How starter kits meet IFRS – IAS 31
This series of blogs describes how SAP® BusinessObjectsTM Financial Consolidation, Starter Kit for IFRS has been configured to meet International Financial Reporting Standards (IFRS).
In our previous blogs, we have covered the following topics:
- Brief overview of SAP BusinessObjects Financial Consolidation, Starter Kit for IFRS (How Starter kits Meet IFRS requirements – Introduction)
- Presentation of consolidated financial statements according to How Starter Kits meet IFRS – IAS 1 and How Starter Kits meet IFRS – IAS 7
- Translation of a foreign entity’s financial statements as part of the consolidation process following the principles set out in How Starter Kits meet IFRS – IAS 21
- Current consolidation process (How starter kits meet IFRS – IAS 27 (part 1)), loss of control (How starter kits meet IFRS – IAS 27 (part 2)) and equity transactions (How starter kits meet IFRS – IAS 27 (part 3))
- Accounting for investments in associates (How starter kits meet IFRS – IAS 28)
Let’s go on with IAS 31 “Interests in Joint-ventures”.
IAS 31 applies in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors. This blog focuses on how joint-ventures should be included in the consolidated statements.
Proportionate consolidation or equity method
Joint-ventures (entities that are jointly controlled by the parent and other venturers) are included in the consolidated statements using either proportionate consolidation or the equity method. For more details about the equity method, please refer to the blog dedicated to IAS 28.
As regards proportionate consolidation, the venturer may combine its share of each of the assets, liabilities, income and expenses of the jointly controlled entity with the similar items, line by line, in its financial statements (option 1). Alternatively, the venturer may include separate line items for its share of the assets, liabilities, income and expenses of the jointly controlled entity in its financial statements (option 2).
In the starter kit
In the starter kit, both methods (proportionate consolidation and equity method) are available. As regards proportionate consolidation, the group’s share of each item of assets, liabilities, income and expenses is included line by line in the financial statements (option 1 above).
IAS 31’s requirements are as follows: “when a venturer contributes or sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction shall reflect the substance of the transaction. While the assets are retained by the joint venture, and provided the venturer has transferred the significant risks and rewards of ownership, the venturer shall recognize only that portion of the gain or loss that is attributable to the interests of the other venturers. When a venturer purchases assets from a joint venture, the venturer shall not recognize its share of the profits of the joint venture from the transaction until it resells the assets to an independent party”.
IAS 31 is silent when it comes to operations between joint-ventures or between subsidiaries and joint-ventures.
In the starter kit
Automatic rules described in How starter kits meet IFRS – IAS 27 (part 1) (IAS 27) for subsidiaries apply to joint-ventures. Elimination is weighted with the joint-venture’s consolidation rate or with the lowest consolidation rate when transactions take place between joint-ventures.
Changes in investor’s ownership interest
Loss of joint control
Principles described in IAS 27 for loss of control over a subsidiary apply when a parent loses joint control over a joint-venture. When the remaining interest, if any, gives significant influence, same principles apply as for a subsidiary becoming an associate (see How starter kits meet IFRS – IAS 27 (part 2) – loss of control).
Increase / decrease in interest rate
If a parent increases its interest in a joint-venture without achieving control (which means that the acquiree remains a joint-venture afterwards), IFRSs do not specify how to deal with this operation in the consolidated financial statements.
As regards a decrease in interest rate, IAS 31 states that “if an investor’s ownership interest in a jointly controlled entity is reduced, but the investment continues to be a jointly controlled entity, the investor shall reclassify to profit and loss only a proportionate amount of the gain or loss previously recognized in other comprehensive income”. It is inferred that a gain or loss should be recognized in the income statement on a partial disposal of a joint-venture.
In the starter-kit
The new interest rate and the new integration rate in the joint-venture (which changes as a consequence) are taken into account with the impact of change posted on flow F04. Additional manual entries are left up to the user (same as for associates, see blog #8).
In the next blog, we will focus on How starter kits meet IFRS – IFRS 3 “Business combinations”.