Statistics Act, 1999
R 385
Public Finance Management Act, 1999 (Act No. 1 of 1999)NoticesStandards of Generally Accepted Municipal Accounting Practice (GAMAP) in terms of Section 91GAMAP 7 : Accounting for Investments in Associates |
Introduction
Standards of Generally Accepted Municipal Accounting Practice (GAMAP)
The Accounting Standards Board (Board) is required in terms of the Public Finance Management Act, Act No. 1 of 1999, as amended (PFMA), to determine generally recognised accounting practice referred to as Standards of Generally Recognised Accounting Practice (GRAP).
The Board must determine GRAP for:
| (a) | departments (national and provincial); |
| (b) | public entities; |
| (c) | constitutional institutions; |
| (d) | municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality; and |
| (e) | Parliament and the provincial legislatures. |
The above are collectively referred to as ‘entities" Standards of GRAP.
The Board considers that the Standards of GAMAP constitute GRAP for municipalities.
GAMAP is an interim solution until such time as it is replaced by a Standard of GRAP.
Any limitation of the applicability of specific Standards is made clear in those Standards.
The Standard of GAMAP on Accounting for lnvestments in Associates is set out in paragraphs .01 - .34. All paragraphs in this Standard have equal authority. The authority of appendices is dealt with in the preamble to each appendix. This Standard should be read in the context of its objective, the Preface to Standards of GRAP, the Preface to Standards of GAMAP and the Framework for the Preparation and Presentation of Financial Statements.
Reference may be made here to a Standards of GRAP that has not been issued at the time of issue of this Standard. This is done to avoid having to change the Standards already issued when a later Standard is subsequently issued. Paragraph .12 of the Standard of GRAP on Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
Scope
| .01 | An entity which prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in accounting by an investor for investments in associates where the investment in the associate leads to the holding of an ownership interest in the form of a shareholding or other formal equity structure. |
| .02 | This Standard provides the basis for accounting for ownership interests in associates. That is, the investment in the other entity confers on the investor the risks and rewards incidental to an ownership interest. The Standard applies only to investments in the formal equity structure (or its equivalent) of an investee. A formal equity structure means share capital or an equivalent form of unitized capital, such as units in a property trust, but may also include other equity structures in which the investor's interest can be measured reliably. Where the equity structure is poorly defined it may not be possible to obtain a reliable measure of the ownership interest. |
| .03 | Some contributions made by entities may be referred to as an "investment" but may not give rise to an ownership interest. For example, an entity may make a substantial investment in the development of a hospital that is owned and operated by a charity. Whilst such contributions are non-reciprocal in nature, they allow the entity to participate in the operation of the hospital, and the charity is accountable to the entity for its use of public monies. However, the contributions made by the entity do not constitute an ownership interest, as the charity could seek alternative funding and thereby prevent the entity from participating in the operation of the hospital. Accordingly, the entity is not exposed to the risks nor does it enjoy the rewards which are incidental to an ownership interest. |
Definitions
.01 The following terms are used in this Standard with the meanings specified:
Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.
Accrual basis means a basis of accounting under which transactions and other events are recognised when they occur (and not only when cash or its equivalent is received or paid). Therefore the transactions and events are recorded in the accounting records and recognised in the financial statements of the periods to which they relate. The elements recognized under accrual accounting are assets, liabilities, net assets, revenue and expenses.
Assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity.
Associate is an entity in which the investor has significant influence and which is neither a controlled entity nor a joint venture of the investor.
Consolidated financial statements are the financial statements of an economic entity presented as those of a single entity.
Contributions from owners is future economic benefits or service potential that have been contributed to the entity by parties external to the entity that establish a financial interest in the net assets of the entity, provided that the contributions:
| (a) | do not result in liabilities of the entity, and |
| (b) | meet the following test, that they: |
| (i) | convey entitlement both to distributions of future economic benefits or service potential by the entity during its life, such distributions being at the discretion of the owners or their representatives, and to distributions to any excess of assets over liabilities in the event of the entity being wound up, and/or |
| (ii) | can be sold, exchanged, transferred or redeemed. |
Control is the power to govern the financial and operating policies of another entity so as to benefit from its activities.
Controlled entity is an entity that is subject to the control of another entity (known as the controlling entity.).
Controlling entity is an entity that has one or more controlled entities.
Cost method is a method of accounting whereby the investment is recorded at cost. The statement of financial performance reflects revenue from the investment only to the extent that the investor receives distributions from accumulated surpluses of the investee arising subsequent to the date of acquisition.
Distributions to owners is future economic benefits or service potential distributed by the entity to all or some of its owners, either as a return on investment or as a return of investment.
Economic entity means a group of entities comprising a controlling entity and one or more controlled entities.
Equity method is a method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the investor's share of net assets of the investee. The statement of financial performance reflects the investor's share of the results of operations of the investee.
Expenses are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrences of liabilities that result in decreases in net assets, other than those relating to distributions to owners.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture.
Joint venture is a binding arrangement whereby two or more parties are committed to undertake an activity which is subject to joint control.
Liabilities are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential.
Net assets are the residual interest in the assets of the entity after deducting all its liabilities.
Surplus or deficit comprises the following components:
| a) | surplus or deficit from ordinary activities, and |
| b) | extraordinary items. |
Reporting date means the date of the last day of the reporting period for which the financial statements relate.
Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets other than increases relating to contributions from owners.
Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control over those policies.
Cost method
| .02 | Under the cost method, an investor records its investment in the investee at cost. The investor recognises revenue only to the extent that it is entitled to receive distributions from the accumulated surpluses of the investee arising subsequent to the date of acquisition by the investor. Entitlements due or received in excess of such surpluses are considered a recovery of investment and are recognised as a reduction of the cost of the investment. |
Equity method
| .03 | Under the equity method, the investment is initially recorded at cost and the carrying amount is increased or decreased to recognise the investor’s share of surpluses or deficits of the investee after the date of acquisition. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for alterations in the investor’s proportionate interest in the investee arising from changes in the investee’s equity that have not been included in the statement of financial performance. Such changes include those arising from the revaluation of land. |
Significant influence
| .04 | Whether an investor has significant influence over the investee is a matter of judgement based on the nature of the relationship between the investor and the investee, and on the definition of significant influence in this Standard. This Standard applies only to those associates in which an entity holds an ownership interest. |
| .05 | The existence of significant influence by an investor is usually evidenced in one or more of the following ways: |
| (a) | representation on the board of directors or equivalent governing body of the investee; |
| (b) | participation in policy-making processes, |
| (c) | material transactions between the investor and the investee, |
| (d) | interchange of managerial personnel, or |
| (e) | provision of essential technical information. |
| .06 | If the investor’s ownership interest is in the form of shares and it holds, directly or indirectly through controlled entities, 20% or more of the voting power of the investee, it is presumed that the investor does have significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly through controlled entities, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence, can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence. |
Consolidated financial statements
| .10 | An investment in an associate shall be accounted for in consolidated financial statements under the equity method except when the investment is acquired and held exclusively with a view to its disposal in the near future, in which case it shall be accounted for under the cost method. |
| .11 | The recognition of revenue on the basis of distributions received may not be an adequate measure of the revenue earned by an investor on an investment in an associate because the distributions received may bear little relationship to the performance of the associate. In particular, where the associate has not-for-profit objectives, investment performance will be determined by factors such as the cost of outputs and overall service delivery. As the investor has significant influence over the associate, the investor has a measure of responsibility for the associate’s performance and, as a result, the return on its investment. The investor accounts for this stewardship by extending the scope of its consolidated financial statements to include its share of surpluses or deficits of such an associate and so provides an analysis of earnings and investment from which more useful ratios can be calculated. As a result, the application of the equity method provides more informative reporting of the net assets and surplus or deficit of the investor. |
| .12 | An investment in an associate is accounted for using the cost method when it operates under severe long-term restrictions that significantly impair its ability to transfer funds or provide other non-financial benefits to, or on behalf of, the investor. Investment in associates is also accounted for using the cost method when the investment is acquired and held exclusively with a view to its disposal in the near future. |
| .13 | An investor shall discontinue the use of the equity method from the date that: |
| (a) | it ceases to have significant influence in an associate but retains, either in whole or in part, its investment, or |
| (b) | use of the equity method is no longer appropriate because the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds or provide other non-financial benefits to, or on behalf of the investor. |
The carrying amount of the investment at that date should be regarded as cost thereafter.
| .14 | An entity is required to discontinue the equity method where severe long-term restrictions have the effect of preventing, or substantially preventing, the investee from transferring funds or providing other non-financial benefits to the investor. Where the associate does not have a profit objective (such as a social welfare agency) the associate may not be able to transfer funds to the investor but may nonetheless be able to deliver services to beneficiaries, consistent with the objectives of the investor. |
Separate financial statements of the investor
| .15 | An investment in an associate that is included in the separate financial statements of an investor that issues consolidated financial statements shall be either: |
| (a) | Accounted for using the equity method or the cost method, whichever is used for the associate in the investor’s consolidated financial statements, or |
| (b) | Accounted for as an investment. |
| .16 | Guidance on accounting for investments can be found in the International Accounting Standard on Financial Instruments: Recognition and Measurement. |
| .17 | The preparation of consolidated financial statements does not, in itself, obviate the need for separate financial statements for an investor. |
| .18 | An investment in an associate that is included in the financial statements of an investor that does not issue consolidated financial statements shall be either: |
| (a) | accounted for using the equity method or the cost method, whichever would be appropriate for the associate if the investor issued consolidated financial statements, or |
| (b) | accounted for as an investment. |
| .19 | Guidance on accounting for investments can be found in the International Accounting Standard on Financial Instruments: Recognition and Measurement. |
| .20 | An investor that has investments in associates may not issue consolidated financial statements because it does not have controlled entities. It is appropriate that such an investor provides the same information about its investments in associates as those entities that issue consolidated financial statements. |
Application of the equity method
| .21 | Many of the procedures appropriate for the application of the equity method are similar to the consolidation procedures set out in the Standard of Generally Accepted Municipal Accounting Practice on Consolidated financial Statements and Accounting for Controlled Entities. Furthermore, the broad concepts underlying the consolidation procedures used in the acquisition of a controlled entity are adopted on the acquisition of an investment in an associate. |
| .22 | Where an associate is accounted for using the equity method, unrealized surpluses and deficits resulting from all transactions between an investor (or its consolidated controlled entities) and associates shall be eliminated to the extent of the investor’s interest in the associate. Unrealised deficits shall not be eliminated to the extent that the transaction provides evidence of an impairment of the asset transferred. |
| .23 | An investment in an associate is accounted for under the equity method from the date on which it falls within the definition of an associate. Guidance on accounting for any difference (whether positive or negative) between the cost of acquisition and the investor’s share of the fair values of the net identifiable assets of the associate can be found in the International Accounting Standard on Business Combinations. Appropriate adjustments to the investor’s share of the surpluses or deficits after acquisition are made to account for: |
| (a) | depreciation of the depreciable assets, based on their fair values, and |
| (b) | amortisation of the difference between the cost of the investment and the investor’s share of the fair values of the net identifiable assets. |
| .24 | The most recent available financial statements of the associate are used by the investor in applying the equity method; they are usually drawn up to the same date as the financial statements of the investor. When the reporting data of the investor and the associate are different, the associate often prepares, for the use of the investor, statements as at the same date as the financial statements of the investor. When it is impracticable to do this, financial statements drawn up to a different reporting date may be used. The consistency principle dictates that the length of the reporting periods, and any difference in the reporting dates, are consistent from period to period. |
| .25 | When financial statements with a different reporting date are used, adjustments are made for the effects of any significant events or transactions between the investor and the associate that occur between the date of the associate's financial statements and the date of the investor's financial statements. |
| .26 | The investor's financial statements are usually prepared using uniform accounting policies for like transactions and events in similar circumstances. In many cases, if an associate uses accounting policies other than those adopted by the investor for like transactions and events in similar circumstances, appropriate adjustments are made to the associate's financial statements when they are used by the investor in applying the equity method. If it is not practicable for such adjustments to be calculated, that fact is generally disclosed. |
| .27 | If an associate has outstanding cumulative preferred shares, held by outside interests, the investor computes its share of surpluses or deficits after adjusting for the preferred dividends, whether or not the dividends have been declared. |
| .28 | If, under the equity method, an investor's share of deficits of an associate equals or exceeds the carrying amount of an investment, the investor discontinues including its share of further losses. The investment is reported at nil value. Additional deficits 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. If the associate subsequently reports surpluses, the investor resumes including its share of those surpluses only after such share of the surpluses equals the share of net deficits not recognised. |
Impairment losses
| .29 | If there is an indication that an investment in an associate may be impaired, an entity should consider the International Accounting Standard on Impairment of Assets. |
Contingencies
| .30 | In accordance with the Standard of Generally Accepted Municipal Accounting Practice on Provisions, Contingent Liabilities and Contingent Assets and the International Public Sector Accounting Standard on Events After the Reporting Date, the investor discloses: |
| (a) | its share of the contingencies and capital commitments of an associate for which it is also contingently liable, |
| (b) | those contingent liabilities that arise because the investor is severally liable for all the liabilities of the associate, and |
| (c) | its share of the contingent assets of an associate. |
Disclosure
| .31 | The following disclosures shall be made: |
| (a) | An appropriate listing and description of significant associates including the proportion of ownership interest and, if different, the proportion of voting power held, |
| (b) | The methods used to account for such investments, |
| (c) | The carrying amount of the investment for each significant associate, |
| (d) | Summarised financial information in regard to asset, liabilities and the results of the operations of significant associates presented individually or in aggregate, |
| (e) | The investor’s share of cumulative post acquisition reserves or deficits of associates, |
| (f) | The gross amount of loans made to the associate or received from associate by the investor, |
| (g) | Accounting periods for which the financial statement of the associate have been prepared where they are different from that of the investor, |
| (h) | The total market value of the listed investment in associates and the total council’s valuation of investments in unlisted associates, |
| (i) | Distribution received from or accrued in respect of associates, and |
| (j) | Gains and losses on the sale of shares or other dilutions in associates by the investor. |
| .32 | Investments in associates accounted for using the equity method shall be classified as non-current assets and disclosed as a separate item in the statement of financial position. The investor’s share of the surpluses or deficits of such investments should be disclosed as a separate item in the statement of financial performance. |
| .33 | The Standard of Generally Recognised Accounting Practice on Presentation of Financial Statements also requires the share of surpluses or deficits of associates accounted for using the equity method of accounting to be presented on the face of the statement of financial performance. |
Effective date
| .34 | This Standard of Generally Accepted Municipal Accounting Practice becomes effective for annual financial statements covering periods beginning on or after a date to be determined by the Minister of Finance in a regulation to be published in accordance with section 91 (1) (6) of the Public Finance Management Act, Act No. 1 of 1999 as amended. |
