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Commission Regulation (EC) No 1725/2003 of 29 September
2003 adopting certain international accounting standards
in accordance with Regulation (EC) No 1606/2002 of the
European Parliament and of the Council.
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Equity accounting method -
recognition of losses
Paragraph 11 of IAS 1 (revised 1997), presentation of
financial statements, requires that financial statements
should not be described as complying with International
Accounting Standards unless they comply with all the
requirements of each applicable standard and each applicable
interpretation issued by the Standing Interpretations
Committee. SIC interpretations are not intended to apply to
immaterial items.
Reference: IAS 28, accounting for investments in associates
(revised 1998).
Issue
1. 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.
2. IAS 28.22 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.
3. In applying the equity method, the issues are:
(a) which financial interests are included in the "carrying
amount of an investment" referred to in IAS 28.22; and
(b) 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.
4. This interpretation addresses the application of the
equity method under IAS 28. Under the allowed alternative
treatment permitted by IAS 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 IAS
28.22, 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 International Accounting
Standards, for example, IAS 39, and prior to the
implementation of IAS 39, IAS 25 (reformatted 1994).
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
IAS 37. (Prior to the application of IAS 37, the recognition
of a provision is evaluated under the requirements of IAS 10 (reformatted
1994).)
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.
Date of consensus: August 1999.
Effective date: This interpretation becomes effective on 15
July 2000. Changes in accounting policies should be accounted
for according to the transition requirements of IAS 8.46
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