Separate Financial Statements of the Investor

08. An investment in an associate that is included in the separate financial statements of an investor should be accounted for under the cost method.

Consolidated Financial Statements

09. An investment in an associate should be accounted for in consolidated financial statements under the equity method except when

(a) The investment is acquired and held exclusively with a view to its disposal in the near future ( under 12 months), or;

(b) The associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. In this case, an investment in the associate is accounted for using the cost method in the consolidated financial statements.

10. The recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate because the distributions received may bear little relationship to the performance of the associate.

As the investor has significant influence over the associate, and has responsibility for the associate’s performance, the investor accounts for this stewardship by extending the scope of its consolidated financial statements to include the returns on its investment commensurate with its share of results of such an associate.

The application of the equity method provides more informative reporting of the net assets and net income of the investor than that of the cost method.

11. An investor should 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) the 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 to the investor.

The carrying amount of the investment at that date should be regarded as cost thereafter.