Table of Content

Table of Content
1. Introduction
2. Definitions
2.1 Associate
2.2 Joint Venture
3. Key Features of IPSAS 36
3.1 Equity Method
3.2 Impairment Testing
3.3 Disclosures
3.4 Exemptions
4. Advantages of IPSAS 36
4.1 Enhanced Financial Insight
4.2 Transparency and Consistency
5. Disadvantages of IPSAS 36
5.1 Complexity in Application
5.2 Potential Misalignment
5.3 Impairment Risks
6. Operations under IPSAS 36
6.1 Recognition and Measurement
6.2 Disclosures
Reference
1. Introduction
IPSAS 36, issued by the International Public Sector Accounting Standards Board (IPSASB),
addresses the specific accounting requirements for public sector entities that manage investments
in associates and joint ventures. The adoption of IPSAS 36 ensures that public sector entities
engage in sound financial practices, offering increased transparency and improved comparability
with the private sector. Given the inherent complexities and strategic nature of these investments,
this standard provides comprehensive guidelines to mitigate potential risks and enhance financial
reporting.

The application of IPSAS 36 allows public entities to clearly reflect the economic relationships
between the entity and its investments, whether in associates or joint ventures, and ensure that
these investments are appropriately valued in financial statements. This is critical in ensuring that
users of the financial statements can evaluate the financial position and performance of these
investments accurately.

Through the equity method, public sector entities can achieve greater alignment with
International Financial Reporting Standards (IFRS), specifically IAS 28, which covers similar
investments in the private sector. This approach enhances global consistency and promotes
uniformity in the accounting treatment of investments, allowing entities to present financial
information that is comparable across both sectors. In this context, IPSAS 36 plays a crucial role
in improving the reliability and quality of public sector financial reporting.

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2. Definitions

2.1 Associate

An associate refers to an entity where the investor has significant influence but not control or
joint control. The key characteristic that distinguishes an associate from a subsidiary or joint
venture is that the investor does not have the ability to direct the financial and operating policies
of the investee. Significant influence is typically presumed if the investor holds 20% to 50% of
the voting rights in the investee. However, the presence of significant influence depends on the
facts and circumstances, including the investor’s representation on the board of directors or the
involvement in policy decisions.

While the percentage of voting power is a general indicator, the determination of whether an
investor has significant influence requires professional judgment. This can involve analyzing
whether the investor can influence decision-making processes without actually controlling the
investee. For example, a 25% shareholder may have significant influence if they can influence
key decisions through board representation or participation in policy discussions.

2.2 Joint Venture

A joint venture exists when two or more parties have joint control over an arrangement, with the
rights to the net assets of that arrangement. Joint control is defined as the contractually agreed
sharing of control, where decisions regarding the relevant activities require unanimous consent
from the parties involved. This definition distinguishes joint ventures from joint operations,
where the participants have rights to assets and obligations for liabilities.

The distinguishing factor for joint ventures is the fact that the parties involved share rights to the
net assets of the venture, which contrasts with joint operations where each party has rights to the
individual assets and liabilities.

Joint ventures are typically structured as separate legal entities, where each party contributes
capital, resources, or expertise and shares in the economic outcomes. These ventures are

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commonly used in the public sector for large-scale infrastructure projects or other long-term
collaborative investments that require pooling of resources, expertise, or risk.

3. Key Features of IPSAS 36

3.1 Equity Method

The equity method is central to the accounting treatment prescribed by IPSAS 36 for
investments in associates and joint ventures. The method involves the recognition of the
investment initially at cost, with subsequent adjustments for the investor’s share of profits or
losses from the investee, as well as changes in the investee's net assets. This ensures that the
investment’s carrying amount is continuously updated to reflect the economic performance and
financial position of the investee.

Under the equity method, the investor’s share of the profits or losses is added to or deducted
from the carrying amount of the investment. This ensures that the investment account reflects the
investor’s economic interest in the investee. Dividends received from the investee are deducted
from the carrying amount of the investment, as they represent a return on the investor’s capital.

In practice, the equity method enables entities to reflect their proportionate share of the investee's
results, which can provide a more accurate representation of the financial position of the investor
than using the cost method or fair value method.

3.2 Impairment Testing

Regular impairment testing is required for investments in associates and joint ventures, as
specified by IPSAS 36. An impairment loss is recognized if the carrying amount of the
investment exceeds its recoverable amount, which is the higher of fair value less costs to sell and
value in use. This ensures that the carrying amount of investments is not overstated and
accurately reflects the potential decline in the value of the asset.

Impairment testing is particularly important in the context of associates and joint ventures, as the
economic conditions surrounding the investee can change over time. For example, a downturn in

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the industry in which an associate operates could negatively affect its financial performance,
leading to impairment of the investment. Regular impairment reviews ensure that public sector
entities maintain realistic valuations of their investments.

3.3 Disclosures

IPSAS 36 requires public sector entities to provide extensive disclosures regarding their
investments in associates and joint ventures. This includes the nature and extent of the influence
or control the entity has over its investments, the financial impact of these investments, and any
associated risks and uncertainties. These disclosures are intended to provide users of the financial
statements with sufficient information to assess the financial position and performance of the
investee and the implications for the investor.

Key disclosure requirements include:

● The nature of the relationship between the investor and the investee, including whether
the investor has significant influence or joint control.
● The financial impact of the investment, including the share of profits or losses and
dividends received.
● Risks related to the investment, including any risks associated with the investee’s
financial position, operations, or market conditions.

These disclosures help ensure that stakeholders have access to relevant information, which aids
in evaluating the effectiveness of the investment and the associated risks.

3.4 Exemptions

IPSAS 36 also allows for exemptions from the equity method in certain cases. These exemptions
typically apply to investments held for sale, where the investor plans to dispose of the investment
in the near future, and to investments measured at fair value through profit or loss, such as those
held for trading. In such cases, the investor is not required to use the equity method but must
instead account for the investment in accordance with other relevant IPSAS standards.

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4. Advantages of IPSAS 36

4.1 Enhanced Financial Insight

By using the equity method, IPSAS 36 provides a more comprehensive view of the financial
performance and position of associates and joint ventures. This method accounts for the
investor’s share of the investee’s profits or losses, which allows the investor to recognize the
economic impact of the investment more accurately than under other accounting methods. This
enhanced insight helps public sector entities make better-informed decisions regarding their
investments and strategic goals.

4.2 Transparency and Consistency

IPSAS 36 ensures greater transparency and consistency in the financial reporting of public
sector investments. By standardizing the treatment of investments in associates and joint
ventures, IPSAS 36 helps entities present financial information that is comparable across
different public sector entities. This is crucial for stakeholders, such as government bodies,
auditors, and taxpayers, who rely on consistent and accurate financial statements to assess the
performance and risks of public sector entities.

5. Disadvantages of IPSAS 36

5.1 Complexity in Application

One of the key challenges in applying IPSAS 36 is the complexity involved in the equity
method. Determining whether the investor has significant influence or joint control requires
careful analysis of the facts and circumstances. Furthermore, applying the method to calculate
the investor’s share of profits, losses, and changes in net assets involves significant judgment and
expertise, particularly in complex investment arrangements.

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5.2 Potential Misalignment

Another disadvantage is the potential for misalignment between the investor’s strategy and the
objectives of the investee. In joint ventures and associates, both parties must work together to
achieve shared goals. However, differences in governance, strategic objectives, and financial
management approaches can lead to conflicts that hinder the effectiveness of the investment.

5.3 Impairment Risks

Regular impairment testing is required to assess the value of the investment, which can be a
challenge for public sector entities. If the value of an investment declines, it may lead to
impairment losses that negatively impact the entity’s financial position. This introduces an
element of risk that must be managed carefully to ensure that investments are not overstated on
the balance sheet.

6. Operations under IPSAS 36

6.1 Recognition and Measurement

Public sector entities must recognize investments in associates and joint ventures at cost upon
acquisition. The cost includes the purchase price of the investment as well as any related
transaction costs. Subsequent adjustments are made for the investor’s share of profits or losses,
dividends received, and impairment.

6.2 Disclosures

IPSAS 36 requires entities to provide detailed disclosures on their investments in associates and
joint ventures. These disclosures should include information on the nature of the relationships,
the financial effects of these investments, and any risks and uncertainties associated with them.

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Reference
❖ https//www.ipsasb.org