This is a group project, which was
submitted for International Accounting at 27th of October 27,
1999
Group 7: IAS 28
Nadarasa Subramaniam
Frederic Schneider
Marit Østhus
Mikael Kronie Pedersen
The IAS 28 p.1
French law and IAS 28 p.4
Comparing the Norwegian Standard with the IAS and the European
Directives p.5
The IAS and the Danish Law on Accounting Standards p.7
International Accounting Standard (IAS) 28
The IASC devotes a special standard, IAS 28, to shareholdings,
which is referred to as Investments in Associates, conferring
significant influence. In this view, IAS 28 defines how the
investments in associates should be shown in the financial
statements. Under this standard, when an investor has more than
20% of voting power, it generally account for its investment by
equity method, whereby the proportional share of the investee's
operating results will be reflected in the investor's financial
statement.
Scope
The scope of this standard is divided into the following:
a. This standard should be applied in
accounting by an investor for investments in associates.
b. The standard supersedes IAS 3 consolidated financial
statements, in so far as that standard deals with accounting for
investments for associates.
Before looking at how the entries are being taken place according
to IAS 28, it is better to know what the following terms, which
are often being used related to this standard, are being meant by
according to IAS 28.
· An Associate
An associate is an enterprise in which the investor has
significant influence and which
is neither a subsidiary nor a joint venture of the investor.
· Investor
A business enterprise that holds an investment in the voting
stock of another enterprise.
· Investee
Invstee is an enterprise that issued voting stock that is held by
an investor.
· Joint Venture
A contractual arrangement, whereby two or more parties undertake
economic activity subject to their joint control.
· Control (For the purpose of this standard)
Control is the power to govern the financial and operating
policies of an enterprise so as to obtain benefits from its
activities.
· Joint Control
The contractually agreed on joint sharing of control over the
operations and/ or assets of an economic activity.
· A Subsidiary
A subsidiary is an enterprise that is controlled by another
enterprise, which is often referred to as the parent company.
· Significant Influence
The power of the investor to participate in financial and
operating policy decisions of the investee, this is the less than
the ability to control these policies. If an investor owns either
directly or indirectly through subsidiaries, 20% or more of the
voting power of the investee, it is presumed that investor has
significant influence. Conversely, if the investor holds,
directly or indirectly through subsidiaries, less than 20% of
voting power of investee, it is presumed that the investor does
not have significant influence, unless such influence can be
clearly demonstrated. The existence of significant influence by
an is usually evidenced in one or more of following ways:
a. Representation on the board of directors or equivalent
governing body of the
investee.
a. Participation in policy making process.
b. Material transactions between the investor and the investee.
c. In charge of managerial personnel or
d. Provision of essential technical information.
Methods of accounting for Investments in Associates
According to IAS 28, there are mainly two different methods,
which are being applied to evaluate investments in associates,
when we prepare the financial statements.
1. Equity Method
2. Cost Method
Equity Method
Under the equity method, the investment is initially record at
cost and the carrying amount is increased or decreased to
recognise the investor's share of profits or losses of the
investee after the date of acquisition. Distributions received
from an investee reduce the carrying amount of the investment.
Adjustment to the carrying may also be necessary for alterations
in investors's proportionate interest in investee's equity that
have not been included in the income statement. Such changes
include those arising from the revaluation of property, plant,
equipment and investments, from foreign exchange translation
differences and from the adjustment of differences arising on
business combinations.
Cost method
Under the cost method, an investor records its investment in the
investee at cost. The investor recognises income only to the
extent that it receives distributions from the accumulated net
profits of investee arising subsequent to the date of acquisition
by the investor. Distributions received in excess of such profits
are considered a recovery of investment and are recorded as
reduction of the cost of the investment.
French law and IAS 28
The issue of IAS 28 (Accounting for investments in associates)
deals with both individual and consolidated accounts. That makes
this issue extremely broad from the point of view of French
standards. Thus, sometimes we cannot avoid some references to the
consolidated accounts (IAS 27). So instead of presenting all the
details and the differences between IAS 28 and French law we
prefer to notice several points that reflects the mains
differences.
First of all it is important to notice that the accounting law of
April 1983 and the law on consolidated accounts of January 1985
have permitted the transposition of the Seventh Directives into
the French law; that shows the implication of French institutions
for harmonisation.
We have seen in the first part of this presentation the meaning
of significant influence. Briefly we can remember whether the
investor holds 20 percent of the voting power of the investee it
is presumed that the investor has significant influence, but in
order to evidence this influence IASC uses also 5 factors
(representation on the board of directors or equivalent governing
body of the investee; participation in policy making processes ;
material transactions between the investor and the investee ;
interchange of managerial personnel; or provision of essential
technical information). On the contrary the 20 percent rule is
the only standard for the French law. What is quiet interesting
is that la CNCC (Compagnie Nationale des Commissaires aux
Comptes) - the institution responsible for all auditors - advises
auditors to use these 5 points to evidence the significant
influence .
Moreover French law does not have the term associates. It
considers on one hand the subsidiary (the investor holds more
than 50 percent of the voting power) and on the other hand the «
investments » (it holds less than 50 percent). In that last case
the cost method will be used.
Further the equity method (« mise en équivalence ») is not
considered as a method of valuation but as a method of
consolidation . It means that the consolidating company will use
this method only if the investor has significant influence on the
investee and only if the consolidating company has to draw up
consolidated accounts. Thus you will never see this method used
with investments in associates in individual accounts.
As a conclusion we can say that the problem of accounting for
investments in associates is not a real problem in France because
the method of valuation normally used is the cost method. But we
have seen through those few lines that dealing with equity method
is also dealing with consolidation in French law that is proposed
in IAS 27.
Comparing the Norwegian Standard with the IAS and the
European Directives
Norway is not a member of the European Union. "But as far as
accounting is concerned, there is no difference whether or not a
particular country is a member of the European Union since in
1992 the trade organisation EFTA made an agreement with the EU
that included, among other things, the obligation for EFTA
countries to incorporate the European directives on accounting
into their legislation." (International Accounting, Walton
et. al, London 1998). The implementation of the directives was
one of the driving forces for The Norwegian Accounting Act 1999
(Regnskapsloven 1999). This means that some changes in the
Norwegian legislation were necessary to comply with the EU
directives. (Finansregnskap med analyse, Arne Kinserdal, Oslo
1996).
The Norwegian Accounting Act 1999 contains a new
regulation/provision when it comes to accounting for investments
in associates. Historical cost is the main rule about valuation
of fixed assets. An exception to the principal rule can be seen
for valuation of investments in associates - the equity method
shall be used for this type of investments. § 5-8 says:
"Investments in associates have to be accounted for in
consolidated financial statements under the equity method and can
be accounted for in the separate financial statements under the
equity method." (Revisors håndbok, DNR, Oslo 1998). The
cost method was used prior to this regulation.
IAS 28 and the seventh council directive says that the equity
method should be used in the consolidated financial statements
when accounting for investments in associates.
IAS 28 and the fourth council directive allows the equity method
to be used in the separate financial statements when accounting
for investments in associates.
This means that the Norwegian standards do comply with the
international standards when it comes to accounting for
investments in associates. This is a result of The Norwegian
Accounting Act 1999. But in fact, a lot of the Norwegian
companies have voluntarily rewritten and presented the account in
accordance with the international methods before the
implementation of the new provision. The reason is that most of
the big Norwegian companies are dealing with international
markets. Statoil has for instance prepared the account in
accordance with the IAS for many years.
The IAS and the Danish Law on Accounting Standards
The IAS 28 (reformatted in 1994) applies for the Årsregnskabsloven
(Danish Law on Accounting Standards) for all yearly accounts
beginning on or later than 1/1/1990.
The IAS' definition of an associated company corresponds to the
Danish definition , both being when a company (and in the Danish
case, it's subsidiaries as well) enjoy significant influence over
another company. Significant influence being defined as 20% or
more of the voting rights, as well as having a say in the
operating and financial control of the company. The only
difference being that the definition of significant influence and
what an associated company is, are placed in a single paragraph
in the Danish Standard, while it is spread over 2 points in the
IAS.
The rules for including the associated company in the company's
consolidated accounts and in the investors fiscal accounts
corresponds to the Danish Law on Financial Standards in all
important area's. A small difference is that the Årsregnskabslov
prescribes that the consolidated accounts group equity shares
into 3, one of these being associated companies, the other 2
being subsidiaries and other securities and equity shares.
The rules in the IAS concerning the capitalisation of dividends,
revaluation's in equity as a whole, the companies share of the
profits, all correspond to the Årsregnskabslov. The Årsregnskabslov
does state that the accumulated net-revaluation (gains) of the
share of the equity in the associated company are to be placed in
reserve for net-revaluation using the equity method, and that
this cannot be used for distribution or dividends.
There is no demand for special or specific information concerning
a share of (the associated) company's exceptional items or items
concerning past financial accounts in the Årsregnskabslov.