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IFRS Vs GAAP: Investments in Associates






IFRS: An associate is an entity over which the investor has significant influence – that is, the power to participate in, but not control, an associate’s financial and operating policies. Participation by an investor in the entity’s financial and operating policies via representation on the entity’s board demonstrates significant influence. A 20% or more interest by an investor in an entity’s voting rights leads to a presumption of significant influence.

US GAAP: Similar to IFRS, although the term ‘equity investment’ rather than ‘associate’ is used. US GAAP does not include unincorporated entities, although these would generally be accounted for in a similar way.


Equity Method

IFRS: An investor accounts for an investment in an associate using the equity method. The investor presents its share of the associate’s post-tax profits and losses in the income statement. The investor recognizes in equity its share of changes in the associate’s equity that have not been recognized in the associate’s profit or loss.

The investor, on acquisition of the investment, accounts for the difference between the cost of the acquisition and investor’s share of fair value of the net identifiable assets as goodwill. The goodwill is included in the carrying amount of the investment. The investor’s investment in the associate is stated at cost, plus its share of post-acquisition profits or losses, plus its share of post-acquisition movements in reserves, less dividends received.

Losses that reduce the investment to below zero are applied against any long-term interests that, in substance, form part of the investor’s net investment in the associate – for example, preference shares and long-term receivables and loans. Losses recognized in excess of the investor’s investment in ordinary shares are applied to the other components in reverse order of priority in a winding up. Further losses are provided for as a liability only to the extent that the investor has incurred legal or constructive obligations to make payments on behalf of the associate.

Disclosure of information is required about the revenues, profits or losses, assets and liabilities of associates. Investments in associates held by venture capital organizations, mutual funds, unit trusts and similar entities including investment-linked insurance funds can be carried at fair value through profit or loss.

US GAAP: Similar to IFRS if the equity method is applied. In addition, an entity can elect to adopt the fair value option for any of its equity method investments. If elected, equity method investments are presented at fair value at each reporting period, with changes in fair value being reflected in the income statement.


Accounting Policies

IFRS: An investor’s financial statements are prepared using uniform accounting policies for like transactions and events; adjustments are made to the associate’s policies to conform to that of the investor.

US GAAP: The investor’s financial statements do not have to be adjusted if the associate follows an acceptable alternative US GAAP treatment, although it would be acceptable to do so.



IFRS: If the investor has objective evidence of one of the indicators of impairment set out in IAS 39.59 for example, significant financial difficulty impairment is tested as prescribed under IAS 36, Impairment of Assets. The entire carrying amount of the investment is tested by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. In the estimation of future cash flows for value in use, the investor may use either: its share of future net cash flows expected to be generated by the investment (including the cash flows from its operations) together with the proceeds on ultimate disposal of the investment; or the cash flows expected to arise from dividends to be received from the associate together with the proceeds on ultimate disposal of the investment.

US GAAP: The impairment test under US GAAP is different to IFRS. Equity investments are considered impaired if the decline in value is considered to be other than temporary. As such, it is possible for the fair value of the equity method investment to be below its carrying amount, as long as that decline is temporary. If an other-than-temporary impairment is determined to exist, the investment is written down to fair value.


Investments in Joint Ventures


IFRS: A joint venture is defined as a contractual agreement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control of an economic activity. Unanimous consent of the parties sharing control is required.

US GAAP: A corporate joint venture is defined as a corporation owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group.


Types of Joint Venture

IFRS: Distinguishes between three types of joint venture:

  1. jointly controlled entities – the arrangement is carried on through a separate entity (company or partnership);
  2. jointly controlled operations – each venturer uses its own assets for a specific project;
  3. jointly controlled assets – a project carried on with assets that are jointly owned.


US GAAP: Only refers to jointly controlled entities, where the arrangement is carried on through a separate corporate entity.


Jointly Controlled Entities

IFRS: Either the proportionate consolidation method or the equity method is allowed. Proportionate consolidation requires the venturer’s share of the assets, liabilities, income and expenses to be either combined on a line-by-line basis with similar items in the venturer’s financial statements, or reported as separate line items in the venturer’s financial statements.

US GAAP: Prior to determining the accounting model, an entity first assesses whether the joint venture is a VIE. If the joint venture is a VIE, the accounting model discussed in the above section, “Special purpose entities”, is applied. If the joint venture is not a VIE, venturers apply the equity method to recognize the investment in a jointly controlled entity. Proportionate consolidation is generally not permitted except for unincorporated entities operating in certain industries.


Contributions to a Jointly Controlled Entity

IFRS: A venturer that contributes non-monetary assets, such as shares or non-current assets, to a jointly controlled entity in exchange for an equity interest in the jointly controlled entity recognises in its consolidated income statement the portion of the gain or loss attributable to the equity interests of the other venturers, except when:

  1. the significant risks and rewards of the contributed assets have not been transferred to the jointly controlled entity;
  2. the gain or loss on the assets contributed cannot be measured reliably; or
  3. the contribution transaction lacks commercial substance.


US GAAP: As a general rule, an investor (venturer) records its contributions to a joint venture at cost (i.e.: the amount of cash contributed and the book value of other non-monetary assets contributed). Sometimes, appreciated non-cash assets are contributed to a newly formed joint venture in exchange for an equity interest when others have invested cash or other ‘hard assets’. It is sometimes argued that the investor contributing appreciated non-cash assets has effectively realized part of the appreciation as a result of its interest in the venture to which others have contributed cash and that immediate recognition of a gain would be appropriate. Practice and existing literature vary in this area. As a result, the specific facts and circumstances affect gain recognition and require careful analysis.


Jointly Controlled Operations

IFRS: Requirements are similar to jointly controlled entities without an incorporated structure. A venturer recognises in its financial statements:

  1. the assets that it controls;
  2. the liabilities it incurs;
  3. the expenses it incurs;
  4. its share of income from the sale of goods or services by the joint venture.


US GAAP: Equity accounting is appropriate for investments in unincorporated joint ventures. The investor’s pro-rata share of assets, liabilities, revenues and expenses are included in their financial statements in specific cases where the investor owns an undivided interest in each asset of a non-corporate joint venture.


Jointly Controlled Assets

IFRS: A venturer accounts for its share of the jointly controlled assets, liabilities, income and expenses, and any liabilities and expenses it has incurred.

US GAAP: Not specified. However, proportionate consolidation is used in certain industries to recognize investments in jointly controlled assets.(REFERENCES: IFRS: IAS 1, IAS 28, IAS 31, SIC-13, IAS 36, IAS 39. US GAAP: APB 18, FAS 153, FIN 35).



  1. lee

    Mar 29, 2010 at 4:30 am

    mind if i ask a question? what is the journal entry if there is a change from investment in equity securities to investment in associates within the 1st year. with no declaration of dividend and income before the change happened?

  2. lee

    Mar 29, 2010 at 3:41 pm

    i’ll rephrase my question. the declaration of income and dividend is after the change of the investment

  3. lee

    Mar 29, 2010 at 3:44 pm

    sorry what i mean is that there is no declaration of income and dividend before the change. after the change the entity declared dividend and income all in the same year. what are the journal entries for these following transactions?

  4. dirk

    Apr 1, 2010 at 5:46 pm

    just for clarification: you describe the situation where an investor starts with an investment in a financial asset (accounted for as ‘held-for-trading’ or ‘available-for-sale’) where the stake is below the 20% threshold. Then, during the year the investor increases the stake in the investee so that he finally reaches and surpasses the 20% level. now, that he can exert significant influence on the investee, he needs to account for the investment as an investment in associates. right?

  5. dirk

    Apr 1, 2010 at 6:50 pm

    I would proceed as follows (let’s wait for putra’s comment)
    Before the change: investments are carried at fair value with changes in fair value reported on the income statement (held-for-trading) or directly in equity as part of other comprehensive income (available-for-sale). let’s name the relevant balance sheet account ‘financial investments’
    After the change: you need to transfer the carrying value to a new balance sheet account (let’s name it ‘investment in associates’) by the following journal entry: investment in associates / financial investments.
    journal entry for cash payment: investment in associates / cash
    journal entry for investor’s share of investee’s income: investment in associates / equity income [increasing the carrying value]
    journal entry for dividends received: cash / investment in associates [decreasing carrying value in associates]
    depreciation/ amortization of excess purchase price is recorded as follows: depreciation excess purchase price / investment in associates [decreasing the carrying value in associates]

  6. Anuj

    Apr 3, 2010 at 8:03 am

    Hello, i wanted to understand that when there is an investment made in an associate then how do we have to calculate the goodwill(or do we have to??), in the net identifiable assets do we have to consider the intangibles also for fair valuation…if yes then what is the difference between the fair value calculation when control is there and when it is an associate…

  7. lee

    Apr 4, 2010 at 3:35 am

    @dirk thank you so much with the reply. i also had the same entries in my exam like you do because the declaration of both dividend and income were after the change were the investor could have significant influence over the entity except for the entry for depreciation or amortization which i don’t know that i have to make.

  8. dirk

    Apr 5, 2010 at 1:19 pm

    investments in associates (stakes between 20 and 50% of voting interest) are accounted for using the equity method. this method uses the so-called “one-line-consolidation”. goodwill has to be calculated but is NOT separately reported (because of one-line-consolidation) but is part of the carrying value of the investment. example: investor A acquires 30% stake in associate B for $100,000. the book value of net assets be $220,000 and the fair value of net assets be $270,000. the difference between FV (270,000) and BV (220,000) may be attributed to property, plant, equipment (PP&E) which has to be depreciated over a 10 year period, straight-line.
    1. step: calculate excess purchase price
    excess purchase price = 100,000 minus 30% of BV (net assets) = $34,000.
    2. step: attribute excess purchase price to net identifiable assets
    in this case, part of the excess purchase price of 34,000 may be attributed to PP&E fair value adjustment, which equals 30% of $50,000 = $15,000.
    3. derive goodwill
    goodwill is the part of the excess purchase price that may not be attributed to net identifiable assets. here goodwill = $ 34,000 minus $15,000 = $19,000.

    please note that the amount attributed to net identifiable assets under step 2 ($15,000) has to be depreciated according to the method that applies to the respective asset. in this case straight-line depreciation over 10 years is used. so your yearly depreciation expense increases by $1,500 (15,000/10 years).
    generally, internally generated patents, brands, etc. may NOT be activated as an asset. but in an acquisition, the fair value of those internally generated intangibles must be recognized as an asset just as any other asset. the complete fair value ot those intangibles need to be amortized over the respective life.

  9. dirk

    Apr 5, 2010 at 1:44 pm

    @ anuj (second part)
    goodwill recognition for controlling interest (stake above 50% voting interest) may be different depending on your method used. under US GAAP the full goodwill method is used; under IFRS either the full goodwill or partial goodwill method is used.
    example: you acquire 90% of the outstanding shares of a subsidiary for $180,000. the fair value of the outstanding shares (market price) on the date of acquisition be $200,000. book value of subsidiary net assets be $100,000. fair value of subsidiary net assets be $160,000. the difference of $60,000 (160,000-100,000) is attributable to PP&E fair value revaluation.

    full goodwill method:
    goodwill = $200,000 (fair value of the subsidiary) minus $160,000 (fair value net assets) = $40,000
    you also have to report the value of 10% noncontrolling interest (because you acquired only 90% of outstanding shares) in your equity section. the value of 10% noncontrolling interest = 10% of $200,000 (fair value of the subdsidiary) = $20,000.

    partial goodwill approach:
    goodwill = $180,000 (acquisition price) minus $144,000 (90% of fair value of net assets) = $36,000.
    minority interest = 10% of $160,000 (fair value of net assets) = $16,000.

  10. Josh

    Nov 22, 2010 at 9:01 am

    How do I account for a acquisition of an associate company and apply the equity method if the associate company was purchased by a share issue.

    Do I capture the acquisition in the books of the parent or only in the books of the consolidated financial statements via pro forma journal entries?

  11. Sheraz Asif Javed

    Mar 8, 2011 at 7:57 am

    Hi Readers,

    I am seeking some clarity on the issue of ‘Impairment Review’ for JVs and Associates as per IFRS/IAS. I would really appreciate if someone could provide guidance on the following queries:

    1) Does IFRS require mandatory impairment review for JVs and associates at the Balance Sheet Date?

    2) What is prescribed method of carrying out the ‘Impairment review’ for JVs as per IFRS/IAS? Is it the same as the Associates as outlined in this post?

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