HKAS 28 - Investments in Associates and Joint Ventures
HKAS 28 - Investments in Associates and Joint Ventures
1. OBJECTIVE AND SCOPE
Objective (Paragraph 1)
The objective of HKAS 28 is to prescribe the accounting for investments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.
Scope (Paragraph 2)
This Standard shall be applied by all entities that are investors with joint control of, or significant influence over, an investee.
2. DEFINITIONS (Paragraph 3)
| Term | Definition |
|---|---|
| Associate | An entity over which the investor has significant influence |
| Consolidated financial statements | Financial statements of a group in which assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity |
| Equity method | A method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets. The investor's profit or loss includes its share of the investee's profit or loss and the investor's other comprehensive income includes its share of the investee's other comprehensive income |
| Joint arrangement | An arrangement of which two or more parties have joint control |
| Joint control | 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 |
| Joint venture | A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement |
| Joint venturer | A party to a joint venture that has joint control of that joint venture |
| Significant influence | The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies |
Additional Defined Terms (Paragraph 4)
The following terms are defined in HKAS 27 and HKFRS 10 and are used in HKAS 28 with the meanings specified in those standards:
3. SIGNIFICANT INFLUENCE (Paragraphs 5-9)
Presumption Based on Voting Power (Paragraph 5)
20% or more voting power → Presumed significant influence (unless clearly demonstrated otherwise)
Less than 20% voting power → Presumed no significant influence (unless clearly demonstrated otherwise)
A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.
Evidence of Significant Influence (Paragraph 6)
The existence of significant influence 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 entity and its investee
(d) Interchange of managerial personnel
(e) Provision of essential technical information
Potential Voting Rights (Paragraphs 7-8)
When assessing significant influence, an entity shall consider:
Not currently exercisable or convertible → When they cannot be exercised or converted until a future date or until the occurrence of a future event
In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances including:
Exception: The intentions of management and the financial ability to exercise or convert those potential rights are NOT considered.
Loss of Significant Influence (Paragraph 9)
An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee.
Loss of significant influence can occur:
4. EQUITY METHOD (Paragraphs 10-15)
Basic Principles (Paragraph 10)
Under the equity method:
Rationale for Equity Method (Paragraph 11)
The recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate or a joint venture because:
Potential Voting Rights and Ownership Interest (Paragraphs 12-14)
General rule: When potential voting rights exist, the entity's interest in an associate or a joint venture is determined solely on the basis of existing ownership interests and does not reflect the possible exercise or conversion of potential voting rights.
Exception (Paragraph 13): In some circumstances, an entity has, in substance, an existing ownership as a result of a transaction that currently gives it access to the returns associated with an ownership interest. In such circumstances, the proportion allocated to the entity is determined by taking into account the eventual exercise of those potential voting rights.
HKFRS 9 Application (Paragraph 14):
Long-term Interests (Paragraph 14A)
An entity also applies HKFRS 9 to other financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term interests that, in substance, form part of the entity's net investment in an associate or joint venture (see paragraph 38).
Key requirement: An entity applies HKFRS 9 to such long-term interests before it applies paragraph 38 and paragraphs 40-43 of this Standard. In applying HKFRS 9, the entity does not take account of any adjustments to the carrying amount of long-term interests that arise from applying this Standard.
Classification as Non-current Asset (Paragraph 15)
Unless an investment, or a portion of an investment, in an associate or a joint venture is classified as held for sale in accordance with HKFRS 5, the investment, or any retained interest in the investment not classified as held for sale, shall be classified as a non-current asset.
5. APPLICATION OF THE EQUITY METHOD (Paragraphs 16-43)
General Requirement (Paragraph 16)
An entity with joint control of, or significant influence over, an investee shall account for its investment in an associate or a joint venture using the equity method except when that investment qualifies for exemption in accordance with paragraphs 17-19.
Exemptions from Applying the Equity Method (Paragraphs 17-19)
Exemption for Parent Entities (Paragraph 17)
An entity need not apply the equity method if:
(a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not applying the equity method.
(b) The entity'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).
(c) The entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation, for the purpose of issuing any class of instruments in a public market.
(d) The ultimate or any intermediate parent of the entity produces financial statements available for public use that comply with HKFRSs or IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with HKFRS 10 or IFRS 10.
Exemption for Venture Capital Organisations, Mutual Funds, etc. (Paragraph 18)
When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that investment at fair value through profit or loss in accordance with HKFRS 9.
Key points:
Partial Exemption (Paragraph 19)
When an entity has an investment in an associate, a portion of which is held indirectly through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that portion of the investment in the associate at fair value through profit or loss in accordance with HKFRS 9 regardless of whether those entities have significant influence over that portion of the investment.
If the entity makes that election, the entity shall apply the equity method to any remaining portion of its investment in an associate that is not held through such entities.
Classification as Held for Sale (Paragraphs 20-21)
Initial Classification (Paragraph 20):
Reversal of Held for Sale Classification (Paragraph 21):
When an investment, or a portion of an investment, previously classified as held for sale no longer meets the criteria to be so classified, it shall be accounted for using the equity method retrospectively as from the date of its classification as held for sale. Financial statements for the periods since classification as held for sale shall be amended accordingly.
Discontinuing the Use of the Equity Method (Paragraphs 22-24)
When Investment Becomes a Subsidiary (Paragraph 22(a))
If the investment becomes a subsidiary → Account for in accordance with HKFRS 3 and HKFRS 10.
When Retained Interest is a Financial Asset (Paragraph 22(b))
If the retained interest in the former associate or joint venture is a financial asset:
Reclassification of OCI Amounts (Paragraph 22(c))
When an entity discontinues the use of the equity method, the entity shall 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.
Example (Paragraph 23): If an associate or a joint venture has cumulative exchange differences relating to a foreign operation and the entity discontinues the use of the equity method, the entity shall reclassify to profit or loss the gain or loss that had previously been recognised in OCI in relation to the foreign operation.
Change Between Associate and Joint Venture (Paragraph 24)
If an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate, the entity continues to apply the equity method and does not remeasure the retained interest.
Changes in Ownership Interest (Paragraph 25)
If an entity's ownership interest in an associate or a joint venture is reduced, but the investment continues to be classified either as an associate or a joint venture respectively, the entity shall reclassify to profit or loss the proportion of the gain or loss that had previously been recognised in OCI relating to that reduction in ownership interest if that gain or loss would be required to be reclassified to profit or loss on the disposal of the related assets or liabilities.
Equity Method Procedures (Paragraphs 26-39)
General Principles (Paragraph 26)
Many procedures appropriate for the equity method are similar to consolidation procedures described in HKFRS 10. Concepts underlying procedures for accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate or a joint venture.
Group's Share (Paragraph 27)
A group's share in an associate or a joint venture is the aggregate of the holdings in that associate or joint venture by the parent and its subsidiaries. The holdings of the group's other associates or joint ventures are ignored for this purpose.
When an associate or a joint venture has subsidiaries, associates or joint ventures, the profit or loss, OCI and net assets taken into account in applying the equity method are those recognised in the associate's or joint venture's financial statements (including the associate's or joint venture's share of the profit or loss, OCI and net assets of its associates and joint ventures), after any adjustments necessary to give effect to uniform accounting policies.
Upstream and Downstream Transactions (Paragraphs 28-29)
General Rule (Paragraph 28):
Gains and losses resulting from 'upstream' and 'downstream' transactions between an entity (including its consolidated subsidiaries) and its associate or joint venture are recognised in the entity's financial statements only to the extent of unrelated investors' interests in the associate or joint venture.
| Transaction Type | Description |
|---|---|
| Upstream | Sales of assets from an associate or a joint venture to the investor |
| Downstream | Sales or contributions of assets from the investor to its associate or its joint venture |
The investor's share in the associate's or joint venture's gains or losses resulting from these transactions is eliminated.
Exception for Losses (Paragraph 29):
Contribution of Non-monetary Assets (Paragraphs 30-31)
General Rule (Paragraph 30):
The contribution of a non-monetary asset to an associate or a joint venture in exchange for an equity interest shall be accounted for in accordance with paragraph 28, except when the contribution lacks commercial substance (as described in HKAS 16).
If such a contribution lacks commercial substance:
Exception (Paragraph 31):
If, in addition to receiving an equity interest in an associate or a joint venture, an entity receives monetary or non-monetary assets, the entity recognises in full in profit or loss the portion of the gain or loss on the non-monetary contribution relating to the monetary or non-monetary assets received.
Acquisition and Goodwill (Paragraph 32)
An investment is accounted for using the equity method from the date on which it becomes an associate or a joint venture. On acquisition:
(a) Goodwill relating to an associate or a joint venture is included in the carrying amount of the investment. Amortisation of that goodwill is not permitted.
(b) Any excess of the entity's share of the net fair value of the investee's identifiable assets and liabilities over the cost of the investment is included as income in the determination of the entity's share of the associate or joint venture's profit or loss in the period in which the investment is acquired.
Post-acquisition adjustments:
Financial Statements Used (Paragraphs 33-34)
General Rule (Paragraph 33):
The most recent available financial statements of the associate or joint venture are used by the entity in applying the equity method.
Different Reporting Periods (Paragraph 34):
When the end of the reporting period of the entity is different from that of the associate or joint venture:
Key requirement: The difference between the end of the reporting period of the associate or joint venture and that of the entity shall be no more than three months. The length of the reporting periods and any difference between the ends of the reporting periods shall be the same from period to period.
Uniform Accounting Policies (Paragraphs 35-36A)
General Requirement (Paragraph 35):
The entity's financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances.
Adjustment Requirement (Paragraph 36):
Except as described in paragraph 36A, if an associate or a joint venture uses accounting policies other than those of the entity for like transactions and events in similar circumstances, adjustments shall be made to make the associate's or joint venture's accounting policies conform to those of the entity when the associate's or joint venture's financial statements are used by the entity in applying the equity method.
Exception for Investment Entity Associates/Joint Ventures (Paragraph 36A):
Notwithstanding the requirement in paragraph 36, if an entity that is not itself an investment entity has an interest in an associate or joint venture that is an investment entity, the entity may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate's or joint venture's interests in subsidiaries.
This election is made separately for each investment entity associate or joint venture, at the later of:
(a) The date on which the investment entity associate or joint venture is initially recognised
(b) The date the associate or joint venture becomes an investment entity
(c) The date the investment entity associate or joint venture first becomes a parent
Preference Shares (Paragraph 37)
If an associate or a joint venture has outstanding cumulative preference shares that are held by parties other than the entity and are classified as equity, the entity computes its share of profit or loss after adjusting for the dividends on such shares, whether or not the dividends have been declared.
Recognition of Losses (Paragraphs 38-39)
Limitation on Loss Recognition (Paragraph 38):
If an entity's share of losses of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, the entity discontinues recognising its share of further losses.
Definition of "Interest in the Associate or Joint Venture":
The interest in an associate or a joint venture is:
Examples of long-term interests:
Excluded items:
Order of Loss Application:
Losses recognised using the equity method in excess of the entity's investment in ordinary shares are applied to the other components of the entity's interest in an associate or a joint venture in the reverse order of their seniority (i.e., priority in liquidation).
Resumption of Loss Recognition (Paragraph 39):
After the entity's interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.
If the associate or joint venture subsequently reports profits, the entity resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.
Impairment Losses (Paragraphs 40-43)
Objective Evidence of Impairment (Paragraphs 41A-41C)
The net investment in an associate or joint venture is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the net investment (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows from the net investment that can be reliably estimated.
Objective Evidence Includes (Paragraph 41A):
(a) Significant financial difficulty of the associate or joint venture
(b) A breach of contract, such as a default or delinquency in payments by the associate or joint venture
(c) The entity, for economic or legal reasons relating to its associate's or joint venture's financial difficulty, granting to the associate or joint venture a concession that the entity would not otherwise consider
(d) It becoming probable that the associate or joint venture will enter bankruptcy or other financial reorganisation
(e) The disappearance of an active market for the net investment because of financial difficulties of the associate or joint venture
What is NOT Evidence of Impairment (Paragraph 41B):
Additional Evidence for Equity Instruments (Paragraph 41C):
In addition to the types of events in paragraph 41A, objective evidence of impairment for the net investment in the equity instruments of the associate or joint venture includes:
Impairment Testing (Paragraphs 42-43)
Treatment of Goodwill (Paragraph 42):
Because goodwill that forms part of the carrying amount of the net investment in an associate or a joint venture is not separately recognised, it is not tested for impairment separately by applying the requirements for impairment testing goodwill in HKAS 36.
Instead, the entire carrying amount of the investment is tested for impairment in accordance with HKAS 36 as a single asset, by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount whenever application of paragraphs 41A-41C indicates that the net investment may be impaired.
Key point: An impairment loss recognised in these circumstances is not allocated to any asset, including goodwill, that forms part of the carrying amount of the net investment in the associate or joint venture. Accordingly, any reversal of that impairment loss is recognised in accordance with HKAS 36 to the extent that the recoverable amount of the net investment subsequently increases.
Determining Value in Use:
In determining the value in use of the net investment, an entity estimates:
(a) Its share of the present value of the estimated future cash flows expected to be generated by the associate or joint venture, including the cash flows from the operations of the associate or joint venture and the proceeds from the ultimate disposal of the investment; OR
(b) The present value of the estimated future cash flows expected to arise from dividends to be received from the investment and from its ultimate disposal
Using appropriate assumptions, both methods give the same result.
Assessment per Associate/Joint Venture (Paragraph 43):
The recoverable amount of an investment in an associate or a joint venture shall be assessed for each associate or joint venture, unless the associate or joint venture does not generate cash inflows from continuing use that are largely independent of those from other assets of the entity.
6. SEPARATE FINANCIAL STATEMENTS (Paragraph 44)
An investment in an associate or a joint venture shall be accounted for in the entity's separate financial statements in accordance with paragraph 10 of HKAS 27 (as amended in 2011).
7. EFFECTIVE DATE AND TRANSITION (Paragraphs 45-45K)
Initial Effective Date (Paragraph 45)
Subsequent Amendments
| Amendment | Effective Date | Key Changes |
|---|---|---|
| HKFRS 9 (September 2014) | When HKFRS 9 applied | Amended paragraphs 40-42, added paragraphs 41A-41C |
| Equity Method in Separate Financial Statements (September 2014) | Annual periods beginning on or after 1 January 2016 | Amended paragraph 25 |
| Investment Entities: Applying the Consolidation Exception (January 2015) | Annual periods beginning on or after 1 January 2016 | Amended paragraphs 17, 27 and 36; added paragraph 36A |
| Annual Improvements 2014-2016 Cycle (March 2017) | Annual periods beginning on or after 1 January 2018 | Amended paragraphs 18 and 36A |
| HKFRS 17 (January 2018) | When HKFRS 17 applied | Amended paragraph 18 |
| Long-term Interests in Associates and Joint Ventures (January 2018) | Annual periods beginning on or after 1 January 2019 | Added paragraph 14A; deleted paragraph 41 |
Transition for Long-term Interests Amendments (Paragraphs 45H-45K)
If applying amendments at same time as HKFRS 9 (Paragraph 45H):
Apply the transition requirements in HKFRS 9 to the long-term interests described in paragraph 14A.
If applying amendments after HKFRS 9 (Paragraph 45I):
Apply the transition requirements in HKFRS 9 necessary for applying the requirements set out in paragraph 14A to long-term interests. References to the date of initial application in HKFRS 9 shall be read as referring to the beginning of the annual reporting period in which the entity first applies the amendments (the date of initial application of the amendments).
Restatement: The entity is not required to restate prior periods to reflect the application of the amendments. The entity may restate prior periods only if it is possible without the use of hindsight.
For entities applying temporary exemption from HKFRS 9 under HKFRS 4 (Paragraph 45J):
Not required to restate prior periods. May restate only if possible without hindsight.
If not restating prior periods (Paragraph 45K):
At the date of initial application of the amendments, recognise in the opening retained earnings (or other component of equity, as appropriate) any difference between:
(a) The previous carrying amount of long-term interests described in paragraph 14A at that date; AND
(b) The carrying amount of those long-term interests at that date
8. REFERENCES TO HKFRS 9 (Paragraph 46)
If an entity applies this Standard but does not yet apply HKFRS 9, any reference to HKFRS 9 shall be read as a reference to HKAS 39.
9. WITHDRAWAL OF HKAS 28 (2004) (Paragraph 47)
This Standard supersedes HKAS 28 *Investments in Associates* (issued in 2004).
KEY TAKEAWAYS SUMMARY
| Topic | Key Points |
|---|---|
| Significant Influence | 20%+ voting power presumption; evidenced by board representation, policy participation, material transactions, personnel interchange, technical information |
| Equity Method | Initial cost; adjusted for post-acquisition share of profit/loss and OCI; distributions reduce carrying amount |
| Exemptions | Parent exemption (similar to HKFRS 10); VC/mutual fund/unit trust election for FVTPL; partial exemption for indirectly held portions |
| Held for Sale | Apply HKFRS 5; retained portion continues equity method until disposal; retrospective reapplication if criteria no longer met |
| Discontinuing Equity Method | If becomes subsidiary → HKFRS 3/10; if retained interest is financial asset → measure at fair value; reclassify OCI amounts |
| Change Associate↔Joint Venture | Continue equity method; no remeasurement |
| Upstream/Downstream | Eliminate investor's share; recognise only to extent of unrelated interests; full recognition for impairment evidence |
| Non-monetary Contributions | Eliminate against investment if lacks commercial substance; full recognition for assets received |
| Goodwill | Included in carrying amount; not amortised; not separately tested for impairment |
| Loss Recognition | Discontinue when share of losses ≥ interest; interest includes long-term interests; resume only after unrecognised losses recovered |
| Impairment | Test entire carrying amount as single asset; impairment not allocated to specific assets; reversal permitted |
| Uniform Policies | Required; exception for investment entity associates/joint ventures |
| Reporting Period Difference | Maximum 3 months; consistent from period to period |
| Long-term Interests | Apply HKFRS 9 before applying loss recognition and impairment paragraphs |
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