| |
| Home > Accounting Standards > Interpretations of Financial Reporting Standards 2003 > INT FRS 20 |
| |
Interpretation of Financial Reporting Standard
|
|
| |
Equity Accounting Method - Recognition of Losses |
| |
Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items. |
| |
Reference: FRS 28, Accounting for Investments in Associates |
| |
ISSUE |
| |
| |
- In some situations, an investor may hold a variety of financial interests in an associate or joint venture that is accounted for under the equity method. For example, the investor may hold financial interests including ordinary or preferred shares, loans, advances, debt securities, options to acquire ordinary shares, or trade receivables.
- FRS 28.20 indicates that in applying the equity method, once the investor's share of losses of an associate equals or exceeds the carrying amount of an investment, the investor normally discontinues including its share of further losses in its income statement. However, additional losses are provided for to the extent that the investor has incurred obligations or made payments on behalf of the associate to satisfy obligations of the associate that the investor has guaranteed or otherwise committed.
- In applying the equity method, the issues are:
- which financial interests are included in the "carrying amount of an investment" referred to in FRS 28.20; and
- whether recognition of the entity's share of losses of the associate or jointly controlled entity (investee) in excess of the carrying amount of the investment is continued when the enterprise holds other financial interests in the investee which are not included in the carrying amount of the investment.
- This Interpretation addresses the application of the equity method under FRS 28. Under the allowed alternative treatment permitted by FRS 31.32, an enterprise applies the equity method in reporting its interest in a jointly controlled entity and therefore also applies this Interpretation.
|
| |
CONSENSUS |
|
|
| 5. |
Financial interests may be described in a variety of ways, for example, some interests are described as ordinary shares or as preferred shares. For the purpose of applying FRS 28.20, the carrying amount of an investment should include only the carrying amount of instruments which provide unlimited rights of participation in earnings or losses and a residual equity interest in the investee. |
| |
|
| 6. |
If the investor's share of losses exceeds the carrying amount of the investment, the carrying amount of the investment is reduced to nil and recognition of further losses should be discontinued, unless the investor has incurred obligations to the investee or to satisfy obligations of the investee that the investor has guaranteed or otherwise committed, whether funded or not. To the extent that the investor has incurred such obligations, the investor continues to recognise its share of losses of the investee. |
| |
|
| 7. |
Financial interests in an investee which are not included in the carrying amount of the investment under paragraph 5 of this Interpretation are accounted for in accordance with other applicable Financial Reporting Standards, for example, FRS 39, and prior to the implementation of FRS 39, FRS 25. |
| |
|
| 8. |
Continuing losses of an investee should be considered objective evidence that financial interests in that investee, both financial interests which are included in the carrying amount of an investment under paragraph 5 of this Interpretation and other financial interests, may be impaired. Impairment of the carrying amount of a financial interest which is included in the carrying amount of an asset is determined based on the carrying amount after any adjustment for equity method losses. |
| |
|
| 9. |
If the investor has guaranteed or is otherwise committed to obligations to the investee or to satisfying obligations of the investee, in addition to continuing to recognise its share of losses of the investee, the investor should determine whether a provision should be recognised in accordance with FRS 37. (Prior to the application of FRS 37, the recognition of a provision is evaluated under the requirements of FRS 10.) |
| |
|
DISCLOSURE |
| |
|
| 10. |
If an investor discontinues recognition of its share of losses of an investee, the investor should disclose in the notes to the financial statements the amount of its unrecognised share of losses of the investee, both during the period and cumulatively. |
| |
|
BASIS FOR CONCLUSIONS |
| |
| 11. |
FRS 28 defines the equity method and provides guidance on how it is to be applied, including the allocation of initial cost and the subsequent recognition of the investor's share of profits and losses. That definition and guidance also applies to a venturer which chooses to apply the equity method under FRS 31.32. |
| |
|
| 12. |
It follows from the guidance provided in FRS 28 that losses of an investee are recognised in relation to instruments which represent the investor's residual interest in the net assets of the investee. All other financial interests in the investee are not part of the carrying amount of the investment and are accounted for in accordance with other applicable Financial Reporting Standards. |
| |
|
| 13. |
FRS 28.20 states that additional losses are provided for to the extent that the investor has incurred obligations or made payments on behalf of the investee to satisfy obligations of the investee that the investor has guaranteed or otherwise committed. An obligation to the investee and a payment to the investee which is made to satisfy such obligations that the investor has guaranteed or committed would in substance represent the same type of obligation of the investor as an obligation or payment made on behalf of the investee. Therefore, the fact that an obligation is made to the investee and funding of an obligation in any form, for example as a loan or advance to the investee, should not result in the discontinuance of loss recognition. |
| |
|
| 14. |
For financial interests accounted for under the equity method of accounting, FRS 28.21 requires that if there is an indication that an investment in an associate may be impaired, an enterprise determines whether an impairment loss should be recognised under FRS 36, Impairment of Assets. For financial interests accounted for under FRS 39, paragraph 109 requires an enterprise to assess at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets may be impaired. If any evidence exists, the enterprise should address the relevant impairment tests included in FRS 39.111 and .117. Continued losses of an investee are evidence that impairment may exist and further testing is required to determine whether an impairment charge should be recognised. |
| |
|
| 15. |
FRS 37 addresses the recognition and measurement requirements for provisions, including guarantees and legal or constructive obligations. Measurement of a provision considers losses of the investee which have already been recognised under the equity method and, as a result, avoids duplicating in a provision charges already recognised through equity method losses. |
| |
|
| 16. |
FRS 28.20 indicates that if the investee subsequently reports profits, the investor resumes including its share of those profits only after its share of the profits equals the share of net losses not recognised. Disclosure of unrecognised amounts of an investor's share of losses of an investee is necessary to provide information relevant to an understanding of the investment. |
| |
|
Effective Date: INT FRS 20 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40. |
| |
| |
| |
|
| |
