1.3 Investments — Equity Method and Joint Ventures

Both IFRS Accounting Standards and U.S. GAAP require the application of the equity method of accounting to certain investments (note that for IFRS Accounting Standards purposes, investees are referred to as associates). However, as shown in the table below, the standards differ in several respects in the determination of when and how the equity method should be applied.

Topic	IFRS Accounting Standards (IFRS 11, IFRS 3, IAS 28)	U.S. GAAP (ASC 323, ASC 808)
Scope — general	An investor must apply the equity method of accounting when it has significant influence over an investee unless the investment is in a venture capital organization or a mutual fund, unit trust, or similar entity (i.e., investment entities). For investment entities, the investor may account for its investments that would otherwise qualify for the equity method by using FVTPL. Because IFRS Accounting Standards do not include an FVO for equity method investments, the application of the FVO rather than the equity method is more limited than it is under U.S. GAAP.	An investor must apply the equity method of accounting when it has significant influence over an investee unless (1) it has elected the FVO or (2) it carries its investment at fair value under specialized industry accounting guidance applicable to investment companies. In these cases, the investor would record its interest at fair value. In addition, investments in partnerships or certain LLCs require the use of the equity method of accounting with as little as 3 percent to 5 percent ownership even if significant influence does not clearly exist.
Scope — investments in instruments other than common equity	The evaluation of significant influence is framed in reference to “voting rights,” which can arise from instruments other than ordinary common shares. However, the equity method of accounting may be applied only to ordinary shares or instruments that are substantively the same as ordinary shares.	An investor would apply the equity method of accounting for an investment in a corporation when it has significant influence over an investee and it holds an investment in common stock or in-substance common stock. In-substance common stock includes instruments that are substantially similar to common stock based on subordination, risks and rewards of ownership, and an obligation to transfer value.
Applying the equity method of accounting — significant influence	Although IAS 28 provides considerations similar to those in U.S. GAAP for the evaluation of whether an investor holds significant influence over an investee, IFRS Accounting Standards do not provide explicit significant-influence investment thresholds for partnerships or LLCs.	The evaluation of significant influence is generally the same as it is under IFRS Accounting Standards. However, there is special guidance in U.S. GAAP for partnerships. An investment greater than 3 percent to 5 percent in a partnership or LLC that maintains specific ownership accounts is generally accounted for under the equity method of accounting even if the investor does not have significant influence.
Applying the equity method of accounting — potential voting rights	An investor should consider “potential voting rights that are currently exercisable or convertible” in evaluating significant influence. Instruments with potential voting rights contingent on future events or the passage of time would not be considered until the contingent event occurs or the specified time frame passes.	An investor would consider only “present voting privileges.” Therefore, potential voting rights are generally disregarded.
Initial measurement — contingent consideration	Although IFRS Accounting Standards do not provide explicit guidance, contingent consideration is generally recognized at fair value by analogy to IFRS 3. Therefore, contingent consideration is generally recognized at its fair value on the acquisition date in accordance with IFRS 3. Subsequently, the liability is measured at fair value, with any changes in value recognized in the income statement.	Contingent consideration may be recognized in two scenarios: When the contingent consideration meets the recognition criteria of U.S. GAAP (other than ASC 805), such as if the contingent consideration meets the definition of a derivative. When the noncontingent consideration offered is less than the interest in the investee’s underlying net assets.
Initial measurement — nonmonetary contributions to investee for equity interests	IFRS Accounting Standards contain conflicting guidance, which the IASB attempted to resolve through a narrow-scope amendment. IAS 28 indicates that nonmonetary contributions should be recognized with partial gain recognition. This, however, conflicts with IFRS 10, which indicates that upon loss of control of a subsidiary, a parent should recognize full gain or loss. Therefore, when an entity contributes shares of a subsidiary in exchange for an equity method investment, the entity in effect has an accounting policy choice between applying the approach in IFRS 10 (full gain recognition) or IAS 28 (partial gain recognition) since both IFRS 10 and IAS 28 have equal standing under IFRS Accounting Standards.	The recognition of nonmonetary contributions to an equity method investee depends on whether the assets contributed are a business. If they are, ASC 810 would indicate that full gain or loss recognition is required (except if the transaction is the sale of in-substance real estate or a conveyance of oil and gas mineral rights). A contribution of nonfinancial assets or in-substance nonfinancial assets that is not an output of the entity’s ordinary business activities (i.e., outside the scope of ASC 606) would generally be accounted for in accordance with ASC 610-20, which indicates that full gain or loss recognition is appropriate when the transaction meets the various recognition criteria described therein.
Subsequent measurement — losses in excess of interests	An investor is typically required to discontinue use of the equity method of accounting when the value of an investment reaches zero unless the investor has incurred legal or constructive obligations or made payments on behalf of the associate.	An investor generally discontinues use of the equity method of accounting when the value of an investment reaches zero unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support to the investee. However, unlike the treatment under IFRS Accounting Standards, an investor is required under U.S. GAAP to continue to recognize additional losses after the investment reaches zero if the imminent return to profitable operations appears to be assured.
Subsequent measurement — impairment	An entity must test an investment for impairment by comparing its recoverable amount (the higher of its value in use or its fair value less costs to sell) with its carrying amount whenever there is indication of any impairment. Impairment losses should be reversed in a subsequent period to the extent that the recoverable amount of the associate or joint venture increases.	An entity must record impairment or losses in value of an investment that represent an other-than-temporary decline. A reduction in the current fair value of an investment below its carrying amount may indicate a loss in value of the investment. Impairment losses cannot be reversed in subsequent periods.
Subsequent measurement — differences in reporting periods	The investor’s and investee’s reporting dates must be the same unless it is impracticable for them to be the same. When it is impracticable, the dates must be no more than three months apart. Unlike U.S. GAAP, IFRS Accounting Standards require the investor to record its share of the associate’s significant transactions or events that have occurred during the lag period.	A difference in reporting dates is permitted as long as it is not more than three months. An entity must disclose the effect of any transactions or events during the intervening period that materially affect the investor’s financial statements.
Subsequent measurement — differences in accounting policies	An entity is required to make adjustments to an investee’s financial statements to conform the investee’s accounting policies to those of the reporting entity.	An entity is not required to make adjustments to financial statements when an investee and a reporting entity have different accounting policies; however, a reporting entity has the option of conforming an investee’s accounting policies to those of the reporting entity.
Subsequent measurement — loss of significant influence	An investor would recognize any retained interest at fair value, with any difference between the fair value of the retained interest and the carrying value of the equity method investment recognized in the income statement.	When an investor loses significant influence over an investee, it recognizes any retained investment on the basis of historical cost and thus recognizes no gain or loss solely because of the loss of significant influence (and thus the discontinuance of the equity method of accounting). Note, however, that other U.S. GAAP subsequently applicable to the investment may require measurement at fair value, with changes recognized in income (e.g., ASC 321).
Joint arrangements — models	IFRS 11 defines a joint arrangement as an “arrangement of which two or more parties have joint control” and clarifies that joint control exists only when “decisions about the relevant activities require the unanimous consent of the parties that collectively control the arrangement.” IFRS 11 requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved by assessing its rights and obligations arising from the arrangement. IFRS 11 establishes two types of joint arrangements: (1) joint operations and (2) joint ventures, both distinguished by the rights and obligations of the parties involved. In a joint operation, the parties have rights to the underlying assets and obligations for the liabilities of the arrangement and should recognize their share of the assets, liabilities, revenues, and expenses arising from their interest. In a joint venture, the parties have rights to the net assets of the arrangement and should account for their interests by using the equity method of accounting. Further, a joint venture requires the use of a separate vehicle (e.g., a separate legal entity); otherwise, the arrangement is a joint operation. Note that the existence of a separate vehicle is not sufficient evidence on which to base a conclusion that the arrangement is a joint venture.	Before determining the appropriate accounting model to use, an entity must first assess whether the joint venture is a variable interest entity (VIE). If so, the entity must apply the consolidation model in ASC 810. If the VIE is not consolidated under ASC 810, the entity must determine which of the following two accounting models is appropriate to use: Joint operations not involving a legal entity — ASC 808, and not ASC 323, addresses jointly controlled operations not primarily conducted through a legal entity. Under ASC 808, a joint operator must be (1) an active participant in the joint operations conducted primarily outside of a legal entity and (2) exposed to significant risks and rewards dependent on commercial success of the joint activity. Jointly controlled entities — These are entities, such as joint ventures, for which all significant decisions regarding the financing, development, sale, or operations require the approval of two or more of the owners. Investors with joint control would generally be able to apply the equity method of accounting.
Initial contribution of nonmonetary assets that meet the definition of a business to a joint venture	An accounting policy election of one of the following three approaches may be taken (unless a venturer adopted the amendments proposed by the IASB in September 2014 before it indefinitely deferred them in December 2015): Approach A (based on the September 2014 amendments to IFRS 10 and IAS 28) — In a transaction involving a joint venture, the extent of gain or loss recognition by the venturer depends on whether the assets sold or contributed constitute a business. When an entity (1) sells or contributes assets that constitute a business to a joint venture or (2) loses control of a subsidiary that contains a business but retains joint control, the gain or loss resulting from that transaction is recognized in full. Approach B (based on the guidance in IAS 28 before the adoption of the September 2014 amendments) — Paragraph 28 of IAS 28 states that any gain or loss is recognized by the venturer “only to the extent of unrelated investors’ interests in the . . . joint venture.” Approach C (based on the guidance in IFRS 10 before the adoption of the September 2014 amendments) — Under IFRS 10, the venturer derecognizes all the net assets of the former subsidiary and recognizes at fair value any consideration received and any retained interest in the former subsidiary.	A gain or loss is recognized as the difference between the following: The sum of (1) the fair value of any consideration received, (2) the fair value of any retained noncontrolling investment in the net assets as of the date of the contribution (the date control is lost), and (3) the carrying amount of any noncontrolling interest in the net assets as of the date of the contribution (the date control is lost). The carrying amount of the net assets contributed as of the date of the contribution (the date control is lost).
Initial contribution of nonmonetary assets that do not meet the definition of a business to a joint venture	An accounting policy election of one of the following three approaches may be taken (unless a venturer adopted the amendments proposed by the IASB in September 2014 before it indefinitely deferred them in December 2015): Approach A (based on the September 2014 amendments to IFRS 10 and IAS 28) — In a transaction involving a joint venture, when the venturer (1) sells or contributes assets that do not constitute a business to a joint venture or (2) loses control of a subsidiary that does not contain a business but retains joint control in a transaction involving a joint venture, the gain or loss resulting from that transaction is recognized only to the extent of the unrelated investors’ interests in the joint venture (i.e., the entity’s share of the gain or loss is eliminated). A new example added to IFRS 10 (Appendix B, Example 17) illustrates the appropriate accounting in such circumstances. Approach B (based on the guidance in IAS 28 before the adoption of the September 2014 amendments) — Paragraph 28 of IAS 28 states that a gain or loss is recognized by the venturer “only to the extent of unrelated investors’ interests in the . . . joint venture.” Approach C (based on the guidance in IFRS 10 before the adoption of the September 2014 amendments) — Under IFRS 10, the venturer derecognizes all the net assets of the former subsidiary and recognizes at fair value any consideration received and any retained interest in the former subsidiary.	Generally, venturers recognize the initial contributions of nonmonetary assets that do not meet the definition of a business at fair value and may recognize a gain if applicable.