Accounting for Investments

The accounting for investments involves tracking, measuring, and reporting and compliance (GAAP & IFRS) on the value of investments to understand profit and loss, tax reporting, risk and the overall effect on an organisation’s financial performance. Investment measurements can be done through equity method (e.g., 20%-50% ownership), fair value method (for trading or available for sale), and cost method (non-controlling stakes, less than 20% ownership).

2.1.  Subsidiary

IFRS 10 Consolidated Financial Statements defines a subsidiary as an entity that is controlled by another entity (the parent company).

Example 1:

Johson Co acquires more than 50% of the voting rights of another entity (Judin Co) and decision-making is resolved by voting rights.

On 1 September 2005, Johnson Co acquired £2.4m of the ordinary shares of Judin Co. At that date Judin Co had £3m ordinary shares in issue. Thus, Johnson Co has acquired an 80% holding (£2.4M/£3m = 80%).

2.2.  Associate

IAS 28 Investments in Associates and Joint Ventures defines an associate as an entity over which the investor has significant influence. The significant influence is the “power to participate in the financial and operating policy decisions of the investee but is not control of those policies.

On 1 January 2005, Akin Ltd acquired 80m of the 200m ordinary shares in issue by Orange Ltd. Akin Ltd has now acquired an associate, because it has acquired between 20% and 50% of the voting right shares.

2.3.  Joint Venture

IAS 28 Investment in Associate and Joint Ventures defines a joint venture as a “joint agreement whereby the parties that have joint control of the agreement have rights to the net assets of the agreement.

On 1 February 2005, Soso Ltd and Asun Ltd, entities that are related, acquire 50% each of the ordinary shares of Gogo Ltd and will jointly control the agreement.

2.4.  Trade or Simple Investment

A trade or investment occurs where an investor acquires less than 20% of the voting rights of the investee and the investment can be considered to bring about a significant influence.

Accounting Standards for trade investment are the IFRS 9 ‘Financial Instruments’ and the IAS 39 ‘Financial Instruments Recognition and Measurement’. The standard encompasses requisites for recognition and measurement, impairment, derecognition, and general hedging accounting.