Difference Between IAS 28 Under Going Concern and IAS 28 Under Liquidation

Introduction

IAS 28, “Investments in Associates and Joint Ventures,” outlines the accounting treatment for investments in associates and joint ventures, including the use of the equity method. This report explores the key differences in applying IAS 28 under a going concern assumption and during liquidation.

IAS 28 Under Going Concern

Core Principle

Under IAS 28, the core principle is to apply the equity method for accounting for investments in associates and joint ventures. The equity method involves recognizing the investment initially at cost and subsequently adjusting for the investor’s share of the investee’s profits or losses, dividends received, and other comprehensive income.

Initial Recognition

Investments in associates and joint ventures are initially recognized at cost, which includes the purchase price and any directly attributable transaction costs.

Example: A company purchases a 30% interest in an associate for R500,000. The investment is initially recognized at this cost.

Equity Method of Accounting

Under the equity method, the carrying amount of the investment is adjusted for the investor’s share of the investee’s profits or losses, dividends received, and other comprehensive income.

Example: The associate earns a profit of R200,000. The investor’s share (30%) is R60,000, which is added to the carrying amount of the investment. If the associate pays a dividend of R20,000, the investor’s share (30%) is R6,000, which is deducted from the carrying amount of the investment.

Impairment

Investments in associates and joint ventures are tested for impairment when there is an indication that the investment may be impaired. The carrying amount is compared to the recoverable amount, and any impairment loss is recognized in profit or loss.

Example: If the recoverable amount of an investment in an associate is determined to be R450,000 and the carrying amount is R500,000, an impairment loss of R50,000 is recognized.

Disclosures

IAS 28 requires extensive disclosures about investments in associates and joint ventures, including the nature of the relationship, summarized financial information, and the investor’s share of the investee’s financial performance.

Example: A company discloses its investment in an associate, including the associate’s total assets, liabilities, revenues, and profits, and the company’s share of these amounts.

IAS 28 Under Liquidation

Core Principle

During liquidation, the focus shifts from applying the equity method for ongoing operations to the immediate realization of investments in associates and joint ventures. The recognition and measurement of these investments are impacted by the urgency to sell or settle obligations quickly.

Initial Recognition

The initial recognition criteria remain the same, but the relevance of initial cost diminishes as the focus shifts to the liquidation value of the investments.

Example: A company in liquidation recognizes its investment in an associate at the initial cost but immediately focuses on determining its liquidation value.

Equity Method of Accounting

The equity method continues to apply until the investment is sold or liquidated. However, the carrying amount may need to be adjusted to reflect the expected proceeds from the sale or liquidation.

Example: A company in liquidation continues to apply the equity method but reassesses the carrying amount of its investment in an associate based on the expected liquidation proceeds.

Impairment

Frequent reassessment of investment values is necessary to reflect the lower expected disposal values. Impairment losses are more likely to be recognized as investments are written down to their recoverable amounts under liquidation conditions.

Example: A company in liquidation tests its investment in an associate for impairment and recognizes an impairment loss if the fair value less costs to sell is lower than the carrying amount.

Disclosures

Disclosures during liquidation should reflect the changes in the measurement of investments, any impairment losses recognized, and the impact of liquidation on these investments. The goal is to provide transparency about the basis for valuations during liquidation.

Example: A company in liquidation discloses the impairment losses recognized on its investment in an associate and the adjustments made to reflect the lower liquidation values.

Immediate Realization and Settlement

The focus during liquidation is on the immediate realization of investments. Entities must adjust their financial statements to reflect the expected proceeds from the sale or liquidation of investments in associates and joint ventures.

Example: A company in liquidation sells its investment in an associate for R400,000 and recognizes the proceeds in its financial statements, adjusting the carrying amount to reflect the sale.

Loss of Significant Influence

As the liquidation process progresses, entities may lose significant influence over associates due to the sale of their investments. This requires derecognizing the investment and recognizing any resulting gains or losses.

Example: A company in liquidation loses significant influence over an associate due to the sale of its interest. The company derecognizes the investment and recognizes a gain or loss based on the difference between the sale proceeds and the carrying amount of the investment.

Conclusion

The application of IAS 28 under a going concern assumption and during liquidation involves the same fundamental principles but different practical considerations. Under going concern, the focus is on applying the equity method and providing comprehensive disclosures about the nature and financial performance of investments in associates and joint ventures. In contrast, during liquidation, the emphasis shifts to the immediate realization of investments and the settlement of related obligations, with adjustments to the carrying amounts to reflect expected liquidation proceeds. Entities must carefully reassess their investments and make necessary adjustments to ensure accurate and transparent financial reporting during liquidation. This adjustment ensures that stakeholders receive a true and fair view of the entity’s financial position and performance during the liquidation process.

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