An investment in an associate is an investment in an entity over which the investor has significant influence, but not control or joint control. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but not the power to control those policies.
The accounting for investments in associates is governed by IAS 28 Investments in Associates and Joint Ventures. Under IAS 28, investments in associates are measured using the equity method. This means that the investor's share of the investee's profit or loss is recognized in the investor's income statement, and the investor's share of the investee's assets and liabilities is recognized on the investor's balance sheet.
The equity method is applied as follows:
The investment in the associate is initially recorded at cost.
The investor's share of the investee's profit or loss is recognized in the investor's income statement, net of any tax effects.
Distributions received from the investee are deducted from the carrying amount of the investment.
The carrying amount of the investment is adjusted to reflect changes in the investor's proportionate interest in the investee, such as changes due to share issues or repurchases.
The carrying amount of the investment is also adjusted to reflect changes in the investee's fair value, if the investment is measured at fair value.
If the investor's share of the investee's losses exceeds the carrying amount of the investment, the carrying amount of the investment is reduced to zero. Any further losses are not recognized.
The equity method is a relatively complex method of accounting for investments in associates. However, it provides a more accurate reflection of the economic reality of an investment in an associate, where the investor has significant influence but not control.
Here are some examples of investments in associates:
A company that owns 20% of the shares of another company.
A company that has a seat on the board of directors of another company.
A company that has a contractual agreement with another company to participate in its decision-making process.
Investments in associates can be a valuable asset for a company. They can provide access to new markets, new products or services, and new technologies. They can also provide a source of financial support. However, investments in associates also carry some risks. The investee company may not be successful, or it may change its business strategy in a way that is unfavorable to the investor. Therefore, it is important for companies to carefully evaluate potential investments in associates before making a commitment.
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