ACQUISITION OF AN ASSOCIATE AND ACCOUNTING TREATMENT

7. ACQUISITION OF AN ASSOCIATE AND ACCOUNTING TREATMENT

7.1 When an investment in an associate is acquired, any difference between the cost of the invest- ment and the investor’s share of the net fair value of the associate’s net assets and contingent li-

abilities is accounted for in accordance with IFRS 3. Thus, any goodwill relating to the associate will be included in the carrying value of the investment.

7.2 FRS 3 and, therefore, IAS 28 do not allow amortization of that goodwill. Negative goodwill is excluded from the carrying amount of the investment. This amount should be included as income in determining the investor’s share of the associate’s profit or loss for the period in which the in- vestment was acquired.

7.3 After acquisition, adjustments will be made to the investor’s share of the associates’ profits or losses for such events as impairment losses incurred by the associate.

Chapter 21 / Investments in Associates (IAS 28)

7.4 In determining the investor’s share of profits or losses, the most recently available financial statements of the associate are used. If the reporting dates of the investor and the associate are dif- ferent, both should prepare financial statements as of the date as those of the investor unless it is impracticable to do so.

7.5 If financial statements are prepared to a different reporting date, then adjustments should be made for any significant transactions or events that occurred between the date of the associate’s financial statements and the date of the investor’s financial statements. The difference between the

reporting dates should not be more than three months.

7.6 If the associate uses accounting policies that are different from those of the investor, the asso- ciate’s financial statements should be adjusted and the investor’s accounting policies should be used.

7.7 If the investor’s share of losses of an associate equals or exceeds its interest in the associate, then the investor should not recognize its share of any further losses.

7.8 The interest in the associate is essentially the carrying amount of the investment using the eq- uity method together with any other long-term interests that are essentially part of the investor’s net investment in the associate. An example is a long-term loan from the investor to the associate. Long-term interests in this context do not include trade receivables or payables or any secured long-term receivables. Losses recognized in excess of the investor’s investment in ordinary shares should be applied to the other elements of the investor’s interest in the associate in the order of their priority in liquidation.

7.9 When the investor’s interest is reduced to zero, any additional losses are provided for and liabilities recognized only to the extent that the investor has a legal or constructive obligation or has made payments on behalf of the associate. When the associate reports profits, the investor can

recognize its share of those profits only after its share of the profits equals the share of the losses not yet recognized.

Practical Insight

November AG Gesellschaft fur Molekulare Medizin, a German company, accounted for an associate under the equity method in 2001. As a result of the associate’s uncertain financing, the investment was written down to €1. The write-down was classified as depreciation but should have been treated as an impairment loss in the income statement.