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Investments in Associates and Joint Ventures

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..... arent and its subsidiaries are presented as those of a single economic entity. The equity method is 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. A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is 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. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. A joint venturer is a party to a joint venture that has joint control of that joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of .....

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..... voting rights contribute to significant influence, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential rights, except the intentions of management and the financial ability to exercise or convert those potential rights. 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. The loss of significant influence can occur with or without a change in absolute or relative ownership levels. It could occur, for example, when an associate becomes subject to the control of a government, court, administrator or regulator. It could also occur as a result of a contractual arrangement. Equity method 10 Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor s share of the profit or loss of the investee after the date of acquisition. The investor s share of the investee s pr .....

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..... ents containing potential voting rights in substance currently give access to the returns associated with an ownership interest in an associate or a joint venture, the instruments are not subject to Ind AS 109. In all other cases, instruments containing potential voting rights in an associate or a joint venture are accounted for in accordance with Ind AS 109. 9 [ 14A An entity also applies Ind AS 109 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). An entity applies Ind AS 109 to such long-term interests before it applies paragraph 38 and paragraphs 40 43 of this Standard. In applying Ind AS 109, the entity does not take account of any adjustments to the carrying amount of long-term interests that arise from applying this Standard. ] 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 Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, the investment, or any r .....

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..... stment-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 Ind AS 109 regardless of whether the venture capital organisation has 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 a venture capital organisation. Classification as held for sale 20 An entity shall apply Ind AS 105 to an investment, or a portion of an investment, in an associate or a joint venture that meets the criteria to be classified as held for sale. Any retained portion of an investment in an associate or a joint venture that has not been classified as held for sale shall be accounted for using the equity method until disposal of the portion that is classified as held for sale takes place. After the disposal takes place, an entity shall account for any retained interest in the associate or joint venture in accordance with Ind AS 109 unless the retained interest continues to be an associate or a joint venture, in which case the entit .....

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..... foreign operation. 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 25 If an entity s ownership interest in an associate or a joint venture is reduced, but the entity continues to apply the equity method, the entity shall reclassify to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income 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 26 Many of the procedures that are appropriate for the application of the equity method are similar to the consolidation procedures described in Ind AS 110. Furthermore, the concepts underlying the procedures used in 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. 2 [ 27 A group s sha .....

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..... ealised gains and losses shall be eliminated against the investment accounted for using the equity method and shall not be presented as deferred gains or losses in the entity s consolidated balance sheet or in the entity s balance sheet in which investments are accounted for using the equity method. 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 nonmonetary assets received. 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 of the investment, any difference between the cost of the investment and the entity s share of the net fair value of the investee s identifiable assets and liabilities is accounted for as follows: (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 ident .....

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..... ] 6 [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 the date on which (a) the investment entity associate or joint venture is initially recognised; (b) the associate or joint venture becomes an investment entity; and (c) the investment entity associate or joint venture first becomes a parent.] 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. 38 If an entity s share of losses of an associate or a joint venture equals or exceeds its interest in th .....

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..... ombined effect of several events may have caused the impairment. Losses expected as a result of future events, no matter how likely, are not recognised. Objective evidence that the net investment is impaired includes observable data that comes to the attention of the entity about the following loss events: (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; or (e) the disappearance of an active market for the net investment because of financial difficulties of the associate or joint venture. 41B The disappearance of an active market because the associate s or joint venture s equity or financial instruments are no longer publicly traded is not evidence of impairment. A downgrade of an associate s or joint venture .....

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..... assumptions, both methods give the same result. 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. Separate financial statements 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 Ind AS 27. 7 [ Effective date and transition 45 * 45A * 45B * 45C * 45D * 45E Annual Improvements to Ind AS - Amendments in Ind AS 112 and 28, amended paragraphs 18 and 36A. An entity shall apply those amendments retrospectively in accordance with Ind AS 8 for annual periods beginning on or after 1st April, 2018.] 11 [ 45F * (*Refer Appendix 1) 45G Long-term Interests in Associates and Joint Ventures, added paragraph 14A and deleted paragraph 41. An entity shall apply those amendments retrospectively in accordance with Ind AS 8 for annual reporting periods beginning on or after 1 April, 2019, except as specifi .....

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..... uidation. (b) P Shares-non-cumulative preference shares that form part of the net investment in the associate and that the investor measures at fair value through profit or loss applying Ind AS 109. (c) LT Loan-a long-term loan that forms part of the net investment in the associate and that the investor measures at amortised cost applying Ind AS 109, with a stated interest rate and an effective interest rate of 5% a year. The associate makes interest-only payments to the investor each year. The LT Loan is the most senior of the three interests. The LT Loan is not an originated credit-impaired loan. Throughout the years illustrated, there has not been any objective evidence that the net investment in the associate is impaired applying Ind AS 28, nor does the LT Loan become credit-impaired applying Ind AS 109. The associate does not have any outstanding cumulative preference shares classified as equity, as described in paragraph 37 of Ind AS 28. Throughout the years illustrated, the associate neither declares nor pays dividends on O Shares or P Shares. The investor has not incurred any legal or constructive obligations, nor made payments on behalf of the associate, as .....

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..... #8377; 10 To recognise the change in fair value (₹ 110 ₹ 100) DR. Profit or loss ₹ 10 CR. Loss allowance (LT Loan) ₹ 10 To recognise an increase in the loss allowance (₹ 90 ₹ 100) DR. O Shares ₹ 20 CR. Profit or loss ₹ 20 To recognise the investor s share of the associate s profit (₹ 50 40%) At the end of Year 1, the carrying amount of O Shares is ₹ 220, P Shares is ₹ 110 and the LT Loan (net of loss allowance) is ₹ 90. Year 2 The investor recognises the following in Year 2: DR. Profit or loss ₹ 20 CR. P Shares ₹ 20 To recognise the change in fair value (₹ 90 ₹ 110) DR. Profit or loss ₹ 20 .....

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..... ; 50) Recognition of the change in fair value of ₹ 10 in Year 4 results in the carrying amount of P Shares being negative ₹ 10. Consequently, the investor recognises the following to reverse a portion of the associate s losses previously allocated to P Shares: DR. P Shares ₹ 10 CR. Profit or loss ₹ 10 To reverse a portion of the associate s losses previously allocated to P Shares Applying paragraph 38 of Ind AS 28, the investor limits the recognition of the associate s losses to ₹ 40 because the carrying amount of its net investment in the associate is then zero. Accordingly, the investor recognises the following: DR. Profit or loss ₹ 40 CR. LT Loan ₹ 40 To recognise the investor s share of the associate s loss At the end of Year 4, the carrying amount of O Shares is zero, P Shares is zero and the LT Loan (net of loss allowance) i .....

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..... the associate s profit it allocates to P Shares and the LT Loan to the amount of equity method losses previously allocated to those interests, which in this example is ₹ 60 for both interests. DR. O Shares ₹ 80 DR. P Shares ₹ 60 DR. LT Loan ₹ 60 CR. Profit or loss ₹ 200 To recognise the investor s share of the associate s profit (₹ 500 40%) At the end of Year 6, the carrying amount of O Shares is ₹ 80, P Shares is ₹ 80 and the LT Loan (net of loss allowance) is ₹ 70. Year 7 The investor recognises the following in Year 7: DR. P Shares ₹ 30 CR. Profit or loss ₹ 30 To recognise the change in fair value (₹ 110 ₹ 80) DR. Loss allowance (LT Loan) ₹ 20 .....

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..... ; 200 ₹ 5 Year 7 ₹ 20 ₹ 30 ₹ 200 ₹ 5 ] Appendix 1 Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the major differences, if any, between Indian Accounting Standard (Ind AS) 28, Investments in Associates and Joint Ventures, and the corresponding International Accounting Standard (IAS) 28, Investments in Associates and Joint Ventures, issued by the International Accounting Standards Board. Comparison with IAS 28, Investments in Associates and Joint Ventures 1. Paragraph 35 of Ind AS 28 requires use of uniform accounting policies, unless, in case of an associate, it is impracticable, which IAS 28 does not provide. This change has been made because the investor does not have control over the associate, it may not be able to influence the associate to prepare additional financial statements or to follow the accounting policies that are followed by the investor. 2. Paragraph 32 (b) has been modified on the lines of Ind AS 103, Business Combinat .....

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..... of the profit or loss, other comprehensive income and net assets of its associates and joint ventures), after any adjustments necessary to give effect to uniform accounting policies (see paragraphs 35 and 36). 3. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 36 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. 4. Inserted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 5. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018, before it was read as, 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 s .....

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