Section 13: Investments in Associates and Interests in Joint Arrangements (AASB1061_04-26)

This section applies to investors in associates and parties to a joint arrangement in: 

(a) the consolidated financial statements of a parent entity; and 

(b) the financial statements of an entity that is an investor in one or more associates, or a party to one or more joint arrangements, but in either case is not a parent.

Notwithstanding paragraph 13.1(b), this section does not apply to investments in associates and joint arrangements that are collectively classified as a single class of assets in accordance with the alternative treatment permitted by paragraph 8.3 (ie investments in notable relationship entities).

An investor that is not a parent but has one or more investments in associates or joint ventures may, in addition, present separate financial statements. Paragraphs 8.29–8.35 specify the accounting for investments in associates and joint ventures in these separate financial statements, where prepared. The investor shall account for other interests in a joint arrangement, for example as a joint operator, in accordance with the requirements of this section in those separate financial statements. 

An associate is an entity over which the investor has significant influence. An associate may be an unincorporated entity, such as a partnership.

Significant influence is the power to participate in the financial and operating policy decisions of investee but is not control or joint control of those policies.

An entity applies judgement in assessing whether it has significant influence. If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of an investee, it is presumed that the entity has significant influence, unless it can clearly be demonstrated that this is not the case. Conversely, if the entity holds, directly or indirectly, less than 20 per cent of the voting power of the investee, it is presumed that the entity does not have significant influence, unless such influence can clearly be demonstrated. The existence and effect of potential voting rights that are currently exercisable or convertible (including potential voting rights held by other entities) are considered when assessing whether an entity has significant influence.

The existence of significant influence by an entity is usually evidenced in one or more of the following ways: 

(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 distributions of any surpluses; 

(c) material transactions between the two entities; 

(d) interchange of managerial personnel; and 

(e) provision of essential technical information.

Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

An entity that is a party to an arrangement shall assess whether the contractual arrangement gives all the parties, or a group of the parties, control of the arrangement collectively. All the parties, or a group of the parties, control the arrangement collectively when they must act together to direct the activities that significantly affect the returns of the arrangement (that is, the relevant activities). A party with joint control of an arrangement can prevent any of the other parties, or a group of the parties, from controlling the arrangement.

A joint arrangement is an arrangement of which two or more parties have joint control. Joint arrangements can take the form of a joint operation or a joint venture.

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (‘joint operators’) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint operation involves the use of the assets and other resources of the joint operators but does not require the establishment of a corporation, partnership or other entity, or a financial structure separate from the parties themselves. Each joint operator uses its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The joint operation’s activities may be carried out by the joint operator’s employees alongside that joint operator’s similar activities. The joint arrangement agreement usually provides a means by which the revenue from the sale of the joint product and any expenses incurred in common are shared among the joint operators.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (‘joint venturers’) have rights to the net assets of the arrangement.

The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights and obligations of the parties to the arrangement. An entity assesses its rights and obligations by considering the structure and legal form of the arrangement, the terms agreed by the parties in the contractual arrangement and, when relevant, other facts and circumstances.

A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate vehicle can be either a joint venture or a joint operation as, for example, the terms agreed by the parties in their contractual arrangement and other facts and circumstances can override the rights and obligations conferred by the legal form of the separate vehicle. A joint arrangement that is structured through a separate vehicle whose legal form does not confer separation between the parties and the separate vehicle is a joint operation. A joint arrangement that is not structured through a separate vehicle is a joint operation.

An entity shall account for its investments in associates and joint ventures in its consolidated financial statements using the equity method in paragraph 13.22.

Where consolidated financial statements are not prepared, an entity shall account for its investments in associates and joint ventures using: 

(a) the cost model; 

(b) the fair value model; or 

(c) the equity method. 

A different policy may be selected for each class of assets.

Under the cost model, an investment in an associate or a joint venture is measured at cost less any accumulated impairment losses determined consistently with the requirements in Section 10 for identifying and measuring impairment of financial assets measured at cost.

Dividends and other distributions received are recorded as income in profit or loss when the entity has a legal right to the payment.

Under the fair value model, an investment in an associate or joint venture is initially measured at its fair value, which excludes transaction costs such as legal fees or other fees incurred as a direct result of buying the asset. Section 11 provides guidance on determining fair value.

After initial recording, an investor shall continue to measure investments in associates or joint ventures at fair value. Changes in fair value shall be recorded in profit or loss, except that an investor may make an irrevocable election, upon initial recording of its first investment in each class of asset, to record these changes in other comprehensive income. Any such election applies to the entire class of investments. Those changes shall not subsequently be transferred to profit or loss.

An investor using the fair value model shall discontinue measuring an investment in an associate or joint venture that is represented by unlisted equity instruments at fair value when the variability in the range of reasonable fair value measures is significant, and the probabilities of the various measures cannot be reasonably assessed. Such investments shall be measured in accordance with paragraph 13.17. In these instances, the carrying amount of the investment on the date its fair value was last reliably determinable shall be regarded as its cost. An entity shall resume measuring the investment in an unlisted equity instrument at fair value when these conditions are no longer relevant. A change in the measurement of an investment in the circumstances described in this paragraph is not a change in accounting policy.

Under the equity method of accounting, an investment in an associate or a joint venture is initially measured at the investor’s share of the carrying amounts of the net assets of the investee. The difference between this amount and the consideration paid (excluding any transaction costs) is recognised directly in equity, and is subsequently adjusted to reflect the investor’s share of the profit or loss and other comprehensive income of the investee, by applying the following principles: 

(a) distributions and other adjustments to carrying amount. Distributions received from the investee associate or joint venture reduce the carrying amount of the investment. Adjustments to the carrying amount might also be required as a consequence of changes in the investee’s equity arising from items of other comprehensive income. 

(b) potential voting rights. Although potential voting rights are considered in deciding whether significant influence or joint control exists, an investor shall measure its share of profit or loss and other comprehensive income of the investee and its share of changes in the investee’s equity on the basis of present ownership interests. Those measurements shall not reflect the possible exercise or conversion of potential voting rights. 

(c) impairment. If there is objective evidence that an investment in an investee is impaired, an investor shall record impairment determined consistently with the requirements in Section 10 for identifying and measuring impairment of financial assets measured at cost. 

(d) investor’s transactions with investees. The investor shall eliminate unrealised profits and losses resulting from upstream (investee to investor) and downstream (investor to investee) transactions to the extent of the investor’s ownership interest in the investee. Unrealised losses on such transactions might provide evidence of an impairment of the asset transferred. 

(e) date of investee’s financial statements. In applying the equity method, the investor shall use the financial statements of the investee as of the same date as the financial statements of the investor unless doing so is impracticable. If it is impracticable, the investor shall use the most recent available financial statements of the investee, with adjustments made for the effects of any significant transactions or other events occurring between the reporting period ends. In any case, the difference between the date of the investor’s and investee’s financial statements shall not exceed three months, and both the length of the reporting periods and any difference between the dates of the financial statements shall be the same from period to period. 

(f) investee’s accounting policies. If the investee uses different accounting policies from those of the investor, the investor may adjust the investee’s financial statements to reflect the investor’s accounting policies for the purpose of applying the equity method. 

(g) losses in excess of investment. If an investor’s share of losses of an investee equals or exceeds the carrying amount of its investment in the investee, the investor shall discontinue recording its share of further losses. After the investor’s interest is reduced to zero, the investor shall record additional losses only to the extent that the investor either has incurred legal or constructive obligations and records a provision (see Section 19) or has made payments on behalf of the investee. If the investee subsequently reports profits, the investor shall resume recording its share of those profits only after its share of the profits equals the share of losses not recorded.

In respect of its interests in joint operations, a joint operator shall record in its financial statements: 

(a) its assets, including its share of the jointly controlled assets, classified according to the nature of the assets; 

(b) its liabilities, including its share of any liabilities owed jointly with the other parties in relation to the joint operation; 

(c) any revenue from the sale or use of its share of the output of the joint operation, together with its share of any expenses incurred by the joint operation; 

(d) any revenue from its share of the revenue from the sale of the output by the joint operation; and 

(e) any expenses it has incurred in respect of its interest in the joint operation.

When an entity that is a joint venturer or joint operator contributes or sells assets to the joint arrangement, the recording of any portion of a gain or loss from the transaction shall reflect the substance of the transaction. While the assets are retained by the joint arrangement, and provided the entity has lost control of the transferred assets, the entity shall record only the portion of the gain or loss attributable to the other investors’ interests. The entity shall record the full amount of any loss when the contribution or sale provides evidence of an impairment loss.

When an entity that is a joint venturer or joint operator purchases assets from a joint arrangement, the entity shall not record its share of the profits of the joint arrangement from the transaction until it resells the assets to an independent party. The entity shall record its share of the losses resulting from these transactions in the same way as profits, except that losses shall be recorded immediately if they represent an impairment loss.

An entity that participates in, but does not have joint control of, a joint venture shall account for its interest in the arrangement in accordance with Section 10 unless it has significant influence over the joint venture. Where an entity has significant influence over the joint venture, the entity shall account for it in accordance with this section (as an investment in an associate) or Section 8 (together with other investments in notable relationship entities), whichever is applicable.

An entity that participates in, but does not have joint control of, a joint operation shall account for its interest in the arrangement in accordance with paragraph 13.23 if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation. If an entity that participates in, but does not have joint control of, a joint operation does not have rights to the assets, and obligations for the liabilities, relating to that joint operation, it shall account for its interest in the joint operation in accordance with the sections applicable to that interest. 

In addition to the disclosures specified by Section 27, an entity shall disclose the following: 

(a) accounting policy information for investments in associates and joint ventures; 

(b) the total carrying amount of investments in associates; 

(c) the total carrying amount of investments in joint ventures; and 

(d) if the entity is an investor in one or more joint ventures, the aggregate amount of its commitments relating to those joint ventures, including its share of the commitments incurred jointly with other parties.

An entity shall disclose the following information about each investment in an associate and interest in a joint venture accounted for using the cost model: 

(a) its name; 

(b) a description of its relationship with the reporting entity; 

(c) a description of its primary purpose and an indication of the nature of its operations; 

(d) whether the entity prepares audited or reviewed financial statements; and 

(e) for investments in associates only – the total amount of dividends and other distributions recorded as income for the period.

For investments in associates and joint ventures accounted for using the fair value model, an investor shall disclose the carrying amount of each of the following categories as at the reporting date, in total for each class of assets, either in the statement of financial position or in the notes: 

(a) investments measured at fair value through profit or loss; 

(b) investments measured at fair value through other comprehensive income; and 

(c) investments measured at a fair value that is based on a quoted price in an active market for an identical asset.

An entity shall disclose separately for investments in associates and investments in joint ventures accounted for using the equity method: 

(a) its share of the profit or loss of investees; 

(b) its share of any discontinued operations of investees; and 

(c) the total fair value of its investments for which a quoted market price is available.