GAS 26 Associates

• Adopted by the Accounting Standards Committee of Germany (ASCG) on 17 July 2018.
• Publication of the authoritative German version by the Federal Ministry of Justice and Consumer Protection under section 342(2) of the HGB on 16 October 2018.
• Revised paragraph 87 adopted by the Accounting Standards Committee of Germany (ASCG) on 9 March 2021. Publication of the German Accounting Amendment Standard no. 11 with amendments to GAS 26 in the authoritative German version by the Federal Ministry of Justice and Consumer Protection under section 342(2) of the HGB on 2 June 2021.

This Standard expands on the requirements for accounting for associates in accordance with sections 311 and 312 of the HGB that govern the accounting for these entities in the consolidated financial statements using the equity method, and addresses the existing material uncertainties in this context. The Standard aims to ensure the consistent application of the requirements and to strengthen the informative function of the consolidated financial statements.

This Standard applies to all entities that are required by section 290 of the HGB to prepare consolidated financial statements (see also GAS 19.7ff.). The Standard also applies to entities required by section 11 of the PublG to prepare consolidated financial statements. The same additionally applies to the voluntary preparation of consolidated financial statements.

This Standard expands on the criteria for the existence of an associate over which an entity included in the consolidated financial statements has significant influence, the application of the equity method in the consolidated financial statements and the related disclosures in the notes to the consolidated financial statements.

The equity method is applied to the accounting for investments in associates or, as a consequence of the exercise of a corresponding option (section 296 or section 310 of the HGB), to the accounting for investments in certain subsidiaries or joint ventures.

A requirement for classification as an associate in accordance with section 311 of the HGB is that there is a long-term equity investment in accordance with section 271(1) of the HGB and that the parent entity effectively exercises significant influence, or significant influence can be rebuttably presumed. Associates can also be unconsolidated subsidiaries and joint ventures that are not proportionately consolidated. There is a rebuttable presumption of significant influence if the investor holds, directly or indirectly, at least 20% of the voting power of the investee. If the investor holds, directly or indirectly, less than 20% of the voting power, there is a rebuttable presumption that it does not have significant influence.

The positive presumption of associate status can, but does not have to, be rebutted. However, in the event of a negative presumption, an additional assessment is required to establish whether, considering the overall circumstances, the investor exercises significant influence. The judgement whether an investor exercises significant influence requires a case-by-case assessment of the overall circumstances. This includes an assessment of the effective ability to influence as a result of the ownership structure of the entity being assessed or other agreements.

The equity method need not be applied if the investment in the associate is not significant for the net assets, financial position and results of operations of the group.

The basis for the equity method in each case is the most recently available annual financial statements of the associate. If the associate prepares consolidated financial statements, they are used as the basis for applying the equity method.

So that the associate’s annual or consolidated financial statements can be used for the equity method, as a minimum they must have been prepared by the responsible governing bodies and made available to the parent entity. This means that all binding accounting policy decisions that are material for those financial statements must have been taken. If there is a requirement for the financial statements to be audited, as a minimum all material audit procedures should have been completed.

There is no requirement for the reporting date of the annual or consolidated financial statements on which the equity method is based to be the same as the group reporting date.

If the associate uses accounting policies in its financial statements on which the equity method is based that differ from the accounting policies used in the consolidated financial statements, there is an option to align the carrying amounts with the group accounting policies by preparing financial statements that have been adjusted to conform to uniform group accounting policies.

If an investment in a subsidiary for which an inclusion option under section 296 of the HGB has been exercised, or in a joint venture that is not proportionately consolidated in accordance with section 310 of the HGB, is accounted for using the equity method, the equity method may be based on financial statements that have been prepared as at the group reporting date and adjusted to conform to uniform group accounting policies.

The investment in the associate is recognised at its (consolidated) carrying amount the first time the equity method is applied.

When the equity method is applied for the first time, the (consolidated) carrying amount of the investment is offset against the parent entity’s share of the associate’s equity in a separate account. This results in what is referred to as ‘Difference 1’. ‘Difference 1’ is classified in a separate account (including deferred taxes) into hidden reserves and liabilities it contains as well as any residual goodwill or a negative difference (‘Difference 2’).

As a general principle, the equity method is applied for the first time on the basis of the carrying amounts at the time from which the parent entity exercises significant influence over the associate’s operating and financial policies and at which the entity has become an associate within the meaning of section 311(1) of the HGB.

If an inclusion option under section 296 of the HGB is exercised prior to the initial consolidation of a subsidiary in accordance with sections 300 ff. of the HGB, and if the investment in the subsidiary is thus accounted for using the equity method, the carrying amounts at the time when a parent/subsidiary relationship within the meaning of section 290 of the HGB was established are applied to the equity method.

If consolidated financial statements are prepared for the first time, the carrying amounts at the beginning of the group’s financial year are applied to investments in associates already belonging to the group when the equity method is used for the first time, unless the parent entity only effectively started exercising significant influence over the associate’s operating and financial policies over the course of the group’s financial year.

In the consolidated financial statements following the initial application of the equity method, the equity method carrying amount is increased or decreased by the amount of changes in equity corresponding to the parent entity’s proportionate interest in the associate’s equity. The identified hidden reserves and liabilities and any residual goodwill are adjusted at the same time.

In the subsequent periods, ‘Difference 1’ is, in the first instance, adjusted, written down or reversed (including deferred taxes) in the consolidated financial statements to reflect the accounting for the assets, liabilities, prepaid expenses and deferred income, and special items to which hidden reserves or liabilities were allocated in the associate’s annual financial statements. The requirements governing consolidation set out in section 309 of the HGB are applied, with the necessary modifications, to the residual positive or negative ‘Difference 2’.

If adjusting the equity method carrying amount results in a negative equity value, the investment is recorded in the consolidated balance sheet at a nominal amount (memorandum item). The negative equity value is adjusted in the separate account.

The recoverability of the equity method carrying amount is reviewed at each group reporting date. If the equity method carrying amount is higher than the lower of cost or market value, the carrying amount is written down if the impairment is expected to be permanent. A write-down may be recognised if the impairment is not expected to be permanent.

The Standard also addresses how a change in consolidation method is accounted for and how intercompany profits or losses from supplies of goods or services are eliminated.

Investments in associates are presented in the consolidated balance sheet as a separate line item with a corresponding designation.

Profits or losses from changes in the equity method carrying amount are presented in the consolidated income statement as a separate line item with a corresponding designation, to the extent that they are not attributable to changes in the equity of the associate that are recognised outside profit or loss.

The minimum disclosures in the notes to the consolidated financial statements from application of this Standard are also specified.

The requirements of this Standard must be applied to the initial accounting using the equity method for the first time in financial years beginning after 31 December 2019. Additionally, irrespective of the timing of the initial accounting using the equity method, the requirements of this Standard apply to all accounting measures following this initial accounting in financial years beginning after 31 December 2019. Retrospective application is not permitted.

Earlier application is encouraged. In this case, all requirements of this Standard must be applied.