ASBE No. 02
Active
Long-term Equity Investments
Long-term Equity Investments is part of the Chinese Accounting Standards for Business Enterprises (ASBE).
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Conceptual Framework Linkage
Two measurement bases, split by the nature of the holding
ASBE No. 2 governs an investing enterprise's LONG-TERM EQUITY INVESTMENTS in SUBSIDIARIES, ASSOCIATES, and JOINT VENTURES – applying EITHER the COST METHOD (for investments in subsidiaries, WITHIN the investor's own SEPARATE, non-consolidated financial statements) or the EQUITY METHOD (for investments in ASSOCIATES and joint ventures) – broadly PARALLELING the SAME dichotomy found under IAS 27 and IAS 28 internationally, though with a GENUINELY distinctive treatment for combinations UNDER COMMON CONTROL (Section 6).
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Scope
Investments in subsidiaries, associates, and joint ventures
This Standard applies to LONG-TERM EQUITY INVESTMENTS – those held with the INTENT of exercising CONTROL, joint control, or significant INFLUENCE over the investee, RATHER than short-term trading purposes (which would instead fall WITHIN the financial instruments standards, ASBE No. 22).
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The Cost Method – Investments in Subsidiaries (Separate Statements)
Recording the investment at cost, recognising dividends as income
In the investor's OWN separate (non-consolidated) financial statements, an investment in a SUBSIDIARY is recorded at COST, with dividends DECLARED by the subsidiary recognised as INVESTMENT INCOME (EXCEPT to the extent a dividend represents a RETURN of the ORIGINAL investment cost, rather than a distribution of POST-acquisition profits). The SUBSIDIARY's OWN results are NOT otherwise reflected in the investor's separate statements – full CONSOLIDATION occurs SEPARATELY, under ASBE No. 33.
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The Equity Method – Associates and Joint Ventures
Adjusting the investment for the investor's share of the investee's results
For investments in ASSOCIATES and JOINT VENTURES, the EQUITY METHOD applies – the INVESTMENT is initially recorded at COST, then ADJUSTED each period to reflect the investor's SHARE of the investee's PROFIT or LOSS, OTHER comprehensive income, and OTHER changes in the investee's NET assets – INCREASING or DECREASING the investment's carrying amount ACCORDINGLY, WITHOUT the investor separately RECOGNISING the investee's individual assets and liabilities.
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Determining Significant Influence and Joint Control
The thresholds determining which measurement basis applies
SIGNIFICANT INFLUENCE – the power to PARTICIPATE in the investee's FINANCIAL and operating POLICY decisions, WITHOUT full control – is generally PRESUMED where the investor holds BETWEEN 20% and 50% of the investee's VOTING rights (though OTHER qualitative indicators, such as BOARD representation, can also establish significant influence at DIFFERENT ownership levels). JOINT CONTROL exists where DECISIONS about relevant activities REQUIRE the UNANIMOUS consent of the parties SHARING control.
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THE KEY DIVERGENCE – Business Combinations Under Common Control
A predecessor-cost method, not the acquisition method
WHERE a business combination occurs BETWEEN entities that are ULTIMATELY controlled by the SAME party or parties BOTH BEFORE and AFTER the combination (a "COMMON CONTROL" combination), ASBE requires the ACQUIRING entity to measure the LONG-TERM equity investment (or the combined net ASSETS) at the CARRYING AMOUNT reflected in the COMBINED entity's CONSOLIDATED financial statements (a "PREDECESSOR COST" or POOLING-OF-INTERESTS-STYLE approach) – RATHER than at FAIR VALUE under the ACQUISITION method IFRS 3 REQUIRES for essentially ALL business combinations, REGARDLESS of common control. This is ONE of the MOST significant, GENUINELY Chinese-specific departures from INTERNATIONAL standards WITHIN the entire ASBE suite.
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Why Common-Control Combinations Are So Common in China
A reflection of China's state-owned enterprise restructuring landscape
COMMON-CONTROL combinations are GENUINELY frequent in China, LARGELY due to the PREVALENCE of STATE-OWNED enterprise groups RESTRUCTURING their subsidiaries and business UNITS – transfers and combinations WITHIN a single ultimate state-controlled GROUP structure. Requiring FAIR VALUE remeasurement (and the associated GOODWILL recognition) for EVERY such internal restructuring would ARGUABLY overstate the ECONOMIC substance of what is, IN PRACTICE, an INTERNAL reorganisation RATHER than an ARM'S-LENGTH acquisition – the POLICY rationale UNDERLYING this DISTINCTIVE treatment.
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Worked Example – Applying the Equity Method
Adjusting the investment for the investor's share of profit
Example: A 30% investment in an associate
A company acquires a 30% interest in an associate for RMB 60,000,000. During the year, the associate reports a net profit of RMB 20,000,000 and pays no dividends.
The investor recognises its SHARE of the associate's profit: RMB 20,000,000 × 30% = RMB 6,000,000, INCREASING the carrying amount of the investment to RMB 60,000,000 + RMB 6,000,000 = RMB 66,000,000, with the RMB 6,000,000 also recognised as INVESTMENT INCOME in the investor's Income Statement.
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Worked Example – Initial Measurement Under Common Control
Carrying amount, not fair value
Example: A parent company acquiring a sister subsidiary
A parent company, as part of an internal group restructuring, acquires 100% of a sister subsidiary (also ultimately controlled by the SAME parent both before and after the transaction). The subsidiary's net assets have a CARRYING amount of RMB 90,000,000 in the group's consolidated accounts, though an independent valuer estimates their FAIR VALUE at RMB 130,000,000.
Because this is a COMMON CONTROL combination, the acquiring entity records the investment at the subsidiary's CARRYING amount of RMB 90,000,000 – NOT the RMB 130,000,000 fair value – and NO goodwill is recognised, CONTRASTING sharply with how the SAME transaction would be accounted for under IFRS 3's acquisition method.
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Disclosure Requirements
What ASBE No. 2 requires
Classification and carrying amounts of long-term equity investmentsBasis for determining significant influence or joint controlWhether a business combination occurred under common control, and the measurement basis applied
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Whether a business combination is genuinely "under common control," given the timing and substance of ultimate ownershipWhether significant influence exists despite an ownership stake outside the 20–50% presumptive range
SIGNIFICANT ESTIMATES
Fair value of an equity-method investee's identifiable net assets, where relevant to impairment assessment
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Relationship to IAS 27/28 and IFRS 3
Comparison – ASBE 2 vs IAS 27/28 and IFRS 3
FeatureASBE 2IAS 27/28 / IFRS 3
Cost/equity method dichotomySame structureSame structure – converged
Common-control combinationsPredecessor cost (carrying amount), no goodwillNO special exemption – full acquisition method applies regardless of common control
The COST/equity method FRAMEWORK is thoroughly converged – the common-control TREATMENT is a genuinely SIGNIFICANT, WELL-KNOWN structural divergence, reflecting China's DISTINCTIVE state-enterprise ownership landscape.
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Statement Mapping
Where every long-term equity investment event lands
EventStatement(s) affectedNotes
Investment carrying amountBSAt cost, or adjusted under the equity method
Share of investee profit/lossISRecognised as investment income under the equity method
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Related Standards
Cross-reference map
StandardConnection
ASBE No. 20Business Combinations – supplies the general acquisition-method framework this Standard's common-control exception departs from
ASBE No. 33Consolidated Financial Statements – governs full consolidation of subsidiaries, complementing this Standard's separate-statement cost method
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Quick-Reference Glossary
Business combination under common control
A combination in which all combining entities are ultimately controlled by the same party or parties, both before and after the combination, measured at predecessor carrying amounts rather than fair value.
Significant influence
The power to participate in an investee's financial and operating policy decisions, generally presumed at a 20–50% voting interest, without amounting to control.
Financial statement key (Chinese GAAP / ASBE terminology)
BS Balance Sheet (资产负债表)
IS Income Statement (利润表)
SCOE Statement of Changes in Owners' Equity (所有者权益变动表)
CFS Cash Flow Statement (现金流量表)
History & Development
2006-02
ASBE No. 2 Long-term Equity Investments issued
Operative for periods beginning on or after 1 February 2007