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Discuss the main features of IAS 28 IAS 28 - INVESTMENT IN JOINT VENTURES AND ASSOCIATES

The international accounting standard 28 speaks to the investment in joint ventures and associatesandaddresses various applications such as the objectives, scope, definition of key terms, the equity method of accounting and exemptions from applying the equity method when using IAS 28.This essay will explore in details some of the areas of IAS 28 as outline below. OBJECTIVES The objectives of IAS 28 Investment in joint ventures and associates, as was amended in 2011,providedoutlines ofthe condition needed for the equity method to be used as it relates to these investments.IAS 28 objectives are to provide standards that govern how investments in associates and joint ventures are carried out. Additionally, IAS 28 is to prescribe universal standard that would be a guideline to all investors that have interest in joint ventures and associates. The ultimate objective however, is to rule out all misunderstanding and double standard of operating and accounting for investees. SCOPE The International Accounting Standard 28 has set out several guidelines which encompass all investing entities which have some interest in joint ventures and or associates. Thus, companies that have some form of joint arrangement where joint control is held over the arrangement or ifthey acquired twenty to fifty percentage shareholding in other entities, should adhere to the governance of IAS 28 as it relates to the investees finance and operating polices.

DEFINITION OF KEY TERMS In order for investors to fully understand the above mentioned standard to its fullest; they have to have a thorough knowledge and understanding of the frequently used terms and their meanings as it relates to accounting.Below are six of the most frequently used key terms and their meaning: An associateis an entity over which another company holds significant influence, usually twenty to fifty percent. A significant influence is the power an entity has to partake in the day to day activities of the investee especially in the financial and operating procedure decision; this however, is neither control nor joint control of the investee. A Joint arrangement is the arrangement of at least two entities having joint control over the investee. A Joint control is a decision are made by members of the joint venture to share financial activities, and unanimous approval has to be made by them as it relates to strategic objectives. A Joint venture is a contractual arrangement where the entities involve are privileged to the net asset of the investments. An Equity method is an accounting technique that accounts for investments at their initial cost and post-acquisition financial events; this method is used when accounting for associates.

THE EQUITY METHOD OF ACCOUNTING

The basic principle 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.

EQUITY METHOD PROCEDURES. Transactions with associates or joint ventures.

Profits and losses resulting (associate to investor, or joint venture to joint venturer) and (investor to associate, or joint venturer to joint venture) transactions are eliminated to the extent of the investor's interest in the associate or joint venture.

Date of financial statements.

If the associate or joint venture uses accounting policies that differ from those of the investor, the associate or joint venture's financial statements are adjusted to reflect the investor's accounting policies for the purpose of applying the equity method.

Losses in excess of investment.

If an investor's or joint venturer's share of losses of an associate or joint venture equals or exceeds its interest in the associate or joint venture, the investor or joint venturer discontinues recognising its share of further losses. The interest in an associate or joint venture is the carrying amount of the investment in the associate or joint venture under the equity method together with any long-term interests that, in substance, form part of the investor or joint venturer's net investment in the associate or joint venture.

The recoverable amount of an investment in an associate is assessed for each individual associate or joint venture, unless the associate or joint venture does not generate cash flows independently.

EXEMPTIONS FROM APPLYING THE EQUITY METHOD An entity is exempt from applying the equity method if the investment meets one of the following conditions:

The entity is a parent that is exempt from preparing consolidated financial statements under IFRS 10Consolidated Financial Statements or if all of the following four conditions are met (in which case the entity need not apply the equity method):

the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method

the investor or joint venturer's debt or equity instruments are not traded in a public market

the entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market, and

the ultimate or any intermediate parent of the entity produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

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 similar entities

including investment-linked insurance funds, the entity may elect to measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS 9.

When an entity has an investment in an associate, a portion of which is held indirectly through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-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 IFRS 9 regardless of whether the venture capital organisation, or the mutual fund, unit trust and similar entities including investment-linked insurance funds, 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, or a mutual fund, unit trust and similar entities including investment-linked insurance funds.

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GLOSSARY

Accumulated profits - are profits which were generated by a company however were not paid out in dividend. These profit can be either reinvested in the firm as retained earnings or placed in a reserve account. Acquisition - A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both. Anti-trust Law - Legislation enacted by the federal and various state governments to regulate trade and commerce by preventing unlawful restraints, price-fixing, and monopolies; to promote competition; and to encourage the production of quality goods and services at the lowest prices, with the primary goal of safeguarding public welfare by ensuring that consumer demands will be met by the manufacture and sale of goods at reasonable prices. Arms-Length Transaction This term refers to the price at which two unrelated and nondesperate parties would agree to a transaction. Associates Company - A company in which more than 20% but less than 51% of its share is controlled by another company. Bargain Purchase (Negative Goodwill) This arises where the cost of the investment is less than the value of net assets purchased. Business Combination This is the coming together of previously separate business entities through acquisition by one entity of another entitys net asset or a majority of its outstanding

voting ordinary shares or common stock or through an exchange of ordinary stock or common stock. Capital Appreciation - arises when the value of an asset increases in value based on a rise in market price.

Capital Reserve - is a reserve amount which is set aside from retained earnings usually these funds are used to purchase fixed assets. Consolidated Balance Sheet/Financial Positions is the amalgamation of the different balance sheets of subsidiary companies grouped together into the balance sheet of the parent company. This is also called Group balance sheet. Consolidated Income Statement this statement depicts what happened over a specific period of time, usually for a year. It is based on a fundamental accounting equation (Income = Revenue - Expenses) and shows how the owners equity is changing. The Income statement forms a part of an overall picture of the financial position of a company. This is also known as Profit and Loss account. Consolidation - A business combination in which a new corporation is formed to take over two or more business entities that then go out of existence. Current Assets - An asset such as cash and cash equivalents, receivables, inventory that is constantly flowing in and out of an organization in the normal course of its business, as cash is converted into goods and then back into cash. Current Fair Value - Fair value is the value of an asset or liability in an arms-length transaction between unrelated willing and knowledgeable parties.

Current Liability is the obligations such as deferred dividend, trade credit, and unpaid taxes, arising in the normal course of a business and due for payment within a year. Date of acquisition - Is the effective date of purchase of an asset. Depreciation - Is a method of allocating the cost of a tangible asset over its useful life. words depreciation indicates how much of an assets value has been used up. Dividend - Is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. It may be in the form of cash, stock or property. In other

Equity Method A method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investors share of the investees net assets. Fair value - is the price that two parties are will to pay for an asset or liability in an arms-length transaction. Financial Asset An asset that derives value because of a contractual claim such as cash, trade receivables and equity of another entity. Financial Liability is any liability that is a contractual obligation to deliver cash or another financial asset to another entity under conditions that are potentially unfavourable, or that will or may be settled in the entitys own equity instruments. Fixed Assets/ Non-Current Assets - An asset that is not consumed or sold during the normal course of business, such as land, buildings, equipment, machinery, vehicles, etc. The day to day operations of a business is usually dependent on the usefulness of its fixed assets.

Future Value - The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. Goodwill - Is an account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when a company is purchased by another company. In an acquisition, the amount paid for the company over book value usually accounts for the target firm's intangible assets. It is seen as an intangible asset on the balance sheet because it is not a physical asset such as buildings and equipment. Horizontal Integration - The combination of firms in the same business lines or markets. Impairment - A reduction in a company's stated capital. It is the total capital that is less than the par value of the company's capital stock. In other words, this is usually reduced because of poorly estimated losses or gains. Investee A company or entity that you make an investment in. Investor The company or entity that made the investment. Joint Arrangement An arrangement of which two or more parties have joint control. Joint Control 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. Joint Venture a business entity that is owned, operated, and jointly controlled by a small group of investors (venturers) for a specific undertaking; it may be temporary or relatively permanent, and it may be corporate or partnership. Long-term liability The obligations payable in goods or services at a future period, usually more than 12 months away from the date of balance sheet.

Merger a business combination in which one corporation takes over the operations of another entity and that entity goes out of existence; also, a business combination or an acquisition in a generic sense.

Net realisable value is the amount for which an asset can be sold less the cost of sale. Non-Controlling Interests (NCI) or Minority Interests This represents the minority shareholding in a subsidiary. NCI is the interest or percentage ownership of a group of stockholders who, in total, owns a maximum of 49% of the shares in company. Ordinary Shares- These are also known as common shares or any shares that are not preferred or predetermined dividend amount. There are different classes of ordinary shares but each has the same rights to receive dividends. Parent Company/ Holding Company - This is a company that owns over 51% of the shares or stock of another company known as the subsidiary. Pooling of interests - An accounting method for reporting acquisitions accomplished through the use of equity. The combined assets of the merged entity are consolidated using book value, as opposed to the purchase method, which uses market value.

Pre-incorporation profit or loss - is profit or loss which arisen when an entity is sold/bought or when a company invests in shares of another company. This distinction is required as the profit/loss belongs to the shareholders and is used to calculate goodwill.

Present Value - The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Reserve - is where the company sets aside an amount from their retained earnings for a specific purpose example revaluation and statuary reserve. Retained Earnings is defined as profits generated by a company that are not distributed to stockholders/shareholders as dividends but are either reinvested in the business or kept as a reserve for specific objectives. Retained earnings are also called accumulated earnings, accumulated profit, accumulated income, and accumulated surplus. Sarbanes Oxley (SOX) Is a legislation that came into force in 2002 and introduced major changes to the regulation of financial practice and corporate governance. Named after Senator Paul Sarbanes and Representative Michael Oxley, who were its main architects, it also set a number of deadlines for compliance. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards. Share Capital - is funds raised by an entity through the sale of common shares or ordinary shares. This is also called equity share capital or equity financing. Share Premium This is the difference between the higher price paid for a share of stock and the stocks par value when issued. Shareholder These are persons or entities that own shares or equity in a company. Significant Influence This is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Stakeholders are persons, an organization or a group who have direct and indirect interest or investment in a business. Stakeholders include employees, internal teams, customers, vendors and members of the community.

Subsidiary A company in which more than 50% of its shares is owned or controlled by another company. Vertical Integration - The combination of firms with operations in different but successive stages of production and/or distribution.

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How is goodwill and impairment treated in the consolidated statement of comprehensive income and the consolidated statement of the financial position where:

According to the IAS 27, Consolidated and Separate Financial Statements, non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent entity.

IFRS 3 Business Combination states that Non-controlling interests can be measured following one of the two alternative methodologies: fair value (sometimes called the full goodwill method), or the NCI's proportionate share of net assets of the acquiree

IFRS 3 Business Combination also defines goodwill as an asset that represent future economic benefits arising from other assets acquired in a business combination that are not individually identified or separately recognized. The standard dictates that goodwill is measured on the acquisition of a subsidiary by comparing the fair value of the entire subsidiary; this is both consideration from the holding company and fair value of the non-controlling interests and all the fair value of its net assets upon acquisition. IAS 36 explains that an asset is impaired when its carrying amount exceeds its recoverable amount. In other words, impairment is a reduction is an entitys stated asset value.

(i)

Non-controlling interest is valued at book value

When non-controlling interest is valued at book value then goodwill will only be attributable to the parent entity. In other words only the acquiring entitys share of the goodwill will be recognized. This means if or when the goodwill is impaired the impairment will only be ascribed to the parent entity retained earning thus reducing this amount. The accounting treatment would therefore follow: In the consolidated statement of comprehensive income impairment (current) is added to your administrative expense unless otherwise indicated. Impairment carries a debit balance therefore when applied to the retained earnings (carried a credit balance) of the parent entity it reduces this

amount; the corresponding credit entry is applied to goodwill. The carrying amounts for goodwill as well as the net retained earnings are then recorded in the consolidated statement of financial position. Summary: IMPAIRMENT: Debit Group reserves and Credit goodwill GOODWILL: recorded in the consolidated statement of financial position as a non-current asset

(ii)

Non-controlling interest is valued at fair value

When non-controlling interest is valued at fair values this means that the goodwill that arises will be attributed to the entire group, both the parent company and the non-controlling interest. The impairment that results should be apportioned to the parent and non-controlling interest based of their percentage holding in the subsidiary entity. In the consolidated statement of comprehensive income the entire current amount for impairment is added to the administrative expense unless otherwise indicated. The accounting treatment is as follows: Debit group retained earnings (the percentage of impairment the is attributable to holding company) Debit Non-controlling Interest (the percentage of impairment the is attributable to noncontrolling interest) Credit goodwill (with entire impairment amount)

After applying the impairment amount to goodwill the carrying value is then recorded in the consolidated statement of the financial position as a non-current asset. The net group retained

earnings as well as net non-controlling interests are also added to the consolidated statement of the financial as this comprises the groups equity.

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From the Parent consolidated accounts of Proven Investments identify and explain the following for the current and prior year:

Proven Investments Limited (PROVEN) is incorporated in St. Lucia on November 25, 2009 as an International Business Company (IBC) pursuant to the International

Business Companies Act, Cap. 12.14 of St. Lucia. Its registered office is located at McNamara Corporate Services Inc., 20 Micoud Street, Castries, St. Lucia. One March 1, 2010 the business commenced it operations. The company entre and agreement with Guardian Holding s limited to acquire the entire issued share capital of Guardian Asset Management Jamaica Limited, which as then renamed Proven Wealth Limited. The primary activities of the company are the holdings of tradable securities for investments purposes and holding other investments.

(Extracted from Proven Investments Annual Report 2012, notes to financial statement, page 30)

a. Share capital in the parent companys financial statement The share capital of the parent company financial statement for the year 2011 was $29,657,000 and for the year 2012 $29,657,000. The share capital of Proven Investments is a long term source of finance. It is money that has been invested in Proven by shareholders and in return these investors receive shares for their investments within the company. These shares generate income (for shareholder) at a prescribe rate and is paid over to the investor at a set date (quarterly, bi-yearly or annually), this is called dividend. The share capital amount will remain constant from year to year unless the company is authorized to issue additional shares, then the amount will increase. It should be noted also that on consolidation of the parent and subsidiary account only the parents share capital will be recorded in the consolidated statement of financial position.

b. Share capital in the consolidated finance statement The share capital on Provens consolidated financial statement for the year 2011 was $29,657,000 and for the year 2012 $29,657,000. As previously stated in part (a), the share capital that is reflected upon consolidation of the parent and the subsidiarys financial statement is that of the parent company only keeping in accordance with the rule of IFRS 10. The Companys ordinary share is valued at US$0.01 (par value) their preference stock is values at US$0.01 and recently they have additional cumulative redeemable preference shares that is also valued at US$0.01 (par value)

c. Retained earnings of the parent company Retained earnings for the parent company stood at $9,417,000 for the year 2011 and $11,256,000 for the year 2012. Retained earnings represent the sum of a company's profits, after dividend payments, since the company's inception that has been reinvested in the business. Indications have be made that retained earnings can be regarded as a mean of long-term financing therefore it should not be considered as a surplus or money that has been left over but only demonstrated what the parent has done with its profits. The parent company has chosen to reinvest its profits rather than pay out the amount to shareholders as dividend.

d. Group retained earnings The group retained earnings for 2011 $5,304,000 and 2012 was $5,822,000.

The group retained earnings is a combination of the parent and its subsidiary retained earnings (less non-controlling interest portion). This is adjusted to reflect any unrealized profit or impairment that occurred throughout the period. The parent is entitled to a portion of the subsidiary profits based on their percentage holding in the subsidiary (if not wholly owned).

e. Non-Controlling Interest The parent of Proven Investments financial statement has no non-controlling interest for the years 2011 and 2012. However the group consolidated statement of financial position reflected non-controlling interest of $117,000 for the year 2012 and none for the previous year (2011). The Non-controlling interest represents a percentage of interest in a company (in this case Proven Investment) that is less than enough to influence the overall operation and decision making processes of the business (usually 1-19% holding). Proven Investment non-controlling interest has a fifteen percent (15%) holding and is therefore entitled to that portion amounting to fifteen percent of the subsidiarys profit only. This profit however should adjusted for impairment that may occur throughout the year providing the directors of Proven has valued non-controlling interest at fair value that resulted in goodwill which in turn suffered impairment throughout the period.

According to IFRS 10, a parent presents non-controlling interests in its consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

f. The relationship between the investor company and its respective investees. The Companys subsidiaries are as follows: Proven Wealth Limited which is located in Jamaica Proven REIT Limited - located in St. Lucia Proven Kingsway Limited Asset Management Company Limited 2012 100% 85% 100% 100% 2011 100% -

g. Profit attributable to the Parent Company The profit attributable to the parent company as indicated on the consolidated statement of comprehensive income for the year 2011 was $6,602,000.00 and for 2012 $3,263,000. The profit attributable to parent is apportioned based on the parents percentage holding in the subsidiaries as well as from the profits from their own operating activities throughout the year. The parent of the group receives a hundred percent of the profit of Proven Wealth Limited, Proven Kingsway Limited and Asset Management Company Limited but only eighty five percent of Proven REIT Limited. This profit that is attributable to the parent is calculated by combining all the revenues of both the parent and its subsidiaries and adjusting these revenues for the cost of doing business, impairments, depreciation, interest, taxes and other expenses. This resulted in a net a amount which is the apportioned between the non-controlling interest within the group and the parents

h. Profit attributable to non-controlling interest

The profit that is attributable to the non-controlling interest for the period ending 2012 was $31,000; from the consolidated statement of comprehensive income there are indications that there were no non-controlling interests during period ending 2011. Therefore, the profits that derived from the group trading for that period wholly belong to the parent company.

References ACCA Paper F7 - Financial Reporting (International). Published by BPP Learning Media Ltd. (2009) Beams, F., Anthony, J., Bettinghaus, B., & Smith, K. (2012). Advanced Accounting (11th ed.). New Jersey: Pearson Education, Inc.

http://financial-dictionary.thefreedictionary.com/Pooling+of+Interests The Sarbanes-Oxley Act. Retrieved April 28, 2013 http://www.soxlaw.com/ http://www.iasplus.com/en/standards/ifrs10 http://www.ifrs.com/publications.html