ACCA Strategic Professional · Strategic Business Reporting (International)

Associates and Joint Arrangements for ACCA SBR

An associate is an entity over which the investor has significant influence, usually shown by 20% to 50% of the votes, and it is accounted for under the equity method (IAS 28). Joint arrangements (IFRS 11) are joint operations, where you account for your share of assets and liabilities, or joint ventures, which use the equity method.

What this chapter covers

This chapter covers investments where you do not control the other entity. If you control it, it is a subsidiary and you consolidate line by line. If you have significant influence, it is an associate. If you share control under a contract, it is a joint arrangement. Each case has its own accounting.

You will learn how to judge significant influence, apply the equity method, remove unrealised profits on trading between the group and the associate, and test the investment for impairment. You will then classify joint arrangements as joint operations or joint ventures and see how the accounting differs. The last topic deals with changes in holdings, such as moving from an associate to a subsidiary, or from a financial asset to an associate.

This chapter builds on group accounting and on IFRS 10 and IFRS 3. It also links to IFRS 9 for investments that fall outside IAS 28, to IAS 36 for impairment, and to IFRS 13 for fair values. In SBR it usually appears inside the 30-mark group accounting question, and sometimes in the Section B questions as a shorter issue. The scenario will often make you decide the classification before you do any numbers.

Associates and joint arrangements are a regular part of SBR group questions, and they carry both calculation marks and discussion marks. The calculations are short once you know the method, so they are efficient marks. The harder marks come from judging significant influence or joint control from the scenario facts and explaining your conclusion. The professional skills marks also reward clear, reasoned argument, and this chapter gives you plenty to argue. Weak classification leads to wrong numbers, so this is worth real study time.

Associates and joint arrangements: topics in the order to study them

1Associates and Significant Influence (IAS 28)Start here, because you must decide whether an investment is an associate before you pick any accounting method.
2Equity Method Accounting for AssociatesOnce you know it is an associate, learn the core method that every later topic builds on.
3Unrealised Profits and Impairment of AssociatesThis adjusts the equity method for group trading and for falls in value, so you need the basic method first.
4Joint Arrangements: Joint Operations and Joint Ventures (IFRS 11)Joint ventures reuse the equity method, so study this after it is secure, and focus on the classification test.
5Changes in Associate or Joint Venture HoldingsThis is the hardest topic, as it combines step acquisitions, partial disposals and gain or loss calculations, so leave it until last.

How to prepare Associates and joint arrangements

Work from judgement to numbers. Practise the classification reasoning as much as the calculations, because SBR rewards both.

Learn the indicators of significant influence in IAS 28, such as board representation, participation in policy decisions, material transactions, and the presumption linked to 20% of votes. Remember that the presumption can be rebutted.
Build the equity method as a short routine: cost, plus share of post-acquisition profit, less dividends received, less impairment. Practise it until you can do it quickly.
Add unrealised profit adjustments. Learn how the elimination differs for sales by the investor to the associate and sales by the associate to the investor, and where each adjustment goes.
Make a classification checklist for joint arrangements: is there a contractual arrangement, is there joint control, and do the parties have rights to assets and obligations for liabilities or rights to net assets. Practise on short scenarios.
Work through changes in holdings step by step. Remeasure to fair value only in the right cases: gaining control (an associate or financial asset becoming a subsidiary), and losing control or losing significant influence (the retained interest is measured at fair value). Recognise the gain or loss in profit or loss. A financial asset that becomes an associate is carried at cost, which is the fair value of the old holding plus the new consideration. No remeasurement arises when an associate and a joint venture swap, or when significant influence is kept after a partial disposal. In a partial disposal where significant influence is kept, you still recognise the gain or loss on the part sold in profit or loss. Only the retained interest is not remeasured. In that case, also reclassify to profit or loss a proportionate share of any amounts previously in other comprehensive income, where those amounts would be reclassified on a disposal of the related assets or liabilities. Check the fair value and any amounts in other comprehensive income.
Do past-style questions under time. Write your discussion points in short, reasoned paragraphs that apply the scenario facts, then check your numbers against the working layout.

Common mistakes in Associates and joint arrangements

Treating a 20% to 50% holding as an associate automatically.
Fix: Treat 20% as a presumption. Check board seats, policy influence and other facts, and state your conclusion with reasons.
Consolidating the associate line by line.
Fix: Show one line on the statement of financial position and one line in profit or loss. Never add the associate's assets and liabilities.
Eliminating the wrong amount of unrealised profit.
Fix: Calculate the profit in unsold inventory and multiply by the group's percentage. For downstream sales, adjust the investment and the group's profit. For upstream sales, adjust the share of the associate's profit and group inventory. Do not adjust both the investment and inventory for the same sale.
Classifying a joint arrangement by its legal form alone.
Fix: Look at the legal form, the contract terms and other facts. Decide whether the parties have rights to assets and obligations, or only to net assets.
Remeasuring in the wrong cases, or missing it in the right ones, when status changes.
Fix: Identify the date status changes. Remeasure to fair value, with the gain or loss in profit or loss, when control is gained, or when control or significant influence is lost (the retained interest is at fair value). Use cost (old holding at fair value plus new consideration) when a financial asset becomes an associate. Do not remeasure when an associate and joint venture swap, or when significant influence continues. In a partial disposal where significant influence continues, reclassify a proportionate share of amounts previously in other comprehensive income to profit or loss where required.
Giving calculations without any explanation.
Fix: Add a short explanation of the treatment and why it fits the scenario, in clear and concise language.

Last-day revision: Associates and joint arrangements

An associate is an entity over which the investor has significant influence but not control or joint control.
Significant influence is the power to take part in financial and operating policy decisions, not to control them.
A holding of 20% or more of the votes presumes significant influence, but you must look at all facts.
Equity method: start at cost, add share of post-acquisition profits, deduct dividends received and impairment.
In the group statement of financial position, show the associate as one line in non-current assets.
In the group statement of profit or loss, show the share of the associate's profit after tax as one line.
Unrealised profit on trading with an associate is eliminated only to the extent of the group's share. For downstream sales (group to associate), eliminate the group's share of the profit against the investment in the associate and the group's profit. For upstream sales (associate to group), eliminate the group's share against the share of the associate's profit and the inventory held by the group. Adjust each transaction once, not against both the investment and inventory.
Under IAS 28, the investment is tested for impairment under IAS 36 only when there is objective evidence of impairment. The test applies to the whole carrying amount as one asset, and goodwill is not tested separately. Any impairment loss is not allocated to any asset, including goodwill. Any reversal is recognised under IAS 36 to the extent the recoverable amount later increases, up to the original loss.
A joint arrangement needs joint control: unanimous consent of the parties sharing control.
A joint operator recognises its assets, including its share of any held jointly. It recognises its liabilities, including its share of any incurred jointly. It recognises its revenue from selling its share of the output, and its share of the revenue from the joint operation's sale of output. It recognises its expenses, including its share of any incurred jointly.
A joint venturer uses the equity method for its interest in the net assets.
Remeasure to fair value when you gain control (an associate or financial asset becomes a subsidiary) and when you lose control or significant influence (the retained interest is at fair value). A financial asset becoming an associate is at cost: the old holding's fair value plus the new consideration. There is no remeasurement when an associate and a joint venture swap, or when significant influence is retained after a partial disposal. In that partial disposal, the gain or loss on the part sold is still recognised in profit or loss, and a proportionate share of amounts previously in other comprehensive income is reclassified to profit or loss where required, but the retained interest is not remeasured.

Associates and joint arrangements practice questions

Associates and joint arrangements in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Associates and joint arrangements: frequently asked questions

What is the difference between an associate and a joint venture?

An associate is an entity where you have significant influence only. A joint venture is a joint arrangement where the parties share control and have rights to the net assets. Both use the equity method, but the tests for classifying them are different.

Does a holding below 20% always mean no associate?

No. Below 20% there is a presumption of no significant influence, but it can be rebutted. Board representation or involvement in policy-making can show influence even with a smaller holding.

How is a joint operation accounted for?

A joint operator recognises its own assets, liabilities, revenue and expenses, including its share of any held jointly. It does not use the equity method. The accounting follows the rights and obligations the operator has under the arrangement.

Where do associates appear in the SBR exam?

They most often appear within the 30-mark group accounting question in Section A, and sometimes as an issue in other questions. Expect a mix of calculations and discussion, including classification and treatment of changes in holdings.