Ind AS 28

Understanding Ind AS 28: A Core Definition

Ind AS 28, officially titled “Investments in Associates and Joint Ventures,” is an Indian Accounting Standard that prescribes the accounting treatment for investments in entities where an investor has either “significant influence” or “joint control,” but not “control.” It mandates the use of the equity method for accounting for these types of investments in the investor’s separate financial statements, and also when an investor presents consolidated financial statements (unless specific exemptions apply). The primary objective of Ind AS 28 is to ensure that entities provide relevant and reliable information about their investments in associates and joint ventures in their financial reports, thereby reflecting the economic substance of these relationships.

The Journey to Ind AS 28: Its Place in Indian Accounting Standards

Ind AS 28 is an integral part of India’s convergence with International Financial Reporting Standards (IFRS). Developed by the Institute of Chartered Accountants of India (ICAI) and notified by the Ministry of Corporate Affairs (MCA), Ind AS 28 is based on the corresponding International Accounting Standard (IAS) 28, “Investments in Associates and Joint Ventures.” India adopted the Ind AS framework in a phased manner starting from April 1, 2016, for certain classes of companies, bringing its accounting practices in line with global standards. This convergence aimed to enhance the comparability, transparency, and quality of financial reporting for Indian companies operating in a globalized economy. Ind AS 28 specifically addresses a crucial area of financial reporting that involves complex relationships between entities, ensuring consistency and clarity where an investor holds significant sway without outright control.

Navigating Ind AS 28: Key Principles and Accounting Treatment

Ind AS 28 provides detailed guidance on how to account for investments in associates and joint ventures using the equity method. It’s built upon several foundational concepts:

Identifying Associates and Joint Ventures

• Associate: An entity over which the investor has significant influence. Significant influence is presumed when the investor holds 20% or more of the voting power of the investee, unless it can be clearly demonstrated that this is not the case. It can also exist with less than 20% ownership through board representation, participation in policy-making, material intercompany transactions, interchange of managerial personnel, or provision of essential technical information.
• Joint Venture: An arrangement whereby parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

The Equity Method Explained

The equity method is the core accounting technique prescribed by Ind AS 28 for these investments. Here’s how it works:

1. Initial Recognition: The investment is initially recognized at cost.
2. Subsequent Measurement:
   • The carrying amount of the investment is increased or decreased to recognize the investor’s share of the investee’s profit or loss after the date of acquisition. The investor’s share of the investee’s profit or loss is recognized in the investor’s profit or loss.
   • Distributions received from the investee reduce the carrying amount of the investment.
   • The investor’s share of the investee’s other comprehensive income (OCI) is recognized in the investor’s OCI.
   • The investor’s share of changes in the investee’s equity not arising from profit or loss or OCI (e.g., changes from share premium, revaluation surplus directly to equity) is recognized directly in the investor’s equity.
3. Impairment: The investor applies Ind AS 36 “Impairment of Assets” to determine whether it is necessary to recognize any impairment loss with respect to its investment in an associate or joint venture.
4. Cessation of Significant Influence/Joint Control: If an investor loses significant influence or joint control, it derecognizes the investment and recognizes any resulting gain or loss in profit or loss.

Important Considerations and Disclosures

Ind AS 28 also covers complex scenarios like upstream and downstream transactions, potential voting rights, and the financial reporting period of the investee. It requires specific disclosures including:

• The aggregate amount of the investor’s share of the profit or loss of associates and joint ventures and the aggregate amount of the investor’s share of OCI.
• A summary of financial information of associates and joint ventures.
• The fair value of investments in associates or joint ventures for which there are published price quotations.

Why Ind AS 28 Matters to Your Business

Understanding and complying with Ind AS 28 is critical for businesses for several reasons:

• Accurate Financial Reporting: It ensures that the financial statements accurately reflect the economic reality of an entity’s investments, providing a true and fair view to stakeholders.
• Regulatory Compliance: Adherence to Ind AS 28 is mandatory for companies required to follow Ind AS, avoiding penalties and reputation damage associated with non-compliance.
• Informed Decision Making: Proper application of the equity method provides management with a clearer picture of the performance and financial position of its associates and joint ventures, aiding strategic and operational decisions.
• Investor Confidence: Transparent and consistent reporting of investments under a globally recognized standard enhances investor confidence, potentially attracting more capital and improving market valuation.
• Comparability: It allows for better comparison of financial statements with other companies adopting similar accounting standards, both domestically and internationally.

Real-World Scenarios: Where Ind AS 28 Comes into Play

Ind AS 28 applies to a wide range of business situations:

• Minority Strategic Investments: When a company invests in another entity to gain a strategic alliance, market access, or technological advantage, holding a stake typically between 20-50%, thereby exerting significant influence.
• Joint Ventures for Specific Projects: Businesses often form joint ventures for large-scale projects, such as infrastructure development, research and development, or market entry into new geographies, where joint control is contractually established.
• Equity Participations in Startups: Established companies investing in startups, where their investment, coupled with board representation or specific contractual rights, gives them significant influence over the startup’s financial and operating policies.
• Consortiums and Collaborations: In sectors like oil and gas, pharmaceuticals, or aviation, companies often enter into consortiums or collaborative arrangements that might qualify as joint ventures, requiring application of Ind AS 28.

Interconnected Concepts: Other Standards to Consider

Ind AS 28 does not operate in isolation. Several other Ind AS standards are closely related:

• Ind AS 110 “Consolidated Financial Statements”: This standard defines control and sets out requirements for preparing consolidated financial statements. Ind AS 28 applies when an investor has significant influence or joint control, but not control as defined by Ind AS 110.
• Ind AS 111 “Joint Arrangements”: This standard provides guidance on classifying joint arrangements as either joint operations or joint ventures. Ind AS 28 specifically deals with accounting for joint ventures.
• Ind AS 103 “Business Combinations”: When an investment transitions from an associate or joint venture to a subsidiary (i.e., control is gained), Ind AS 103 applies.
• Ind AS 36 “Impairment of Assets”: As mentioned, Ind AS 36 is applied to test for impairment of investments accounted for under the equity method.
• Ind AS 109 “Financial Instruments”: If an investment does not qualify as an associate or joint venture, it may fall under Ind AS 109 as a financial asset.

Staying Current: Recent Developments and Interpretations

While Ind AS 28 itself has been relatively stable, interpretations and practical guidance continually evolve. The ICAI regularly issues clarifications, educational materials, and frequently asked questions (FAQs) to address specific implementation challenges. Key areas of focus often include complex scenarios of assessing significant influence, accounting for dilution or step-acquisitions, and specific disclosure requirements. Keeping abreast of these pronouncements is crucial for ensuring ongoing compliance and accurate application, particularly in a dynamic business environment with evolving investment structures.

Who Needs to Know: Departments Impacted by Ind AS 28

The implications of Ind AS 28 extend beyond just the accounting department:

• Finance & Accounting Department: Directly responsible for the preparation of financial statements, applying the equity method, and ensuring compliance.
• Corporate Development / Mergers & Acquisitions (M&A) Teams: Involved in structuring investment deals, they need to understand the accounting implications (whether it results in an associate, joint venture, or subsidiary) before finalizing agreements.
• Legal Department: Crucial in drafting and reviewing shareholder agreements, joint venture agreements, and other contracts to ensure that the intended level of influence or control (or joint control) is clearly defined and consistent with Ind AS 28 definitions.
• Treasury Department: Manages cash flows, including dividends received from associates and joint ventures, and monitors the overall investment portfolio.
• Internal Audit: Responsible for verifying the correct application of Ind AS 28 principles and the adequacy of related controls.
• Tax Department: Needs to understand the accounting treatment as it often impacts tax calculations and deferred tax considerations related to these investments.

Looking Ahead: The Future Landscape of Investment Accounting

The future of investment accounting under Ind AS 28 will likely involve continued emphasis on robust judgment and transparency. As business models become more interconnected and complex, with increasing reliance on strategic alliances and collaborative ventures, the interpretation and application of “significant influence” and “joint control” will remain a critical area. Potential future trends might include increased scrutiny on the fair value measurement aspects where applicable, refined guidance on non-monetary contributions to joint ventures, and potentially further convergence efforts with any future amendments to IAS 28 at the international level. The underlying principle of providing a faithful representation of these crucial investment relationships will remain at the forefront.