash flows that is
useful for economic decision-making by a broad range of users who are not in a position to
demand reports tailored to meet their particular information needs. Such users include, for
example, owners who are not involved in managing the business, existing and potential
creditors and credit rating agencies.

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Module 14—Investments in Associates

The objective of Section 14 Investments in Associates is to prescribe the accounting requirements

for investments in associates.
An associate is an entity over which the investor has significant influence and that is neither a
subsidiary nor an interest in a joint venture. The main issue that arises in relation to
Section 14 is identification of when significant influence is present.
Section 14 requires an entity to choose one of the following three models to account for its
investments in associates:
(a) the cost model, investment in an associate is measured at cost less any accumulated
impairment losses. However, an investor using the cost model is required to use the fair
value model for any investment in an associate for which a published price quotation is
available.
(b) the equity method, investment in an associate is initially recognised at the transaction
price (including transaction costs) and adjusted thereafter for the investor’s share of the
profit or loss and other comprehensive income of the associates less any accumulated
impairment losses.
(c) the fair value model, investment in an associate is initially recognised at the transaction
price (excluding transaction costs). After initial recognition, at each reporting date, the
investment in an associate is measured at fair value. Changes in fair value are recognised
in profit or loss. However, an investor using the fair value model uses the cost model for
any investment in an associate for which fair value cannot be measured reliably without
undue cost or effort.
Impairment assessments under the cost model and equity are performed in accordance with
Section 27 Impairment of Assets.
An entity that uses the fair value model measures its investments in associates by using the
procedures in paragraphs 11.27–11.32 of Section 11 Basic Financial Instruments. Furthermore, it
makes the disclosures required by Section 11.
Paragraph 9.26 establishes the requirements for accounting for associates in separate financial
statements, if such financial statements are prepared.
If an entity has joint ventures and subsidiaries it follows the requirements of Section 15
Investments in Joint Ventures and Section 9 Consolidated and Separate Financial Statements,
respectively.

What has changed since the 2009 IFRS for SMEs Standard

There are consequential changes to the disclosures in Section 14 (see paragraph 14.15) relating
to changes to Section 2 Concepts and Pervasive Principles. The changes to Section 2 add clarifying
guidance on the undue cost or effort exemption that is used in several sections of the
IFRS for SMEs Standard—based on Q&A 2012/01 Application of ‘undue cost or effort’1—as well as a new
requirement within relevant sections for entities to disclose their reasoning for using such an
exemption (see paragraphs 2.14A–2.14D). There are also minor editorial changes. All changes
are covered in this Module.

1
Q&As are non-mandatory guidance issued by the SME Implementation Group (SMEIG).

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REQUIREMENTS AND EXAMPLES

Scope of this section

14.1 This section applies to accounting for associates in consolidated financial statements
and in the financial statements of an investor that is not a parent but that has an
investment in one or more associates. Paragraph 9.26 establishes the requirements for
accounting for associates in separate financial statements.

Notes

The requirements of Section 14 apply to accounting for investments in associates for:

 a parent that prepares consolidated financial statements; or
 an investor that is not a parent but has one or more associates.
When an entity has no subsidiaries (and therefore does not prepare consolidated
financial statements) it must apply Section 14 to account for its investments in
associates. Such an entity may then choose (or be required by the law in its
jurisdiction) to prepare separate financial statements as a second set of financial
statements where it applies the requirements in paragraph 9.26 to its associates.
If a parent is exempt from producing consolidated financial statements in accordance
with paragraph 9.3, it will apply Section 11 Basic Financial Instruments to account for its
associates in its financial statements. These financial statements are not separate
financial statements.

Associates defined

14.2 An associate is an entity, including an unincorporated entity such as a partnership, over

which the investor has significant influence and that is neither a subsidiary nor an interest
in a joint venture.

Notes

Significant influence is defined in paragraph 14.3. More than one entity can have
significant influence over another entity at the same time. A substantial or majority
ownership by another investor does not preclude an investor from having significant
influence.
A subsidiary is an entity, including an unincorporated entity such as a partnership,
that is controlled by another entity (known as the parent). The requirements on
accounting for and reporting subsidiaries are set out in
Section 9 Consolidated and Separate Financial Statements.
The definition of control can be split into two parts (see paragraph 9.4):
 ‘the power to govern the financial and operating policies of an entity’
 ‘so as to obtain benefits from its activities’.

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Control is not based on legal ownership and can be passive (it is the ability to control,
not the exercise of control). The parent need not own shares in its subsidiary (for
example, an entity might have control over a special purpose entities by some other
means, such as a legal agreement when that entity is set up). In the absence of an
ownership interest, benefits might be obtained, for example, from cross-selling
opportunities or cost savings.
Only one entity can control another entity at a point in time. It is necessary to analyse
in detail the facts and circumstances surrounding how an entity’s financial and
operating policies are governed to establish where control lies.
A joint venture is a contractual arrangement whereby two or more parties undertake
an economic activity that is subject to joint control. Joint ventures can take the form
of jointly controlled operations, jointly controlled assets, or jointly controlled entities.
Joint control is the contractually agreed sharing of control over an economic activity.
It exists only when the strategic financial and operating decisions relating to the
activity require the unanimous consent of the parties sharing control (venturers). The
requirements on accounting and reporting for joint ventures are set out in
Section 15 Investments in Joint Ventures.

14.3 Significant influence is the power to participate in the financial and operating policy
decisions of the associate but is not control or joint control over those policies:
(a) if an investor holds, directly or indirectly (for example, through subsidiaries), 20 per cent
or more of the voting power of the associate, it is presumed that the investor has
significant influence, unless it can be clearly demonstrated that this is not the case;
(b) conversely, if the investor holds, directly or indirectly (for example, through
subsidiaries), less than 20 per cent of the voting power of the associate, it is presumed
that the investor does not have significant influence, unless such influence can be
clearly demonstrated; and
(c) a substantial or majority ownership by another investor does not preclude an investor
from having significant influence.

Notes

Significant influence is the power to participate in the financial and operating policy
decisions of the associate but is not control or joint control over those policies. In this
context, power refers to the ability to do or affect something. Consequently, an entity
has significant influence when it can exercise that power, regardless of whether
significant influence is actively demonstrated or passive in nature.
Judgement must be exercised, in some cases, in determining whether significant
influence exists. Management examines all facts and circumstances and the substance
of the relationship in each case is considered. If it can be clearly demonstrated that an
investor holding 20% or more of the voting power of the investee has no ability to
exercise significant influence, the investment will not be accounted for as an
associate—this is likely to be the case when, for example, the court has appointed an
independent administrator to wind down the investee’s business. Conversely, if it can
be clearly demonstrated that an investor holding less than 20% of the voting power of
the investee can exercise significant influence, the investment will be accounted for as
an associate.

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In most cases when applying the guidance in the IFRS for SMEs Standard it will be clear
whether an entity has significant influence over another entity. However, for more
complex cases an entity may, but is not required to, refer to full IFRS Standards which
provides more detailed application guidance (see paragraph 10.6 of Section 10
Accounting Policies, Estimates and Errors of the IFRS for SMEs Standard). Paragraph 6 of
IAS 28 Investments in Associates and Joint Ventures indicates that the existence of significant
influence by an entity is usually evidenced in one or more of the following ways (note,
this is not intended to be an exhaustive list):
(a) representation on the board of directors or equivalent governing body of the
investee;
(b) participation in policy-making processes, including participation in decisions
about dividends or other distributions;
(c) material transactions between the entity and its investee;
(d) the interchange of managerial personnel; or
(e) the provision of essential technical information.
Significant influence can be gained or lost without a change in absolute or relative
ownership levels. It could be lost, for example, when an associate becomes subject to
the control of a government, court, administrator or regulator. Furthermore, it could
be lost because of a contractual agreement.
Where the investor is a parent (it has one or more subsidiaries), the voting rights of the
group (the parent and its subsidiaries) in the investee are aggregated to determine
whether the parent has significant influence over the investee. The voting rights of the
parent’s associates and joint ventures are ignored for this purpose, as the parent does
not control the voting rights held by those entities.
As noted in paragraph 14.3, if an investor directly or indirectly through its subsidiaries
holds 20% or more of the voting power of an investee, it is presumed that the investor
has significant influence. However, if the investor holds more than 50% of the voting
power, the investor is presumed to have control rather than significant influence
(see paragraph 9.5). Unless there is joint control (see Section 15 Investments in Joint
Ventures), ownership of 50% of the voting power would result in a rebuttable
presumption of significant influence.
Where another investor has a controlling interest in an entity in which the reporting
investor has an equity interest of, say 20%, the substance of the 20% investor’s
influence should be examined carefully to determine whether it is significant
influence.
An investor 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 investor additional voting power or to
reduce another party’s voting power over the financial and operating policies of
another entity. These are known as potential voting rights. Potential voting rights are
considered when assessing whether an entity has significant influence (see
paragraph 14.8(b)).

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Examples—investment is not an associate

Ex 1 Entity A owns 75% of the ordinary shares that carry voting rights at a general
meeting of the shareholders of Entity B. Entity A controls Entity B.
Entity A does not only have significant influence over Entity B—it controls Entity B
Entity A is required to consolidate Entity B in its consolidated financial statements in
accordance with Section 9 Consolidated and Separate Financial Statements.

Ex 2 Entity A owns 25% of the ordinary shares that carry voting rights at a general
meeting of the shareholders of Entity B. Entity C owns 30% of the ordinary shares
that carry voting rights at a general meeting of the shareholders of Entity B.
Entities A and C have contractually agreed to jointly control Entity B.
Entity A does not only have significant influence over Entity B—it has joint control
over Entity B. Entity A is required to account for its investment in Entity B in
accordance with Section 15 Investments in Joint Ventures.

Examples—judgement indicates that significant influence exists

Ex 3 Entity A owns 25% of the ordinary shares that carry voting rights at a general
meeting of the shareholders of Entity B.
Entity A neither controls nor jointly controls Entity B.
In the absence of evidence to the contrary, it is presumed that Entity A has significant
influence over Entity B and therefore Entity B is an associate of Entity A.
However, the determination that Entity A’s 25% holding in Entity B results in
significant influence is not automatic. Judgement is required—it may be that despite
the 25% holding of voting rights, it can be clearly demonstrated that Entity A does not
have significant influence over Entity B.
If it is determined that Entity A does not have significant influence over Entity B, the
investment in the ordinary shares of Entity B would be accounted for as an equity
instrument in accordance with Section 11 Basic Financial Instruments.

Ex 4 Entity A owns all the ordinary shares in Entity B. Entity B own 25% of the
ordinary shares that carry voting rights at a general meeting of the shareholders
of Entity C.
The Entity A Group (Entity A and its subsidiary Entity B) neither controls nor
jointly controls Entity C.
In the absence of evidence to the contrary, it is presumed that Entity A has significant
influence over Entity C.
However, the determination that Entity A’s indirect 25% holding in Entity C results in
significant influence is not automatic. Judgement is required— it may be that despite
the 25% holding, Entity A (or B) does not have significant influence over Entity C.
If it is determined that neither Entity A nor Entity B has significant influence over
Entity C, the investment in the ordinary shares of Entity C would be accounted for as
an equity instrument in Entity B’s financial statements and Entity A’s consolidated
financial statements in accordance with Section 11 Basic Financial Instruments.

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Ex 5 The facts are the same as in Example 4. However, in this example, assume that
Entity B owns only 15% of the ordinary shares of Entity C and that Entity A also
owns 10% of the ordinary shares of Entity C.
If an investor holds, directly or indirectly (through subsidiaries), 20% or more of the
voting power of the investee, it is presumed that the investor has significant influence
over the investee unless it can be clearly demonstrated that this is not the case.
Entity A’s 10% investment in Entity C, by itself, does not give Entity A significant
influence over Entity C. Similarly, Entity B’s 15% investment in Entity C, by itself, does
not give Entity B significant influence over Entity C.
However, because Entity A controls Entity B, Entity A’s 10% investment in Entity C is
considered together with Entity B’s 15% investment in Entity C. Accordingly, in the
absence of evidence to the contrary, Entity A is presumed to have significant influence
over Entity C.
The determination that the combination of Entity A’s 10% holding in Entity C and
Entity B’s 15% holding in Entity C results in significant influence is not automatic.
Judgement is required, and it may be that despite the combined 25% holding, the
group does not have significant influence over Entity C.
If it is determined that Entity A does not have significant influence over Entity C, then
the investment in the ordinary shares of Entity C would be accounted for as an equity
instrument in accordance with Section 11 Basic Financial Instruments.

Ex 6 Entities A and B own 30% and 10%, respectively, of the ordinary shares that carry
voting rights at a general meeting of the shareholders of Entity C. Entity B owns
70% of the ordinary shares that carry voting rights at a general meeting of the
shareholders of Entity A and it is determined that Entity A is a subsidiary of
Entity B. Entities A and B neither control nor jointly control Entity C.
Entity A holds 30% of the voting power in Entity C. Unless it can be clearly
demonstrated that this is not the case, it is presumed that Entity A has significant
influence over Entity C since Entity A holds more than 20% of the voting power in
Entity C. Therefore, Entity C is an associate of Entity A.
Entity B holds 40% of the voting power in Entity C (10% directly plus 30% indirectly
through its control of Entity A). Unless it can be clearly demonstrated that this is not
the case, it is presumed that Entity B has significant influence over Entity C (Entity C is
an associate of Entity B).

Ex 7 The facts are the same as in Example 6. However, in this example, assume that
Entity B owns 30% (not 70%) of the ordinary shares that carry voting rights at a
general meeting of the shareholders of Entity A (and Entity A is an associate, not a
subsidiary, of Entity B).
Entity A holds 30% of the voting power in Entity C. Unless it can be clearly
demonstrated that this is not the case, it is presumed that Entity A has significant
influence over Entity C since Entity A holds more than 20% of the voting power in
Entity C. Therefore, Entity C is an associate of Entity A.
The holding of Entity B’s associate (Entity A) is ignored when assessing how much
voting power Entity B holds in Entity C (because Entity B does not control Entity A).
Entity B holds less than 20% of the voting power in Entity C (it holds 10% of the voting
power). It is determined that Entity B does not have significant influence over Entity C,
unless such influence can be clearly demonstrated.

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Ex 8 Entities A and B own 60% and 30%, respectively, of the ordinary shares that carry
voting rights at a general meeting of the shareholders of Entity C.
Entity B holds 30% of the voting power in Entity C. Unless it can be clearly
demonstrated that this is not the case, it is presumed that Entity B has significant
influence over Entity C.
Entity A has control over more than half of the voting power in Entity C.
Consequently, in the absence of evidence to the contrary, Entity A is presumed to
control Entity C. Entity A accounts for its subsidiary (Entity C) in accordance with
Section 9 Consolidated and Separate Financial Statements.
A substantial or majority ownership by another investor does not preclude an investor
from having significant influence (see paragraph 14.3(c)). However, it is possible that
Entity A’s control over Entity C could preclude Entity B from having the power to
participate in the financial and operating policy decisions of Entity C. If this is the
case, Entity B would not have significant influence over Entity C.
All facts and circumstances should be considered in assessing whether Entity B has
significant influence over Entity C. If Entity B has significant influence over Entity C,
Entity C is an associate of Entity B.

Measurement—accounting policy election

14.4 An investor shall account for all of its investments in associates using one of the following:
(a) the cost model in paragraph 14.5;
(b) the equity method in paragraph 14.8; or
(c) the fair value model in paragraph 14.9.

Cost model

14.5 An investor shall measure its investments in associates, other than those for which there
is a published price quotation (see paragraph 14.7) at cost less any accumulated
impairment losses recognised in accordance with Section 27 Impairment of Assets.

14.6 The investor shall recognise dividends and other distributions received from the investment
as income without regard to whether the distributions are from accumulated profits of the
associate arising before or after the date of acquisition.

14.7 An investor shall measure its investments in associates for which there is a published price
quotation using the fair value model (see paragraph 14.9).

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Equity method
14.8 Under the equity method of accounting, an equity investment is initially recognised at the
transaction price (including transaction costs) and is subsequently adjusted to reflect the
investor’s share of the profit or loss and other comprehensive income of the associate:
(a) distributions and other adjustments to carrying amount. Distributions received from the
associate reduce the carrying amount of the investment. Adjustments to the carrying
amount may also be required as a consequence of changes in the associate’s equity
arising from items of other comprehensive income.
(b) potential voting rights. Although potential voting rights are considered in deciding
whether significant influence exists, an investor shall measure its share of profit or loss
and other comprehensive income of the associate and its share of changes in the
associate’s equity on the basis of present ownership interests. Those measurements
shall not reflect the possible exercise or conversion of potential voting rights.
(c) implicit goodwill and fair value adjustments. On acquisition of the investment in an
associate, an investor shall account for any difference (whether positive or negative)
between the cost of acquisition and the investor’s share of the fair values of the net
identifiable assets of the associate in accordance with paragraphs 19.22–19.24.
An investor shall adjust its share of the associate’s profits or losses after acquisition to
account for additional depreciation or amortisation of the associate’s depreciable or
amortisable assets (including goodwill) on the basis of the excess of their fair values
over their carrying amounts at the time the investment was acquired.
(d) impairment. If there is an indication that an investment in an associate may be
impaired, an investor shall test the entire carrying amount of the investment for
impairment in accordance with Section 27 as a single asset. Any goodwill included as
part of the carrying amount of the investment in the associate is not tested separately
for impairment but, instead, as part of the test for impairment of the investment as a
whole.
(e) investor’s transactions with associates. The investor shall eliminate unrealised profits
and losses resulting from upstream (associate to investor) and downstream (investor
to associate) transactions to the extent of the investor’s interest in the associate.
Unrealised losses on such transactions may provide evidence of an impairment of the
asset transferred.
(f) date of associate’s financial statements. In applying the equity method, the investor
shall use the financial statements of the associate as of the same date as the financial
statements of the investor unless it is impracticable to do so. If it is impracticable, the
investor shall use the most recent available financial statements of the associate, with
adjustments made for the effects of any significant transactions or events occurring
between the accounting period ends.
(g) associate’s accounting policies. If the associate uses accounting policies that differ
from those of the investor, the investor shall adjust the associate’s financial statements
to reflect the investor’s accounting policies for the purpose of applying the equity
method unless it is impracticable to do so.
(h) losses in excess of investment. If an investor’s share of losses of an associate equals
or exceeds the carrying amount of its investment in the associate, the investor shall
discontinue recognising its share of further losses. After the investor’s interest is
reduced to zero, the investor shall recognise additional losses by a provision
(see Section 21 Provisions and Contingencies) only to the extent that the investor has
incurred legal or constructive obligations or has made payments on behalf of the
associate. If the associate subsequently reports profits, the investor shall resume

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recognising its share of those profits only after its share of the profits equals the share
of losses not recognised.
(i) discontinuing the equity method. An investor shall cease using the equity method from
the date that significant influence ceases:
(i) if the associate becomes a subsidiary or joint venture, the investor shall remeasure
its previously held equity interest to fair value and recognise the resulting gain or
loss, if any, in profit or loss.
(ii) if an investor loses significant influence over an associate as a result of a full or
partial disposal, it shall derecognise that associate and recognise in profit or loss
the difference between, on the one hand, the sum of the proceeds received plus
the fair value of any retained interest and, on the other hand, the carrying amount
of the investment in the associate at the date significant influence is lost.
Thereafter, the investor shall account for any retained interest using
Section 11 Basic Financial Instruments and Section 12 Other Financial Instrument
Issues, as appropriate.
(iii) if an investor loses significant influence for reasons other than a partial disposal of
its investment, the investor shall regard the carrying amount of the investment at
that date as a new cost basis and shall account for the investment using
Sections 11 and 12, as appropriate.

Fair value model

14.9 When an investment in an associate is recognised initially, an investor shall measure it at
the transaction price. Transaction price excludes transaction costs.

14.10 At each reporting date, an investor shall measure its investments in associates at fair
value, with changes in fair value recognised in profit or loss, using the fair value
measurement guidance in paragraphs 11.27–11.32. An investor using the fair value model
shall use the cost model for any investment in an associate for which fair value cannot be
measured reliably without undue cost or effort.

Notes

If an entity is required or chooses to prepare separate financial statements, a second

set of financial statements, the choice of accounting policy for investments in
associates in the separate financial statements under paragraph 9.26 does not need to
be consistent with the accounting policy chosen in accordance with 14.4.

Cost model
No published price quotation
An investor that has elected the cost model (see paragraph 14.4(a)) accounts for its
investments in associates for which there is no published price quotation using the
cost-impairment model. At each reporting date, in accordance with Section 27
Impairment of Assets the investor must consider whether such investments have any
indicators of impairment (see paragraphs 27.7–27.9 and 27.29). If present, an
impairment test must be performed (see paragraphs 27.10–27.20). If an investment is
found to be impaired (or a prior period impairment is found to have reversed),
recognise an impairment loss (or a reversal of an impairment loss) in profit or loss (see
paragraphs 27.6 and 27.30-27.31).

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Published price quotation

Investments in associates for which there is a published price quotation are accounted
for using fair value model. Assuming the entity only has one investment in an
associate, it cannot elect the cost model (see paragraph 14.9). An investor who has
more than one investment in associates with at least one where a published price
quotation is not available can elect the cost model while still measuring investments
with a quoted price at fair value (see paragraph 14.7). Investments carried at fair value
are not tested for impairment.
Cost on initial recognition
For assets, historical cost is the amount of cash or cash equivalents paid or the fair
value of the consideration given to acquire the asset at the time of its acquisition (see
paragraph 2.34(a)). Therefore, the cost of an investment in an associate at initial
recognition comprises its purchase price and any directly attributable expenditures
necessary to obtain it such as professional fees for legal services, transfer taxes and
other transaction costs. When the investment in associates have published price
quotations, they are accounted for using the fair value model and therefore,
transaction costs are recognised in profit or loss directly.

Equity method
Other than to the extent that fair value is relevant to impairment testing in accordance
with Section 27, market price is not used in accounting for investments using the
equity method.

Fair value model

Fair value cannot be measured reliably without undue cost or effort
Considering whether determining the fair value of an investment in an associate
would involve undue cost or effort depends on the entity’s specific circumstances and
on management’s judgement in assessing the costs and benefits. This judgement
requires considering how not having that information could affect the economic
decisions of expected users of financial statements. Applying a requirement would
involve undue cost or effort by an SME if the incremental cost (for example, valuers’
fees) or additional effort (for example, endeavours by employees) substantially exceeds
the benefits that expected users of the SME’s financial statements would receive from
having the information (see paragraph 2.14B). If an SME already has or could easily and
inexpensively acquire the information necessary to comply with a requirement, any
related undue cost or effort exemption would not be applicable. The exemption would
not be applicable because, if the information is easily or inexpensively acquired, the
benefits of having it to the users of financial statements would be expected to exceed
any further cost or effort by the SME.
Assessments as to whether initial application of a requirement would involve undue
cost or effort should be based on information about the costs and benefits of applying
the requirement at the time of initial application. An entity must make a new
assessment of whether a requirement will involve undue cost or effort at each
subsequent reporting date, based on information available at that subsequent
reporting date (see paragraph 2.14C).

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When an entity has selected the fair value model (see paragraph 14.4(c)) but accounts
for an investment in an associate using the cost model because the fair value of that
associate cannot be measured reliably without undue cost or effort, the entity shall
disclose that fact, the reasons why fair value measurement would involve undue cost
or effort and the carrying amount of the associate (see paragraph 14.15). At each
reporting date, in accordance with Section 27, the investor must consider whether
such investments have any indicators of impairment (see paragraphs 27.7–27.9 and
27.29) and, if present, must perform an impairment test (see paragraphs 27.10–27.20).
If an investment is found to be impaired (or a prior period impairment is found to have
reversed), the investor recognises an impairment loss (or reversal of an impairment
loss) in profit or loss (see paragraphs 27.6 and 27.30).
All other investments in associates
An investor that has selected the fair value model (see paragraph 14.4(c)) accounts for
all its investments in associates for which it can measure fair value reliably without
undue cost or effort, using the fair value model. These investments are not tested for
impairment.
The fair value model is considered to provide more relevant information to lenders
than the other methods when a reliable fair value can be determined (see paragraphs
BC115–BC117 of the Basis for Conclusions accompanying the IFRS for SMEs Standard).
An entity choosing to apply the fair value model refers to paragraphs 11.27–11.32 for
guidance on the measurement of fair value (see Section 11 Basic Financial Instruments).

Examples—accounting policy

Unless otherwise stated, ignore value in use in determining the recoverable amount
necessary to calculate any impairment loss (fair value less costs to sell is assumed to be
the recoverable amount).

Ex 9 On 1 January 20X1 Entity A acquired 30% of the ordinary shares that carry voting
rights at a general meeting of the shareholders of Entity B for CU300,000 (2).
For the year ended 31 December 20X1, Entity B recognised a profit of CU400,000.
On 30 December 20X1 Entity B declared and paid a dividend of CU150,000 for the
year 20X1. At 31 December 20X1 Entity A estimates that the fair value of its
investment in Entity B is CU425,000. However, there is no published price
quotation for Entity B.

Cost model
Applying the cost model, Entity A must recognise dividend income of CU45,000
(30% × CU150,000 dividend declared by Entity B) in profit or loss for the year ended
31 December 20X1.
At 31 December 20X1, Entity A must report its investment in Entity B (an associate) at
CU300,000 (cost). Entity A must also consider whether there are any indicators that its
investment is impaired and, if so, conduct an impairment test in accordance with
Section 27 Impairment of Assets. Assuming costs to sell is nil, there would be no
impairment loss because the fair value (CU425,000) of the investment exceeds its
carrying amount (CU300,000).

(2) In this example, and in all other examples in this module, monetary amounts are denominated in ‘currency units (CU)’.

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Equity method(3)
Applying the equity method, Entity A must recognise income from its associate of
CU120,000 (30% × CU400,000 Entity B’s profit for the year) in profit or loss for the year
ended 31 December 20X1.
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU375,000 (calculation: CU300,000 cost + CU120,000 share of earnings - CU45,000
dividend). Entity A must also consider whether there are any indicators that its
investment is impaired and, if so, conduct an impairment test in accordance with
Section 27 Impairment of Assets. Assuming costs to sell are nil, there would be no
impairment loss because the fair value (CU425,000) less costs to sell of the investment
exceeds its carrying amount (CU375,000).
Fair value model
Applying the fair value model, in determining profit or loss for the year ended
31 December 20X1 Entity A must:
 recognise dividend income of CU45,000 (30% × CU150,000 dividend declared by
entity B); (4) and
 recognise the increase in the fair value of its investment in Entity B of CU125,000
(CU425,000 fair value at 31 December 20X1 minus CU300,000 carrying amount
on 1 January 20X1).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
its fair value of CU425,000.

Ex 10 The facts are the same as in Example 9. However in this example, on

2 January 20X1, Entity B also declared and paid a dividend of CU100,000 for the
year 20X0 and at 31 December 20X1, Entity A estimates that the fair value of its
investment in Entity B is CU400,000.
Cost model
Applying the cost model, in accordance with paragraph 14.6, Entity A must, without
regard to whether the distributions are from B’s accumulated profits arising before or
after 1 January 20X1, recognise dividend income of CU75,000 in profit or loss for the
year ended 31 December 20X1 (calculation: 30% × CU100,000 dividend declared on
2 January + 30% × CU150,000 dividend declared on 31 December).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU300,000 (cost).
The payment of the dividend out of pre-acquisition profits on 2 January 20X1 could be
an impairment indicator that, in accordance with Section 27 Impairment of Assets,
could trigger an impairment test at 31 December 20X1. Assuming costs to sell is nil,
there would be no impairment loss because the fair value (CU400,000) of the
investment exceeds its carrying amount (CU300,000).

(3) In examples 9–18 it is assumed that there is no implicit goodwill and that there are no fair value adjustments. Example
19 illustrates implicit goodwill and fair value adjustments.
(4) In this example, and in all other examples in this module in which an investor accounts for its interests in associates
using the fair value model, the investor recognises a dividend from its associate in profit or loss when its right to receive the
dividend is established.

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Equity method
Applying the equity method, Entity A must recognise income from its associate of
CU120,000 (30% × CU400,000 Entity B’s profit for the year) in profit or loss for the year
ended 31 December 20X1.
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU345,000 (calculation: CU300,000 cost + CU120,000 share of earnings - CU30,000
dividend declared for the year 20X0 - CU45,000 dividend declared for the year 20X1).
The payment of the dividend out of pre-acquisition profits on 2 January 20X1 could be
an impairment indicator that, in accordance with Section 27, triggers an impairment
test at 31 December 20X1 (at 31 December 20X1 Entity A would calculate the
recoverable amount of its investment in Entity B and, if the recoverable amount is
lower than the carrying amount, reduce the carrying amount to the recoverable
amount). Assuming costs to sell are nil and when the impairment test is conducted,
there would be no impairment because the fair value (CU400,000) less costs to sell of
the investment would exceed its carrying amount (CU345,000).

Fair value model

Applying the fair value model, in determining profit or loss for the year ended
31 December 20X1 Entity A must:
 recognise dividend income of CU75,000 (CU30,000 from the first distribution +
CU45,000 from the second distribution); and
 recognise the increase in fair value of CU100,000 (CU400,000 fair value at
31 December 20X1 minus CU300,000 carrying amount on 1 January 20X1).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
its fair value of CU400,000.

Ex 11 The facts are the same as in Example 9. However, in this example, CU425,000 is
the published price quotation for Entity B.

Cost model
Applying the cost model, Entity A must recognise dividend income of CU45,000
(30% × CU150,000 dividend declared by Entity B) and the increase in the fair value of
its investment in Entity B of CU125,000 in profit or loss for the year ended
31 December 20X1.
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU425,000 (fair value).
Even though Entity A has elected the cost model as its accounting policy for
investments in associates it accounts for its investment in Entity B using the fair
value model because Entity B has a published price quotation.

Equity method
Applying the equity method, Entity A must recognise income from its associate of
CU120,000 (30% × CU400,000 annual profit from Entity B) in profit or loss for the year
ended 31 December 20X1.

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At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU375,000 (calculation: CU300,000 cost + CU120,000 share of earnings - CU45,000
dividend). Entity A must also consider whether there are any indicators that its
investment is impaired and, if so, conduct an impairment test in accordance with
Section 27. Assuming costs to sell are nil, there would be no impairment because the
fair value (CU425,000) less costs to sell of the investment would exceed its carrying
amount (CU375,000).

Fair value model

Applying the fair value model, in determining profit or loss for the year ended
31 December 20X1 Entity A must:
 recognise dividend income of CU45,000 (30% × CU150,000 dividend declared by
entity B); and
 recognise the increase in the fair value of its investment in Entity B of CU125,000
(CU425,000 fair value at 31 December 20X1 minus CU300,000 carrying amount
on 1 January 20X1).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
its fair value of CU425,000.

Ex 12 On 1 March 20X1, Entity A acquired 30% of the ordinary shares that carry voting
rights at a general meeting of the shareholders of Entity B for CU300,000.
On 31 December 20X1, Entity B declared and paid a dividend of CU100,000 for
the year 20X1. Entity B reported a profit of CU80,000 for the year ended
31 December 20X1. Assume, at 31 December 20X1, the recoverable amount of
Entity A’s investment in Entity B is CU290,000 (calculation: fair value CU293,000
minus costs to sell CU3,000). There is no published price quotation for Entity B.

Cost model
Applying the cost model, Entity A must recognise dividend income of CU30,000 in
profit or loss (30% × CU100,000 dividend declared by Entity B).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU290,000 (cost less accumulated impairment).
The payment of the dividend partly out of pre-acquisition profits on 1 March 20X1 is
significant and so may be identified as an impairment indicator that, in accordance
with Section 27 Impairment of Assets, triggers an impairment test at 31 December 20X1.
At 31 December 20X1 the carrying amount is therefore reduced to CU290,000 (the
lower of the recoverable amount and the carrying amount before impairment).
Entity A recognises the impairment loss of CU10,000 in profit or loss for the year
ended 31 December 20X1.

Equity method
Applying the equity method, assuming Entity B earned its profit evenly through the
year, Entity A must recognise income from its associate of CU20,000 in profit or loss
(30% × CU66,667 profit earned by Entity B for the 10 month period ended
31 December 20X1).

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At 31 December 20X1, Entity A must report its investment in Entity B (an associate) at
CU290,000 (calculation: CU300,000 cost + CU20,000 share of associate’s profit -
CU30,000 dividend).
The payment of the dividend partly out of pre-acquisition profits on 1 March 20X1 is
significant and so may be identified as an impairment indicator that, in accordance
with Section 27, triggers an impairment test at 31 December 20X1. In this case there
be no impairment because the recoverable amount (CU290,000) of the investment
equals its carrying amount (CU290,000).

Fair value model

Applying the fair value model, in determining profit or loss for the year ended
31 December 20X1, Entity A must:
 recognise dividend income of CU30,000 (30% × CU100,000 dividend declared by
entity B); and
 recognise the decrease in the fair value of its investment in Entity B as an
expense of CU7,000 in profit or loss (CU293,000 fair value at 31 December 20X1
minus CU300,000 carrying amount on 1 January 20X1).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
its fair value of CU293,000.
Investments in associates that are carried using the fair value model are not tested for
impairment. Accordingly, the CU3,000 estimated costs to sell are ignored in
determining the investment’s carrying amount.

Ex 13 On 1 January 20X1, Entity A acquired 30% of the ordinary shares that carry
voting rights at a general meeting of the shareholders of Entity B for CU300,000.
Entity B incurred a loss of CU100,000 for the year ended 31 December 20X1 and
it did not declare a dividend. Assume at 31 December 20X1 the recoverable
amount of Entity A’s investment in Entity B is CU310,000 (calculation: CU325,000
fair value minus CU15,000 estimated costs to sell). There is no published price
quotation for Entity B.

Cost model
Applying the cost model, at 31 December 20X1 Entity A must report its investment in
Entity B (an associate) at CU300,000. The investment in Entity B has no impact in the
profit or loss of Entity A for the year ended 31 December 20X1, because Entity B did
not declare any dividends. Although the loss is significant and may be identified as an
impairment indicator that triggers an impairment test, Entity A’s investment in
Entity B is not impaired at 31 December 20X1 (the carrying amount of CU300,000 is
lower than the recoverable amount of CU310,000).

Equity method
Applying the equity method, Entity A must recognise its share of the losses of its
associate of CU30,000 in profit or loss (30% × CU100,000 loss incurred by Entity B for
the year ended 31 December 20X1).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU270,000 (calculation: CU300,000 cost minus CU30,000 share of associate’s loss).
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Although the loss is significant and may be identified as an impairment indicator

that triggers an impairment test, Entity A’s investment in Entity B is not impaired at
31 December 20X1 (the carrying amount of CU270,000 is lower than the recoverable
amount of CU310,000).

Fair value model

Applying the fair value model, in determining profit or loss for the year ended
31 December 20X1, Entity A must recognise income of CU25,000 for the increase in
the fair value of its investment in Entity B (CU325,000 fair value at 31 December 20X1
minus CU300,000 initially recognised on 1 January 20X1).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
its fair value of CU325,000 (note: unlike when determining recoverable amount, costs
to sell are excluded from fair value when using the fair value model).

Ex 14 The facts are the same as in Example 13. However, in this example, at
31 December 20X1 the recoverable amount of Entity A’s investment in Entity B is
CU265,000 (calculation: CU275,000 fair value minus CU10,000 estimated costs to
sell).

Cost model
Applying the cost model, Entity A must recognise an impairment loss of CU35,000 in
profit or loss for the year ended 31 December 20X1 (CU300,000 cost minus CU265,000
recoverable amount).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU265,000 (see Section 27).

Equity method
Applying the equity method, Entity A must recognise its share of the losses of its
associate of CU30,000 (30% × CU100,000 loss incurred by Entity B for the
year ended 31 December 20X1) and an impairment of its investment in its associate of
CU5,000 (calculation: CU300,000 cost minus CU30,000 share of associate’s losses =
CU270,000 carrying amount before impairment. CU270,000 minus CU265,000
recoverable amount = CU5,000 impairment loss) in profit or loss.
At 31 December 20X1, Entity A reports its investment in Entity B (an associate) at
CU265,000 (calculation: CU300,000 cost minus CU30,000 share of associate’s loss
minus CU5,000 accumulated impairment loss).

Fair value model

Applying the fair value model, in determining profit or loss for the year ended
31 December 20X1, Entity A must recognise an expense of CU25,000 for the decrease
in the fair value of its investment in Entity B (CU275,000 fair value at 31 December
20X1 minus CU300,000 initially recognised on 1 January 20X1).
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
its fair value of CU275,000.

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Examples—others: equity method

Ex 15 The facts are the same as in Example 9. However, in this example, in 20X1 Entity A
purchased goods for CU100,000 from Entity B. At 31 December 20X1 60% of the
goods purchased from Entity B were in Entity A’s inventories (they had not been
sold by Entity A). Entity B sells goods at a 50% mark-up on cost.
Entity A must recognise income from its associate of CU114,000 (30% × CU400,000
Entity B’s profit for the year = CU120,000 minus 30% × CU20,000(5),(6) unrealised profit =
CU114,000) in profit or loss for the year ended 31 December 20X1.
In this example it is assumed that Entity A follows an accounting policy of eliminating
the unrealised profits from upstream transactions with its associate against the
carrying amount of the associate.(7) At 31 December 20X1 Entity A would report its
investment in Entity B (an associate) at CU369,000 (calculation: CU300,000 cost +
CU114,000 share of earnings after adjusting for the elimination of the unrealised
profit, - CU45,000 dividend). Entity A must also consider whether there are any
indicators that its investment is impaired and, if so, conduct an impairment test in
accordance with Section 27.
In this example Entity A would measure the inventories that it acquired from Entity B
at CU60,000 (60% unsold × CU100,000 purchased) because the unrealised profit, to the
extent of its interest in Entity B, was eliminated from the carrying amount of its
investment in Entity B.

Ex 16 The facts are the same as in Example 15. However, in this example, Entity B
purchased goods for CU100,000 from Entity A. At 31 December 20X1 60% of the
goods purchased from Entity A were in Entity B’s inventories (they had not been
sold by Entity B). Entity A sells goods at a 50% mark-up on cost.
Entity A must recognise income from its associate of CU120,000 (30% × CU400,000
Entity B’s profit for the year) in profit or loss for the year ended 31 December 20X1.
The unrealised profit of CU6,000 (CU33,333 profit recognised by Entity B × 60% unsold
inventories × 30% ownership interest) may be eliminated in two ways:
 Apportioned to the revenue and related and cost of sales (using the example,
CU18,000 against revenue—CU100,000 × 60% unsold inventories × 30% ownership
interest, and CU12,000 against cost of sales—CU18,000 ÷ 150%--50% mark-up on
cost); or
 Cost of sales

Either approach is used in practice. Regardless of the approach used, the elimination is
made against the related investment in associate.

(5) In this example the tax effects of eliminating the unrealised profit have been ignored.
(6) Calculation: 60% inventories bought from entity B unsold by entity A × CU33,333 profit recognised by Entity B (CU100,000

revenue less CU66,667 cost of goods sold (CU100,000 selling price ÷ (100% + 50% mark-up on cost))).
(7) An alternative accounting policy would be to eliminate the unrealised profit in upstream transactions against the asset
transferred (in this case the inventories).

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Ex 17 On 1 January 20X1, Entity A acquired 25% of the ordinary shares that carry voting
rights at a general meeting of the shareholders of Entity B for CU100,000.
The purchase price is equal to 25% of the fair value of Entity B’s net identifiable
assets (25% of the difference between the fair value of its identifiable assets and
liabilities.
For the year ended 31 December 20X1 Entity B recognised a loss of CU600,000.
Entity A has no constructive or legal obligation in respect of its associate and has
made no payments on its behalf.
Entity B recognised profit for the year ended 31 December 20X2 of CU800,000.
There is no published price quotation for Entity B.
20X1
Entity A must recognise CU100,000 loss from its associate in profit or loss for the year
ended 31 December 20X1 (25% × CU600,000 Entity B’s loss for the year = CU150,000.
However, the entity limits the loss recognised to its CU100,000 investment in the
associate).
At 31 December 20X1 Entity A must measure its investment in its associate (Entity B) at
CU0 (calculation: CU100,000 cost minus CU100,000 share of losses).
20X2
Entity A must recognise CU150,000 as its share of associate’s earnings in profit or loss
for the year ended 20X2 (25% × CU800,000 Entity B’s profit for the year = CU200,000
share of associate’s profit. CU200,000 share of associate’s profit - CU50,000 loss not
recognised in 20X1).
At 31 December 20X2 Entity A must measure its investment in its associate (Entity B) at
CU150,000 (calculation: CU100,000 cost - CU100,000 share of losses recognised in 20X1
+ CU150,000 share of profit recognised in 20X2).

Ex 18 The facts are the same as in Example 9. However, in this example, on

31 December 20X1 Entity A lost significant influence over Entity B when it
reduced its shareholding in Entity B to 15% by selling half of its shares in Entity B
to an independent third party for CU212,500. Transaction costs of CU5,000 were
incurred in selling the shares.
Entity A must recognise in profit or loss for the year ended 31 December 20X1:
 income from its associate of CU120,000 (30% × CU400,000 Entity B’s profit for the
year = CU120,000).
 a gain on derecognition of an investment in its associate of CU45,000 (calculation:
(CU212,500 proceeds from sale of shares - CU5,000 transaction costs + CU212,500
fair value of the retained interest) - CU375,000 carrying amount of investment in
Entity B when significant influence was lost). To account for this transaction,
Entity A recognises the following journal entry:

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Dr Cash CU207,500(a)
Dr Financial instrument—equity investment (shares of
Entity B) CU212,500(b)
Cr Investment in associate (Entity B) CU375,000(c)
Cr Profit or loss CU45,000
To recognise the gain on derecognition of investment in associate (Entity B).

(a)
CU212,500 proceeds from sale of shares minus CU5,000 transaction costs incurred.
(b)
In the absence of other information, this is assumed to be the fair value of the retained interest in
Entity B (recent market transaction (see paragraph 11.27(b))).
(c)
The carrying amount of investment in associate derecognised (calculation: CU300,000 cost +
CU120,000 share of earnings minus CU45,000 dividend).

At 31 December 20X1, in accordance with Section 11 Basic Financial Instruments, Entity A

must classify its investment in Entity B as a financial asset and in accordance with
paragraph 14.8(i)(ii) measure its investment in Entity B at CU212,500 (fair value on the
date that significant influence was lost). Thereafter, Entity A would account for its
investment in Entity B in accordance with paragraph 11.14(c).

Ex 19 The facts are the same as in Example 9. However, in this example, on 1 January
20X1 Entity A’s share of the fair values of the net identifiable assets of Entity B is
CU280,000 and the fair value of one of Entity B’s assets (a machine) exceeded its
carrying amount (in entity B’s statement of financial position) by CU50,000.
That machine is depreciated on the straight-line method to a nil residual value
over its remaining five-year useful life.
Entity A estimated the useful life of the implicit goodwill to be five years.
Entity A must recognise income from its associate of CU113,000 in profit or loss for the
year ended 31 December 20X1 (30% × CU400,000 Entity B’s profit for the year -
CU4,000(a) amortisation of implicit goodwill - 30% × CU10,000(b) depreciation
adjustment).(8)
At 31 December 20X1 Entity A must report its investment in Entity B (an associate) at
CU368,000 (calculation: CU300,000 cost + CU113,000 share of earnings - CU45,000
dividend). Entity A must also consider whether any indicators suggest that its
investment is impaired and, if so, conduct an impairment test in accordance with
Section 27.

(a) CU300,000 cost of acquisition - CU280,000 share of the fair values of the net identifiable assets
= CU20,000 implicit goodwill. CU20,000 implicit goodwill ÷ 5 year useful life = CU4,000
amortisation expense.
(b) CU50,000 ‘additional’ cost of machine ÷ 5 year remaining useful life = CU10,000 depreciation.

(8) In this example the tax effects of implicit goodwill and fair value adjustments have been ignored.

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Examples—other: fair value model

Ex 20 The facts are the same as in Example 9. However, in this example, Entity A cannot
measure the fair value of the investment in Entity B reliably without undue cost
or effort.
Entity A must recognise dividend income of CU45,000 (30% × CU150,000 dividend
declared by Entity B) in profit or loss for the year ended 31 December 20X1.
At 31 December 20X1, Entity A must report its investment in Entity B (an associate) at
CU300,000 (cost). Entity A must also consider whether there are any indicators that its
investment is impaired and, if so, conduct an impairment test in accordance with
Section 27. In this case it is unlikely that the profitable associate would be impaired.
Even though Entity A has selected the fair value model as its accounting policy for
investments in associates, it accounts for its investment in Entity B using the cost
model because it cannot measure the fair value of its investment in Entity B reliably
without undue cost and effort. If an investor applies the undue cost or effort
exemption in paragraph 14.10 for any associates, it shall disclose that fact, the reasons
why fair value measurement would involve undue cost or effort and the carrying
amount of investments in associates accounted for under the cost model (see
paragraph 14.15).

Financial statement presentation

14.11 An investor shall classify investments in associates as non-current assets.

Example—presentation

Ex 21 An entity presenting its current assets separately from its non-current assets could
present its investments in associates in its statement of financial position as
follows:

SME A—Statement of financial position at 31 December 20X1

Note 20X1 20X0

ASSETS CU CU
Non-current assets
Investment in associates 15 80,000 100,000
…

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Disclosures

14.12 An entity shall disclose the following:

(a) its accounting policy for investments in associates;
(b) the carrying amount of investments in associates (see paragraph 4.2(j)); and
(c) the fair value of investments in associates accounted for using the equity method for
which there are published price quotations.

14.13 For investments in associates accounted for by the cost model, an investor shall disclose
the amount of dividends and other distributions recognised as income.

Example—cost model disclosures

Ex 22 On 1 January 20X0, SME A acquired 25% of the equity of SME B for CU100,000.
SME A has significant influence over SME B. SME A uses the cost model to account
for its investment in its only associate.

At 31 December 20X1, the recoverable amount of SME A’s investment in SME B is

CU80,000. The recoverable amount of the investment was not determined at
31 December 20X0 because at that date the investment showed no indication that
it might be impaired.
SME B’s loss for the year ended 31 December 20X1 is CU60,000 (20X0: profit of
CU80,000).
On 31 December 20X0 SME B declared and paid a dividend of CU40,000. It did not
declare a dividend in 20X1.
SME A could present its investment in SME B in its financial statements as follows:

SME A—Statement of financial position at 31 December 20X1

Note 20X1 20X0

ASSETS CU CU
Non-current assets
Investment in associate 15 80,000 100,000
…

SME A—Statement of comprehensive income for the year ended 31 December 20X1

Note 20X1 20X0

CU CU
…
Other income—dividend from associate – 10,000
Other expenses—impairment of associate (20,000) –
…

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SME A—Notes to the financial statements for the year ended 31 December 20X1

Note 2 Accounting policies

Investments in associates
Investments in associates are accounted for at cost less any accumulated impairment
losses. However, investments for which a published price quotation exists are accounted
for at fair value with changes in fair value recognised in profit or loss for the period of the
change.
Dividend income from associates is recognised when the shareholder’s right to receive
payment has been established and is shown as other income.

Note 15 Investment in associate

20X1 20X0
CU CU
Cost 100,000 100,000
Less accumulated impairment losses (20,000) –
80,000 100,000

SME A owns 25% of the equity of its associate SME B.

14.14 For investments in associates accounted for by the equity method, an investor shall
disclose separately its share of the profit or loss of such associates and its share of any
discontinued operations of such associates.

Example—equity method disclosures

Ex 23 The facts are the same as in Example 22. However, in this example, SME A uses the
equity model to account for its investment in its only associate.
SME A could present its investment in SME B in its financial statements as follows:

SME A—Statement of comprehensive income for the year ended 31 December 20X1

20X1 20X0
CU CU
…
(a)
Impairment of investment in associate (15,000)
(b) (c)
Share of associate’s (loss)/profit for the year (15,000) 20,000
…

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SME A—Statement of financial position at 31 December 20X1

Note 20X1 20X0

ASSETS CU CU
Non-current assets
(d) (e)
Investment in associate 15 80,000 110,000
…

SME A—Notes to the financial statements for the year ended 31 December 20X1

Note 2 Accounting policies

Investments in associates
Investments in associates are accounted for using the equity method. The carrying
amount of the investment in an associate is calculated at cost plus the entity’s subsequent
share of the associate’s comprehensive income. If at the end of a reporting period
indications show that an investment in an associate may be impaired, the entire carrying
amount of the investment is tested for impairment. If the carrying amount of the
investment is found to be higher than its recoverable amount, the carrying amount is
reduced to its recoverable amount and an impairment loss is immediately recognised in
profit or loss.

Note 15 Investment in associate

20X1 20X0
CU CU
Cost plus share of associate’s post-acquisition reserves 80,000 110,000
less accumulated impairment losses

SME A owns 25% of the equity of its associate SME B.

The calculations and explanatory notes below do not form part of the disclosures:
(a) CU95,000(f) carrying amount at 31 December 20X1 before impairment minus CU80,000 recoverable
amount = CU15,000 impairment.
(b) 25% × CU60,000 loss for the year = CU15,000 share of associate’s loss for the year ended
31 December 20X1.
(c) 25% × CU80,000 profit for the year = CU20,000 share of associate’s profit for the year ended
31 December 20X0.
(d) CU95,000(f) carrying amount at 31 December 20X1 before impairment minus CU15,000(a)
accumulated impairment of investment in associate = CU80,000 carrying amount at 31 December
20X1.
(e) CU100,000 cost + CU20,000(c) profit for the year ended 31 December 20X0 minus CU10,000(g)
dividend received from associate = CU110,000 carrying amount at 31 December 20X0.
(f) CU110,000 carrying amount at 31 December 20X0 minus CU15,000(b) share of associate’s loss for the
year ended 31 December 20X1 = CU95,000 carrying amount at 31 December 20X1 before
impairment.
(g) 25% × CU40,000 dividend declared and paid by associate = CU10,000 dividend received from
associate.

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14.15 For investments in associates accounted for by the fair value model, an investor shall make
the disclosures required by paragraphs 11.41–11.44. If an investor applies the undue cost
or effort exemption in paragraph 14.10 for any associates it shall disclose that fact, the
reasons why fair value measurement would involve undue cost or effort and the carrying
amount of investments in associates accounted for under the cost model.

Example—fair value model disclosures

Ex 24 The facts are the same as in Example 22. However, in this example, SME A uses
the fair value model to account for its investments in associates. The fair value of
the investment in SME B at 31 December 20X1 was determined to be CU85,000
(20X0: CU120,000) by multiplying the entity’s earnings by the adjusted price
earnings ratio of a similar entity for which a published price quotation exists.
The market price earnings ratio was reduced by two basis points because SME B’s
equity is not traded in a public market.

SME A could present its investment in SME B in its financial statements as follows:

SME A—Statement of financial position at 31 December 20X1

Note 20X1 20X0

ASSETS CU CU
Non-current assets
Investment in associate 15 85,000 120,000
…
SME A—Statement of comprehensive income for the year ended 31 December 20X1

Note 20X1 20X0

CU CU
…
Other income—dividend from associate – 10,000
Change in the fair value of investment in associate (35,000) 20,000
…

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SME A—Notes to the financial statements for the year ended 31 December 20X1

Note 2 Accounting policies

Investments in associates
Investments in associates are recognised initially at transaction price excluding
transaction costs and are subsequently accounted for at fair value with changes in fair
value recognised in profit or loss for the period.
Dividend income from associates is recognised when the shareholders’ right to receive
payment has been established and is shown as other income.

Note 15 Investment in associate

20X1 20X0
CU CU
Fair value 85,000 120,000

SME A owns 25% of the equity of its associate SME B.

The fair value of the investment in SME B at 31 December 20X1 was determined by
multiplying the Entity’s earnings by the adjusted price earnings ratio of a similar entity
for which a published price quotation exists. The market price earnings ratio was
reduced by two basis points because SME B’s equity is not traded in a public market.9)

(9) In addition, SME A would also disclose this information as required by paragraphs 11.41–11.44.

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SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS

Applying the requirements of the IFRS for SMEs Standard to transactions and events often
requires the exercise of judgement, including making estimates. Information about
significant judgements made by an entity’s management and key sources of estimation
uncertainty are useful when assessing an entity’s financial position, performance and cash
flows. Consequently, in accordance with paragraph 8.6, an entity must disclose the
judgements—apart from those involving estimates—its management has made in applying the
entity’s accounting policies and that have the most significant effect on the amounts
recognised in the financial statements.
Furthermore, applying paragraph 8.7, an entity must disclose information about the key
assumptions concerning the future, and other key sources of estimation uncertainty at the
reporting date that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
Other sections of the IFRS for SMEs Standard require disclosure of information about particular
judgements and estimation uncertainties.
Some of the areas where significant estimates and other judgements applying Section 14 are
set out as follows.

Classification

In evaluating whether an entity has significant influence over another entity it must first be
ascertained whether the investor has the power to participate in the financial and operating
policy decisions of the investee. If the investor has that power, it must establish that its power
constitutes neither control nor joint control over those policies, before concluding that the
investee is an associate of the investor.
In this context, power refers to the ability to do or affect something. Consequently, an entity
has significant influence when it can exercise that power, regardless of whether significant
influence is actively demonstrated or passive in nature. In cases where significant influence is
not actively demonstrated, judgement may be required to assess whether it exists.
The presumptions provided in paragraph 14.3(a) and (b) are useful to clarify whether an entity
should be considered to have significant influence over another. If after considering all the
facts and circumstances, it is unclear whether significant influence exists, the entity will be
unable to demonstrate the presumptions are incorrect. However, the guidance in paragraph
14.3 does not eliminate the need for judgement to be applied.
The existence of significant influence by an investor is usually evidenced in one or more of the
following ways (note, this is not an exhaustive list):

(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about
dividends or other distributions;
(c) material transactions between the investor and its investee;
(d) the interchange of managerial personnel; or
(e) the provision of essential technical information.

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Judgement must be exercised in determining whether significant influence exists.

The substance of the relationship in each case will need to be considered. If it can be clearly
demonstrated that an investor holding 20% or more of the voting power of the investee does
not exercise significant influence, the investment will not be accounted for as an associate—
this is likely to be the case where the court has appointed an independent administrator to
wind down the investee’s business. Conversely, if it can be clearly demonstrated that an
investor holding less than 20% of the voting power of the investee exercises significant
influence, the investment will be accounted for as an associate.

Where another investor has a controlling interest in an entity in which the reporting investor
has an equity interest of say 20%, the substance of the 20% investor’s influence should be
examined carefully to determine whether it is significant influence or more in the nature of a
passive investment.

1 Measurement

After initial recognition an entity must measure all investments in associates using the cost
model, the equity method or the fair value model.

Cost model and equity method

When the cost model or the equity method is used, significant judgements relating to
accounting for any impairment of investments in associates include:
 assessing whether = an investment in an associate shows any indication that it may be
impaired (see paragraph 27.7); and
 if the investment in an associate shows any indication that it may be impaired—estimating
the recoverable amount of that investment (see paragraph 27.11).

Equity method

When the equity method is used, significant judgements might be necessary to estimate the
fair value of the associate’s identifiable assets and identifiable liabilities at the date of
attaining significant influence. Many judgements are necessary to apply the equity method.
For example:
 when estimating the fair value of the associate’s identifiable assets and identifiable
liabilities (see paragraph 14.8(c));
 if on acquisition there is implicit goodwill, judgement must be made about the useful life
of the goodwill (see paragraph 14.8(c));
 if the entity and its associate have different reporting dates (different accounting period
ends) and it is impracticable for the associate to prepare financial statements with the
same reporting period as the investor—judgements must be made about the effects of any
significant transactions or events occurring between the accounting period ends
(see paragraph 14.8(f)); and
 if the entity and its associate use different accounting policies—judgements may need to be
made about the effects of applying the entity’s accounting policies to the associate (see
paragraph 14.8(g)).

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Fair value model

When the fair value model is adopted for measurement after initial recognition, significant
judgements might be necessary to:

 assess whether the fair value of an investment in a particular associate can be measured
with sufficient reliability without undue cost or effort for the fair value model to be
applied to particular associates (see the notes below paragraph 14.10 and also paragraphs
11.27–11.32); and
 decide which valuation model to use and determining the inputs for that model in the
case when the associate’s shares are not quoted in an active market (for application
guidance on fair value measurement see paragraphs 11.27–11.32).

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COMPARISON WITH FULL IFRS STANDARDS

When accounting for and reporting investments in associates for periods beginning on
1 January 2017, the main differences between the requirements of full IFRS Standards
(see IAS 28 Investments in Associates) and the IFRS for SMEs Standard (see Section 14 Investments in
Associates) are that:
 the IFRS for SMEs Standard is drafted in plain language and includes significantly less
guidance on how to apply the principles.
 the IFRS for SMEs Standard permits an entity to account for investments in associates in its
main/primary financial statements using three different models—the equity method, the
cost model and the fair value model. The chosen model is applied to all investments in
associates. Full IFRS Standards require investments in associates to be accounted for
using the equity method in an investor’s primary financial statements.
 There are a few differences between the equity method in Section 14 and that in IAS 28,
including:
o the IFRS for SMEs Standard includes an impracticability exemption from the
requirement that the investor makes adjustments to the associate’s financial
statements to reflect the investor’s accounting policies. Full IFRS Standards do not
have such an exemption.
o if it is impracticable for the financial statements of the associate to be prepared as of
the same date as the financial statements of the investor, both full IFRS Standards
and the IFRS for SMEs Standard require the most recent available financial statements
of the associate to be used. Full IFRS Standards further requires the difference
between the end of the reporting period of the associate and that of the investor to be
no more than three months. The IFRS for SMEs Standard doesn’t include a three-month
limit on the difference between the reporting dates.
o the IFRS for SMEs Standard requires that implicit goodwill be systematically amortised
over its expected useful life. Full IFRS Standards do not allow the amortisation of
goodwill.
o if an investor loses significant influence for reasons other than a partial disposal of its
investment, the IFRS for SMEs Standard requires the investor to regard the carrying
amount of the investment at that date as a new cost basis for accounting using
Sections 11 or 12. Full IFRS Standards would require the retained investment to be
remeasured to fair value.
o when an entity discontinues use of the equity method, full IFRS Standards require the
entity to 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.
The IFRS for SMEs Standard does not have a similar requirement.

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TEST YOUR KNOWLEDGE

Test your knowledge of the requirements for accounting and reporting investments in
associates applying the IFRS for SMEs Standard by answering the questions provided.
You should assume that all amounts mentioned are material.
Once you have completed the test, check your answers against those set out beneath it.

Mark the box next to the most correct statement.

Question 1

An associate is:
(a) an entity over which the investor has significant influence.
(b) an entity over which the investor has joint control.
(c) an entity over which the investor has significant influence or joint control and that is
not a subsidiary.
(d) an entity over which the investor has significant influence and that is neither a
subsidiary nor an interest in a joint venture.

Question 2

Significant influence is:

(a) the power to participate in the financial and operating policy decisions of the investee
but is not control or joint control over those policies.
(b) active participation in the financial and operating policy decisions of the investee but
is not control or joint control over those policies.
(c) the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
(d) the contractually agreed sharing of control over an economic activity.

Question 3

An entity must account for its investments in associates after initial recognition using:
(a) either the cost model or the fair value model (using the same accounting policy for all
investments in associates).
(b) either the cost model or the fair value model (model can be selected on an
investment-by-investment basis).
(c) either the cost model, the equity method or the fair value model (using the same
accounting policy for all investments in associates).
(d) either the cost model, the equity method or the fair value model (model can be
selected on an investment-by-investment basis).

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Question 4

Investments in associates must be tested for impairment in accordance with

Section 27 Impairment of Assets, if the entity uses:
(a) the cost model, equity method or fair value model.
(b) the cost model or the equity method.
(c) the cost model or the fair value model.
(d) the equity method or the fair value model.

Question 5

Entity A owns 30% of the ordinary shares that carry voting rights at a general meeting of the
shareholders of Entity C.
Entity A, in the absence of any evidence to the contrary:
(a) has no significant influence over Entity C and is accounted for as an equity
instrument within the scope of Section 11 Basic Financial Instruments.
(b) has significant influence over Entity C, provided it does not have joint control over
Entity C.
(c) has significant influence over Entity C, provided it does not have control over Entity C.
(d) has significant influence over Entity C, provided it does not have control or joint
control over Entity C.

Question 6

Which, if any, of the scenarios below would not lead to the presumption that an entity exerts
significant influence over another entity?
(a) holding directly 20% or more of the voting power of the investee
(b) holding indirectly, through a subsidiary, 20% or more of the voting power of the
investee
(c) holding indirectly, through a joint venture, 20% or more of the voting power of the
investee
(d) holding directly 10% of voting power of the investee and holding indirectly, through a
subsidiary, 10% of the voting power of the investee

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Question 7

On 31 December 20X1, Entity A acquired 30% of the ordinary shares that carry voting rights of
Entity B for CU100,000. Entity A incurred transaction costs of CU1,000 in acquiring these shares.
Entity A has significant influence over Entity B. Entity A uses the cost model to account for its
investments in associates.
In January 20X2, Entity B declared and paid a dividend of CU20,000 out of profits earned in 20X1.
No further dividends were paid in 20X2, 20X3 or 20X4.
A published price quotation does not exist for Entity B. At 31 December 20X1, 20X2 and 20X3,
Entity B identified impairment indicators and so in accordance with Section 27 Impairment of
Assets, management assessed the recoverable amount of the investment in Entity B. The fair
value of Entity A’s investment in Entity B was estimated as CU102,000, CU110,000 and CU90,000
respectively. Costs to sell are estimated at CU4,000 throughout. Assume value in use was
assessed to be lower or equal to fair value less costs to sell on each of these dates.
Entity A measures its investment in Entity B on 31 December 20X1, 20X2 and 20X3 respectively
at:
(a) CU100,000, CU100,000, CU100,000
(b) CU95,000, CU95,000, CU86,000
(c) CU98,000, CU106,000, CU86,000
(d) CU98,000, CU101,000, CU86,000
(e) CU102,000, CU110,000, CU90,000
(f) CU101,000, CU101,000, CU101,000

Question 8

The facts are the same as in Question 7. However, in this example, a published price quotation
exists for Entity B.
Entity A measures its investment in Entity B on 31 December 20X1, 20X2 and 20X3 respectively
at:
(a) CU100,000, CU100,000, CU100,000
(b) CU95,000, CU95,000, CU86,000
(c) CU98,000, CU106,000, CU86,000
(d) CU98,000, CU101,000, CU86,000
(e) CU102,000, CU110,000, CU90,000
(f) CU101,000, CU101,000, CU101,000

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Question 9

Which of the following indicators could provide evidence to support the existence of significant
influence by an investor?
(a) representation on the board of directors or equivalent governing body of the investee
(b) participation in policy-making processes, including participation in decisions about
dividends or other distributions
(c) material transactions between the investor and the investee
(d) the interchange of managerial personnel
(e) the provision of essential technical information
(f) (a) and (b) above
(g) all of the above

Question 10

Which of the following statements is false?

(a) significant influence can be gained or lost without a change in absolute or relative
ownership levels.
(b) in determining whether an entity has significant influence over another entity, the
existence and effect of potential voting rights it holds that are exercisable or
convertible are considered.
(c) an entity considers the existence and effect of potential voting rights held by other
parties that are currently exercisable or convertible when determining whether it has
significant influence over another entity.
(d) in determining whether an entity has significant influence over another entity, only
present ownership interests are considered. The possible exercise or conversion of
potential voting rights is not considered.

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Answers

Q1 (d) see paragraph 14.2

Q2 (a) see paragraph 14.3
Q3 (c) see paragraph 14.4
Q4 (b) see paragraphs 14.5 and 14.8(d)
Q5 (d) see paragraph 14.3
Q6 (c) see paragraph 14.3
Q7 (d)
20X1: CU98,000 because recoverable amount—fair value less costs to sell (CU98,000) is
less than cost (CU101,000).
20X2: CU101,000 because cost is less than recoverable amount.
20X3: CU86,000 because recoverable amount (CU86,000) is less than cost (CU101,000).

Impairment
Carrying recognised Carrying
amount at the Recoverable amount at the end of the year during the year amount at
beginning of the (which in this case is fair value less —(impairment the
Year year transaction costs) reversal) year-end

20X1 CU101,000 CU98,000 (CU102,000 minus CU4,000) CU3,000 CU98,000

20X2 CU98,000 CU106,000 (CU110,000 minus CU4,000) (CU3,000) CU101,000
20X3 CU101,000 CU86,000 (CU90,000 minus CU4,000) CU15,000 CU86,000

Q8 (e) see paragraph 14.7

Carrying amount Carrying amount

(fair value) at the (fair value) at the
Year beginning of the year Fair value adjustment – positive (negative) year-end

20X1 CU101,000 CU1,000 = CU102,000 minus CU101,000 CU102,000

20X2 CU102,000 CU8,000 = CU110,000 minus CU102,000 CU110,000
20X3 CU110,000 (CU20,000) = CU90,000 minus CU110,000 CU90,000

Q9 (g) see paragraph 14.3

Q10 (d) see paragraphs 14.3 and 14.8(b)

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Module 14—Investments in Associates

APPLY YOUR KNOWLEDGE

Apply your knowledge of the requirements for accounting and reporting investments in
associates using the IFRS for SMEs Standard by completing the case studies provided.
Once you have completed the case study, check your answers against those set out beneath it.

Case study 1

On 1 January 20X1, SME A acquired 25% of the equity of each of entities B, C and D for
CU10,000, CU15,000 and CU28,000 respectively. SME A has significant influence over
entities B, C and D. Transaction costs of 1% of the purchase price of the shares were incurred
by SME A.
On 2 January 20X1, Entity B declared and paid dividends of CU1,000 for the year ended 20X0.
On 31 December 20X1, Entity C declared a dividend of CU8,000 for the year ended 20X1.
The dividend declared by Entity C was paid in 20X2.
For the year ended 31 December 20X1, entities B and C recognised profit of CU5,000 and
CU18,000 respectively. However, Entity D recognised a loss of CU20,000 for that year.
Published price quotations do not exist for the shares of entities B, C and D. However, assume
that SME A can determine the fair values of its investments in entities B, C and D at
31 December 20X1 as CU13,000, CU29,000 and CU15,000, respectively, using appropriate
valuation techniques. Costs to sell are estimated at 5% of the fair value of the investments.
Also assume that the recoverable amount of Entity D at 31 December 20X1 is equal to its fair
value less costs to sell (as this is determined to be higher than value in use).
SME A has no subsidiaries and therefore does not produce consolidated financial statements.

Part A:
Assume SME A measures its investments in associates using the cost model.
Prepare accounting entries to record the investments in associates in the accounting records
of SME A for the year ended 31 December 20X1.

Part B:
Assume instead that SME A measures all its investments in associates using the equity method.
Assume that there is neither implicit goodwill nor fair value adjustments.
Prepare accounting entries to record the investments in associates in the accounting records
of SME A for the year ended 31 December 20X1.

Part C:
Assume instead that SME A measures all its investments in associates after initial recognition
using the fair value model.
Prepare accounting entries to record the investments in associates in the accounting records
of SME A for the year ended 31 December 20X1.

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Answer to case study 1–Part A

1 January 20X1

Dr Investment in associate (Entity B) CU10,000

Dr Investment in associate (Entity C) CU15,000
Dr Investment in associate (Entity D) CU28,000
Cr Cash CU53,000
To recognise the acquisition of investments in associates.

Dr Investment in associate (Entity B) CU100

Dr Investment in associate (Entity C) CU150
Dr Investment in associate (Entity D) CU280
Cr Cash CU530
To recognise the transaction costs incurred to acquire the investments in associates.

2 January 20X1

Dr Cash CU250
Cr Profit or loss (other income, dividend received) CU250
To recognise dividends received from Entity B (25% × CU1,000 dividend paid by Entity B).

31 December 20X1

Dr Receivable (Entity C) CU2,000

Cr Profit or loss (other income, dividend received) CU2,000
To recognise the dividend receivable from Entity C (25% × CU8,000 dividend paid by Entity C).

Dr Profit or loss (impairment loss) CU14,030(a)

Cr Investment in associate (Entity D) CU14,030
To recognise the impairment of the investment in Entity D.
(Note: an impairment test is only performed if impairment indicators are present. In this case
Entity D’s significant loss would likely be an impairment indicator)

The calculations and explanatory notes below do not form part of the answer to this case study:
(a) CU28,280 cost minus CU14,250(b) = CU14,030 impairment loss.
(b) CU15,000 fair value at 31 December 20X1 minus estimated costs to sell of CU750 (5% × CU15,000) =
CU14,250 fair value minus costs to sell of SME A’s investment in Entity D at 31 December 20X1.

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Answer to case study 1–Part B

1 January 20X1

Dr Investment in associate (Entity B) CU10,000

Dr Investment in associate (Entity C) CU15,000
Dr Investment in associate (Entity D) CU28,000
Cr Cash CU53,000
To recognise the acquisition of investments in associates.

Dr Investment in associate (Entity B) CU100

Dr Investment in associate (Entity C) CU150
Dr Investment in associate (Entity D) CU280
Cr Cash CU530
To recognise the transaction costs incurred to acquire the investments in associates.

2 January 20X1

Dr Cash CU250
Cr Investment in associate (Entity B) CU250
To recognise dividends received from Entity B (25% × CU1,000 dividend paid by Entity B).

31 December 20X1

Dr Receivable (Entity C) CU2,000

Cr Investment in associate (Entity C) CU2,000
To recognise the dividend receivable from Entity C (25% × CU8,000 dividend paid by Entity C).

Dr Investment in associate (Entity B) CU1,250

Cr Profit or loss (share of associate’s earnings) CU1,250
To recognise the share of Entity B’s (an associate) profit for the year (25% × CU5,000 profit by Entity B).

Dr Investment in associate (Entity C) CU4,500

Cr Profit or loss (share of associate’s earnings) CU4,500
To recognise the share of Entity C’s (an associate) profit for the year (25% × CU18,000 profit by Entity C).

Dr Profit or loss (share of associate’s earnings) CU5,000

Cr Investment in associate (Entity D) CU5,000
To recognise the share of Entity D’s (an associate) loss for the year (25% × CU20,000 loss by Entity D).

Dr Profit or loss (impairment loss) CU9,030(a)

Cr Investment in associate (Entity D) CU9,030
To recognise the impairment of the investment in Entity D.
(Note: an impairment test is only performed if impairment indicators are present. In this case
Entity D’s significant loss would likely be an impairment indicator)

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The calculations and explanatory notes below do not form part of the answer to this case study:
(a) CU28,280 cost minus CU5,000 SME A’s share of Entity D’s loss for the year minus CU14,250(b) = CU9,030
impairment loss.
(b) CU15,000 fair value at 31 December 20X1 minus estimated costs to sell of CU750 (5% × CU15,000) =
CU14,250 fair value minus costs to sell of SME A’s investment in Entity D at 31 December 20X1.

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Answer to case study 1–Part C

1 January 20X1

Dr Investment in associate (Entity B) CU10,000

Dr Investment in associate (Entity C) CU15,000
Dr Investment in associate (Entity D) CU28,000
Cr Cash CU53,000
To recognise the acquisition of investments in associates.

Dr Profit or loss CU530(a)

Cr Cash CU530
To recognise the transaction costs incurred to acquire the investments in associates.

2 January 20X1

Dr Cash CU250
Cr Profit or loss CU250
To recognise dividends received from Entity B (25% × CU1,000 dividend paid by Entity B).

31 December 20X1

Dr Receivable (Entity C) CU2,000

Cr Profit or loss CU2,000
To recognise the dividend receivable from Entity C (25% × CU8,000 dividend paid by Entity C).

Dr Profit or loss CU13,000(b)

Cr Investment in associate (Entity D) CU13,000
To recognise the decrease in fair value of investment in Entity D, an associate, in the year.

Dr Investment in associate (Entity B) CU3,000(c)

Dr Investment in associate (Entity C) CU14,000(d)
Cr Profit or loss CU17,000
To recognise increase in fair value of investments in associates (entities B and C), in the year.

The calculations and explanatory notes below do not form part of the answer to this case study:
(a) 1% (CU10,000 Entity B + CU15,000 Entity C + CU28,000 Entity D) = CU530 transaction costs.
(b) CU28,000 cost minus CU15,000 fair value at 31 December 20X1 = CU13,000 decrease in the fair value of
the investment in Entity D for the year ended 31 December 20X1.
(c) CU13,000 fair value at 31 December 20X1 minus CU10,000 cost = CU3,000 increase in the fair value of the
investment in Entity B for the year ended 31 December 20X1.
(d) CU29,000 fair value at 31 December 20X1 minus CU15,000 cost = CU14,000 increase in the fair value of the
investment in Entity C for the year ended 31 December 20X1.

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Case study 2

On 1 January 20X1, SME E acquired 10% of the equity of Entity G for CU10,000.

On 2 January 20X1, Entity F (a wholly-owned subsidiary of SME E) acquired 25% of the equity of
Entity G for CU25,000.

SME E controls Entity F and from 2 January 20X1, SME E has significant influence over
Entity G.

For the year ended 31 December 20X1, Entity G recognised profit of CU12,000.

On 31 December 20X1, Entity G declared (and paid) a dividend of CU4,000.

At 31 December 20X1 the fair value of SME E’s and Entity F’s direct investments in Entity G
are, respectively, CU11,000 and CU27,500. The fair value of SME E Group’s investment in
Entity G is determined to be the sum of the fair value of the two direct holdings (CU38,500).
Costs to sell are estimated at 5% of the fair value of the investment.

SME E Group measures investments in all associates in the consolidated financial statements
subsequent to initial recognition using the cost model.

Part A:
Assume that a published price quotation does not exist for Entity G.

Prepare accounting entries to record the investment in associates in the consolidated

accounting records of the SME E Group for the year ended 31 December 20X1.

Part B:
Assume that a published price quotation exists for Entity G.

Prepare accounting entries to record the investment in associates in the consolidated

accounting records of SME E Group for the year ended 31 December 20X1.

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Answer to case study 2—Part A

1 January 20X1

Dr Financial asset (investment in Entity G shares) CU10,000

Cr Cash CU10,000
To recognise the acquisition of Entity G shares.

2 January 20X1

Dr Investment in associate (Entity G) CU25,000

Cr Cash CU25,000
To recognise the further acquisition of an investment in Entity G (now an associate) through Entity F.

Dr Investment in associate (Entity G) CU10,000

Cr Financial asset (investment in Entity G shares) CU10,000
To recognise the reclassification of Entity G shares acquired on 1 January 20X1 as an investment in associate.

31 December 20X1

Dr Cash CU1,400(a)
Cr Profit or loss (other income—dividend from associate) CU1,400
To recognise the dividend from an associate (Entity G).

The calculations and explanatory notes below do not form part of the answer to this case study:
(a) CU400(b) + CU1,000(c) = CU1,400.
(b) 10% × CU4,000 dividend declared = CU400 dividend received by SME E directly.
(c) 25% × CU4,000 dividend declared = CU1,000 dividend received by SME E Group via Entity F.
Note: At 31 December 20X1, SME E Group must report its investment in Entity G (an associate)
at its cost of CU35,000 (CU25,000 + CU10,000).

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Answer to case study 2—Part B

1 January 20X1

Dr Financial asset (investment in Entity G shares) CU10,000

Cr Cash CU10,000
To recognise the acquisition of Entity G shares.

2 January 20X1

Dr Investment in associate (Entity G) CU25,000

Cr Cash CU25,000
To recognise the further acquisition of an investment in Entity G (now an associate) through Entity F.

Dr Investment in associate (Entity G) CU10,000(a)

Cr Financial asset (investment in Entity G shares) CU10,000
To recognise the reclassification of Entity G shares acquired on 1 January 20X1 as an investment in associate.

31 December 20X1

Dr Cash CU1,400(b)
Cr Profit or loss CU1,400
To recognise the dividend from Entity G, an associate.

Dr Investment in associate (Entity G) CU3,500(c)

Cr Profit or loss CU3,500
To recognise the increase in the fair value of the SME E Group’s investments in Entity G, an associate.

The calculations and explanatory notes below do not form part of the answer to this case study:
(a) Assuming there is no change in fair value from 1 January to 2 January 20X1.
(b) CU400(d) + CU1,000(e) = CU1,400.
(c) CU38,500 fair value at 31 December 20X1 minus CU35,000(f) carrying amount before remeasuring to fair
value = CU3,500.
(d) 10% × CU4,000 dividend declared = CU400 dividend received by SME E directly.
(e) 25% × CU4,000 dividend declared = CU1,000 dividend received by SME E group via Entity F.
(f) CU10,000 cost of SME E’s direct investment in Entity G + CU25,000 cost of SME E’s indirect investment in
Entity G via Entity F = CU35,000 carrying amount of the SME E Group’s investment in Entity G at the
beginning of 20X1.

At 31 December 20X1 SME E Group must report its investment in Entity G (an associate) at its
fair value of CU38,500.

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