As per IAS 28- Losses from associates are borne only to the extent that the investment in associate is nil. Further, losses are absorbed only when there is a binding obligation on the investor to bear such losses.
Now the question is whether the same logic of bearing losses is applicable in the case of JV's. Can the share of losses in JV exceed the investment amount thereby making it negative in the holding company books.
In my opinion, the logic of bearing losses as detailed in Ind AS 28 (para 29 and Para 30) is not applicable in Ind AS 31.
Ind AS 28, Para 29
If an investor’s share of losses of an associate equals or exceeds its “interest in the associate”, the investor discontinues recognising its share of further losses. The “interest in an associate” is the carrying amount of the investment in the associate under the equity method together with any long-term interests that, in substance, form part of the investor’s net investment in the associate. For example, an item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity’s investment in that associate. Such items may include preference shares and long-term receivables or loans but do not include trade receivables, trade payables or any long-term receivables for which adequate collateral exists, such as secured loans.........
Ind AS 28, Para 30
After the investor’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate.....
1. Contractual arrangement is one major characteristic of JV which differentiates it from a Holding-Subsidiary relationship or that of being an Associate Ind AS 31, para 9 to 12). The extent to which profit and losses will be absorbed by a venturer will depend on the contractual arrangement.
2. Joint Control is again one major characteristic of JV which differentiates it from a Holding-Subsidiary relationship or that of being an Associate Ind AS 31, para 9 to 12). It means venture is jointly responsible for future profit and losses of JV (unlike as in the case of an Associate)
3. When recognising an interest in a jointly controlled entity, it is essential that a venturer reflects the substance and economic reality of the arrangement. In a jointly controlled entity, a venturer has control and is jointly responsible over its share of future economic benefits or losses through its share of the assets and liabilities of the venture. This is in sharp contrast if the relationship is that of an Associate.
Since this substance and economic reality has to be reflected in the consolidated financial statements of the venturer when the venturer recognises its interests in the assets, liabilities, income and expenses of the jointly controlled entity, a venturer’s accounts has to reflect the investment even in cases where the loss has exceeded the investment.
Regards / Mohit
Thanks Mohit !! for your reply. Even i was having the same understanding on bearing of losses by JV.
CAclubindia
