IPSAS 7 is based on IAS 28 Investments in Associates (Revised 2003).
IPSAS 7 Investments in Associates prescribes the accounting treatment for investments in Associates. Associates will be accounted for using the equity method and concern entities where the investor has significant influence.
IPSAS 7 was reissued in December 2006 and applies to annual periods beginning on or after 1 January 2008.
History of IPSAS 7
Annual periods beginning on or after 1 January 2008
Refer to IFAC website here
Summary of IPSAS 7 Investments in Associates
This standard applies to entities that prepare and present financial statements under the accrual basis of accounting [IPSAS 7.1]. IPSAS 7 applies to all public sector entities other than GBEs [IPSAS 7.5].
IPSAS 7 shall be applied by an investor for investment in associates, except for associates held by [IPSAS 7.1]:
• venture capital organizations
• Mutual funds, unit trusts and similar entities including investment linked insurance funds
When such investments are measured at fair value with the changes in fair value through surplus or deficit in accordance with IPSAS 29.
Key definitions [IPSAS 7.7]
An associate: an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence, and that is neither a controlled entity nor an interest in a joint venture.
Equity method: a method of accounting whereby the investment is initially recognized at cost, and adjusted thereafter for the post-acquisition change in the investor’s share of net assets/equity of the investee. The surplus or deficit of the investor includes the investor’s share of the surplus or deficit of the investee.
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.
Identification of associates
Significant influence is a matter of judgment based on the definition of significant influence and the nature particular of the relationship between the investor and the investee [IPSAS 7.11].
Significant influence is presumed when holding 20% or more of the voting power (directly or through subsidiaries) unless the contrary can be clearly demonstrated. If the holding is less than 20%, the investor will be presumed not to have significant influence unless such influence can be clearly demonstrated [IPSAS 7.13]
Significant influence is in most case evidenced by [IPSAS 7.12]:
• Representation on the board of directors or equivalent governing body of the investee
• Participation in policy-making processes, including participation in decisions about dividends or similar distributions
• Material transactions between the investor and the investee
• Interchange of managerial personnel
• Provision of essential technical information
Potential voting rights should be considered in determining whether significant influence exists [IPSAS 7.14].
Accounting for associates
In consolidated financial statements the equity method of accounting should be used for investments in associates, except in the following three circumstances [IPSAS 7.19]:
• the entity is acquired and held exclusively with a view to sell within 12 months from acquisition and management is actively seeking a buyer. The investment in the associate should be classified as held for trading and accounted for under IPSAS 29 [IPSAS 7.20].
• a controlling entity that is exempted from preparing consolidated financial statements by paragraph 16 of IPSAS 6 may prepare separate financial statements as its primary financial statements. In those separate statements, the investment in the associate may be accounted for by the cost method or as a financial instrument under IPSAS 29. [IPSAS 7.41]
• the equity method should not be applied if all of the four following conditions are met [IPSAS 7.19(c)]
1) the investor is
• itself a wholly-owned controlled entity and users of such financial statements are unlikely to exist or their information needs are met by its controlling entity’s consolidated financial statements;
• a partially-owned controlled entity of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the controlling entity not presenting consolidated financial statements
2) The investor’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets)
3) the investor did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market
4) the ultimate or any intermediate controlling entity of the investor produces consolidated financial statements available for public use that comply with IPSASs.
Application of the equity method
Main principle: Under the equity method of accounting, an equity investment is initially recorded at cost and is subsequently adjusted to reflect the investor's share of the net profit or loss of the associate [IPSAS 7.17].
Reporting date of associate's financial statements: for the application of the equity method, the investor should use the most recent financial statements of the associate, when the dates reporting dates are different the associate should prepare financial statements on the reporting date of the investor as unless it is impracticable to do so [IPSAS 7.30] In case it is impracticable, the most recent available financial statements of the associate should be used and adjustments should be made for significant transactions or events that have occurred between the reporting period ends. In any case the difference between the reporting dates cannot exceed three months [IPSAS 7.31]
Uniform accounting policies: accounting policies consistent with these of the investor should be used for the associate’s financial statements [IPSAS 7.31]. If different policies are used, adjustments should be made to reflect the investor's accounting policies for the purpose of applying the equity method [IPSAS 7.32].
Distributions and other adjustments to carrying amount: Distributions received from the investee reduce the carrying amount of the investment. Adjustments to the carrying amount may be necessary for changes in the investee's net assets/equity that have not been included in surplus or deficit (for example, revaluations and foreign exchange translations) [IPSAS 7.17].
Potential voting rights: Potential voting rights are only considered in determining whether significant influence exists, the investor's share of surplus or deficit of the investee and of changes in the investee's net assets/equity is determined on the basis of present ownership interests. It should not reflect the possible exercise or conversion of potential voting rights [IPSAS 7.18].
Elimination of transactions with associates: surpluses and deficits resulting from upstream and downstream transactions (transactions between investor and associate) should be eliminated to the extent of the investor's interest in the associate [IPSAS 7.28].
Implicit goodwill and fair value adjustments: Goodwill relating to an associate is included in the fair value of an associate. On acquisition of the investment in an associate, 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 is accounted for like goodwill in accordance with relevant national or international standards (e.g. IFRS 3 Business Combinations). Appropriate adjustments to the investor's share of surpluses and deficits after acquisition are made to account for additional depreciation of the depreciable assets based on their fair values at the acquisition date [IPSAS 7.29].
Deficits in excess of investment: In case an investor's share of deficits of an associate equals or exceeds its interest in the associate, the investor discontinues recognizing its share of further losses. The interest in an associate is the carrying amount of the investment in the associate under the equity method together with any long-term interests that, in substance, form part of the investor's net investment in the associate [IPSAS 7.35]. After the investor's interest is reduced to zero, a provision or a liability for additional deficits/losses should be recognized but only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate. If surpluses are reported subsequently, the investor resumes recognizing its share of those surpluses only after its share of the surpluses equals the share of deficits not recognized [IPSAS 7.36].
Further impairment test: After application of the above described method, the impairment indicators of IPSAS 29 Financial Instruments: Recognition and Measurement, apply to investments in associates [IPSAS 7.37]. If in indication for impairment exists, the methods described in IPSAS 21 Impairment of Non-Cash-Generating Assets and IPSAS 26 Impairment of Cash-Generating Assets should be applied to calculate and allocate the incurred impairment [IPSAS 7.39]. The recoverable amount of an investment in an associate is assessed for each associate individually, except when the associate does not generate cash flows independently [IPSAS 7.40].
Discontinuation of the equity method
Use of the equity method should cease from the date that significant influence ceases. The carrying amount of the investment at that date should be regarded as a new cost basis [IPSAS 7.24-25].
Presentation of associates accounted for using equity method
Associates accounted for using the equity method should be classified in the financial statements as non-current [IPSAS 7.44].
Separate financial statements of the investor
In the separate financial statements of the investor the associate should be accounted for [IPSAS 7.41]:
• using the equity method
• at cost
• as a financial instrument in accordance with IPSAS 29
Disclosures required [IPSAS 7.43]:
• fair value of investments in associates for which there are published price quotations
• summarized financial information of associates, including the aggregated amounts of assets, liabilities, revenues, and surplus or deficits
• an explanation when investments of less than 20% are considered as having significant influence
• an explanation when investments of more than 20% are not considered as having significant influence (versus the presumption of significant influence)
• the use and the reason of a different reporting date of the financial statements of an associate
• nature and extent of any significant restrictions on the ability of associates to transfer funds to the investor in the form of cash dividends, similar distributions or repayment of loans or advances
• unrecognized share of losses of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate
• the fact that an associate is not accounted for using the equity method
• summarized financial information of associates, either individually or in groups, that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues, and surpluses or deficits
The following disclosures are also required:
• the investor’s share of the surplus or deficit and the carrying amount of associates accounted for using the equity method [IPSAS 7.44]
• the investor’s share of discontinuing operations of associates accounted for using the equity method [IPSAS 7.44]
• The investor's share of changes recognized directly in the associate's net assets/equity should also be recognized in net assets/equity by the investor, with disclosure in the statement of changes in net assets/equity as required by IPSAS 1 Presentation of Financial Statements [IPSAS 7.45]
• the investor's share of the contingent liabilities of an associate incurred jointly with other investors [IPSAS 7.46]
• contingent liabilities that arise because the investor is severally liable for all or part of the liabilities of the associate [IPSAS 7.47]
Venture capital organizations, mutual funds, unit trusts and other similar entities are required to provide disclosures about nature and extent of any significant restrictions on transfer of funds by associates [IPSAS 7.1].
IPSAS 7: Investments in Associates was issued
Revision of IPSAS 7
1 January 2008
Effective date of IPSAS 7
1 January 2011
Effective date of improvements to IPSASs (issued in January 2010)