Associates and Joint Ventures
1. What is an associate entity?
Paragraph 3 of AASB 128/IAS 28 defines an associate as:
• an entity over which the investor has significant influence.
The key criterion is the existence of significant influence, also defined in para. 3 defined as:
• The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.
Note that an investor does not have to necessarily hold shares in an associate – yet the application of the equity method depends on such a shareholding. However, refer to the presumptions in para 6 of AASB 128/IAS 28.
2. Why are associates distinguished from other investments held by the investor?
The suite of accounting standards provides different levels of disclosure dependent on the relationship between the investor and the investee:
• Subsidiaries: a control relationship (AASB 10).
• Joint ventures: a joint control relationship (AASB 11).
• Associates: a significant influence relationship (AASB 128).
• Other investments: no relationship (AASB 9).
The investor-associate relationship relates to the ability of the investor to influence the direction of the investee, in comparison to a simple holding of shares as an investment. Where such a relationship exists, it is argued that the investor is both accountable for and benefit from the financial performance and financial position of the investee [why have such an investment if there are no benefits to doing so?]. These effects result in the need for additional disclosure about the nature and the financial effects of that relationship.
3. Discuss the similarities and differences between the criteria used to identify subsidiaries and those used to identify associates.
A subsidiary is identified where another entity controls that entity. Control is defined in para 2 of AASB 128/IAS 28.
An associate is identified where another entity has significant influence over that entity.
Control Significant influence Power over the investee Power to participate Exposure or rights to variable returns To participate in the financial and from involvement in investee operating policy decisions Ability to affect returns through power ----------- No ownership interest is necessary No ownership interest is necessary
4. What is meant by ‘significant influence’?
Para 3 of AASB 128/IAS 28 states:
• Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
Key features:
• the power to participate
• financial and operating policy decision.
5. What factors could be used to indicate the existence of significant influence?
Note paras 5 and 6 of AASB 128/IAS 28:
Para 5. If an investor holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.
Para 6. The existence of significant influence by an investor 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 dividends or other distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
6. What is a joint venture?
A joint arrangement is an arrangement of which two or more parties have joint control.
Where a joint arrangement exists, the arrangement must be classified as either a joint operation or a joint venture. The classification depends on the rights and obligations of the parties to the arrangement. Joint ventures are accounted for under AASB 128/IAS 28 while joint operations are accounted for under AASB 11/IFRS 11.
A joint venture is described as an arrangement where the investor has a right to an investment in the investee. The investee will have the following features:
- the legal form of the investee and the contractual arrangements are such that the investor does not have rights to the assets and obligations for the liabilities of the investee; and
- the investee has been designed to have a trade of its own and as such must directly face the risks arising from the activities it undertakes, such as demand, credit or inventory risks.
7. What is meant by joint control?
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. The key element of joint control is the sharing of control. In other words, there must be at least two investors who have shared control of the investee (AASB 128/IAS 28, para. 3)
8. How does joint control differ from control as applied on consolidation?
Under AASB 10/IFRS 10, an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
There are three investor-investee relationships which are based on different levels of control:
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