07-12-2007, 09:40 PM
Dear Umair,
First of all Warid does not become BAFL's associate just on account of 16.20 % holding by BAFL.
IAS-28 lays down the requirement of at least 20% holding for making it an associate that it declares to be a sufficient evidence of having significant influence over investee.
There could be some exceptions and a company can be treated as associate even if lesser than 20% holding it has but for this purpose the company has to justify that how can it exercise the significant influence over the investee without having 20% holding.
Further, a company may not be an associate despite the 20% holding but again it has to be proved and disclosed that why there is no significant influence in the presence of 20% holding.
For detail you can study IAS 28.
Now coming back to your question. BAFL, if treats Warid as its associate under IAS 28, then it has to show its investment in Warid in its financial statements under equity method of acounting proposed by IAS 28 and not at fair value/market value under IAS 39.
However, I dont know how BAFL is treating its investment i.e. whether as Associate or Avaialbale-for-Sale.
If Warid is not being treated as an Associate by BAFL, then the investment should be recognised as "Availabale-for-sale" or "financial asset through profit or loss" under IAS 39(as in my view it does not qualify for recognition as "held-to-maturity"). In both these cases it should be measured/stated at Fair Value on initial recognition as well as all subsequent reporting dates.
The fair value gain/loss in case of "financial asset through profit or loss" has to be taken to profit and loss account while in case of "Availabale-for-sale", any fair value gain/loss has to be taken directly into equity.
IAS 39 requires that if some entity initially recognises some financial instrument / asset as "financial asset through profit or loss" then on all subsequent dates it has to be treated as "financial asset through profit or loss". There could be no re-designation of such a financial asset. It has always to be treated in the same category.
In my view best option is to treat such investment as "Availabale-for-sale" and gains/loss on measurement at fair value should be taken to equity directly.
Fair values can be determined even in case of unlisted shares. IAS 39, paragraphs AG 69 to AG 82 provide guidelines for this purpose.
However, if some investment's fair value is not determinable by all means, then it could be stated at cost in the financial statements. (Paragraph 46 (c) of IAS 39.
This all discussion has nothing to do with what BAFL will be doing in its financial statements. Infact all these procedures and way outs are the given options under various IFRSs and any one of them can suit any particular situation. Professional Judgment has to be made before deciding anything.
Best regards,
Kamran.
First of all Warid does not become BAFL's associate just on account of 16.20 % holding by BAFL.
IAS-28 lays down the requirement of at least 20% holding for making it an associate that it declares to be a sufficient evidence of having significant influence over investee.
There could be some exceptions and a company can be treated as associate even if lesser than 20% holding it has but for this purpose the company has to justify that how can it exercise the significant influence over the investee without having 20% holding.
Further, a company may not be an associate despite the 20% holding but again it has to be proved and disclosed that why there is no significant influence in the presence of 20% holding.
For detail you can study IAS 28.
Now coming back to your question. BAFL, if treats Warid as its associate under IAS 28, then it has to show its investment in Warid in its financial statements under equity method of acounting proposed by IAS 28 and not at fair value/market value under IAS 39.
However, I dont know how BAFL is treating its investment i.e. whether as Associate or Avaialbale-for-Sale.
If Warid is not being treated as an Associate by BAFL, then the investment should be recognised as "Availabale-for-sale" or "financial asset through profit or loss" under IAS 39(as in my view it does not qualify for recognition as "held-to-maturity"). In both these cases it should be measured/stated at Fair Value on initial recognition as well as all subsequent reporting dates.
The fair value gain/loss in case of "financial asset through profit or loss" has to be taken to profit and loss account while in case of "Availabale-for-sale", any fair value gain/loss has to be taken directly into equity.
IAS 39 requires that if some entity initially recognises some financial instrument / asset as "financial asset through profit or loss" then on all subsequent dates it has to be treated as "financial asset through profit or loss". There could be no re-designation of such a financial asset. It has always to be treated in the same category.
In my view best option is to treat such investment as "Availabale-for-sale" and gains/loss on measurement at fair value should be taken to equity directly.
Fair values can be determined even in case of unlisted shares. IAS 39, paragraphs AG 69 to AG 82 provide guidelines for this purpose.
However, if some investment's fair value is not determinable by all means, then it could be stated at cost in the financial statements. (Paragraph 46 (c) of IAS 39.
This all discussion has nothing to do with what BAFL will be doing in its financial statements. Infact all these procedures and way outs are the given options under various IFRSs and any one of them can suit any particular situation. Professional Judgment has to be made before deciding anything.
Best regards,
Kamran.
