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SectionKey ConceptBrief Description
Objective & ScopePrescribe accounting for associates & joint venturesApplies to all entities with joint control or significant influence over an investee.
DefinitionsAssociate, Equity Method, Joint Control, Significant InfluenceKey terms defined in para 3-4.
Significant InfluencePresumption & Evidence20%+ voting power presumed; evidenced by board representation, policy participation, etc.
Equity MethodInitial cost, adjusted for share of profit/loss & OCIDistributions reduce carrying amount; long-term interests apply HKFRS 9 first.
Application of Equity MethodProcedures, exemptions, impairmentIncludes upstream/downstream transactions, goodwill, loss recognition limits, and impairment testing.
Separate Financial StatementsAccounted per HKAS 27Para 44 reference.
Effective Date & Transition1 Jan 2013, with later amendmentsIncludes long-term interests amendments effective 1 Jan 2019.
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Objective, Scope & Definitions

Objective (para 1)

Prescribe accounting for investments in associates and joint ventures using the equity method.

Scope (para 2)

Applies to all entities with joint control of, or significant influence over, an investee.

Key Definitions (para 3)

TermDefinition
AssociateEntity over which investor has significant influence.
Equity methodInitial cost, adjusted for post-acquisition share of net assets; profit/loss includes share of investee's profit/loss; OCI includes share of investee's OCI.
Joint controlContractually agreed sharing of control requiring unanimous consent for relevant activities.
Significant influencePower to participate in financial/operating policy decisions, but not control or joint control.
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Significant Influence

Presumption Based on Voting Power (para 5)

20% or more voting power โ†’ Presumed significant influence (unless clearly demonstrated otherwise).
Less than 20% voting power โ†’ Presumed no significant influence (unless clearly demonstrated otherwise).

Evidence of Significant Influence (para 6)

Usually evidenced by one or more of:

  • Representation on board of directors
  • Participation in policy-making processes
  • Material transactions between entity and investee
  • Interchange of managerial personnel
  • Provision of essential technical information

Potential Voting Rights (paras 7-8)

Consider currently exercisable or convertible potential voting rights. Do not consider management intentions or financial ability to exercise.

Loss of Significant Influence (para 9)

Occurs when entity loses power to participate in financial/operating policy decisions, with or without change in ownership levels.

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Equity Method โ€“ Basic Principles

Core Principles (para 10)

  • Initial recognition: At cost.
  • Subsequent measurement: Adjusted for investor's share of post-acquisition profit/loss and OCI.
  • Distributions received: Reduce carrying amount.

Rationale (para 11)

Distributions received may not reflect investee performance; investor has significant influence or joint control.

Potential Voting Rights & Ownership Interest (paras 12-14)

Interest determined solely on existing ownership interests, not potential voting rights, unless transaction gives access to returns.

Long-term Interests (para 14A)

Key requirement: Apply HKFRS 9 to long-term interests before applying loss recognition (para 38) and impairment (paras 40-43). Do not adjust for equity method changes.

Classification (para 15)

Classify as non-current asset unless held for sale per HKFRS 5.

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Application of Equity Method โ€“ Exemptions & Held for Sale

General Requirement (para 16)

Use equity method unless exemption applies.

Exemptions (paras 17-19)

ExemptionCondition
Parent exemptionParent exempt from consolidation per HKFRS 10, or wholly-owned subsidiary with no public trading, etc.
VC/Mutual fund/Unit trustMay elect fair value through profit or loss (FVTPL) per HKFRS 9 for each associate/joint venture.
Partial exemptionPortion held indirectly through VC may be FVTPL; remaining portion uses equity method.

Held for Sale (paras 20-21)

Apply HKFRS 5 to portion classified as held for sale. Retained portion continues equity method until disposal. If classification reversed, apply equity method retrospectively.

Discontinuing Equity Method (paras 22-24)

  • If becomes subsidiary โ†’ HKFRS 3/10.
  • If retained interest is financial asset โ†’ measure at fair value; recognise difference in profit/loss.
  • Reclassify OCI amounts as if investee disposed of related assets.
  • Change between associate and joint venture โ†’ continue equity method, no remeasurement.
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Equity Method Procedures โ€“ Transactions & Goodwill

Upstream and Downstream Transactions (paras 28-29)

TypeDescriptionRecognition
UpstreamSale from associate/joint venture to investorRecognise only to extent of unrelated investors' interests; eliminate investor's share.
DownstreamSale from investor to associate/joint ventureSame as upstream; full recognition if evidence of impairment.

Contribution of Non-monetary Assets (paras 30-31)

If lacks commercial substance, gain/loss is unrealised and eliminated against investment. Exception: if entity receives monetary/non-monetary assets, recognise gain/loss in full.

Acquisition and Goodwill (para 32)

  • Goodwill included in carrying amount; not amortised.
  • Excess of share of net fair value over cost โ†’ income in profit/loss in acquisition period.

Financial Statements Used (paras 33-34)

Use most recent available. If different reporting periods, difference โ‰ค 3 months; consistent from period to period.

Uniform Accounting Policies (paras 35-36A)

Adjust associate's policies to conform to entity's, unless associate is an investment entity (may retain fair value measurement).

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Loss Recognition & Impairment

Loss Recognition Limitation (paras 38-39)

If share of losses โ‰ฅ interest in associate/joint venture โ†’ discontinue recognising further losses.
Interest includes: carrying amount of investment + long-term interests (e.g., preference shares, long-term loans).
Excludes: trade receivables/payables, secured loans.

After interest reduced to zero, recognise liability only for legal/constructive obligations or payments made. Resume profit recognition only after unrecognised losses recovered.

Impairment (paras 40-43)

Test entire carrying amount as a single asset per HKAS 36 when objective evidence of impairment exists (e.g., significant financial difficulty, breach of contract).

  • Goodwill not separately tested.
  • Impairment loss not allocated to specific assets; reversal permitted if recoverable amount increases.
  • Assess recoverable amount for each associate/joint venture separately.
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Separate Financial Statements & Effective Date

Separate Financial Statements (para 44)

Account for investment per HKAS 27 (as amended in 2011).

Effective Date (para 45)

Annual periods beginning on or after 1 January 2013. Earlier application permitted with disclosure.

Subsequent Amendments

AmendmentEffective DateKey Change
HKFRS 9 (2014)When HKFRS 9 appliedAdded impairment objective evidence (paras 41A-41C).
Long-term Interests (2018)1 Jan 2019Added para 14A; deleted para 41.

Transition for Long-term Interests (paras 45H-45K)

If applying after HKFRS 9, apply HKFRS 9 transition requirements. Restatement of prior periods not required; may restate only if possible without hindsight.

Withdrawal (para 47)

Supersedes HKAS 28 (2004).

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