Investment in Associate PDF

CHAPTER
BLUE NOTES
12 S
L
Associate is an entity over which the investor has significant influence. (PAS 28, par. 3)
Significant influence is the power to participate in the financial and operating policy decisions of the investee but not
control or joint control over those policies.
Assessment/Criteria – A matter of judgment
A. Existence of Significant Influence
General Rule:
The investor has significant influence when the investor holds (direct or indirect) through subsidiaries
20% or more of the voting power (ordinary shares) of the investee.
Exception:
It is clearly demonstrated that there is no significant influence.
Note: An investor may still have a significant influence despite majority/substantial ownership by another investor.
Some evidences of the existence of significant influence (PAS 28, par. 6)
a. Representation in the board of directors
b. Participation in the policy making process
c. Material transactions between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information
B. Loss of Significant Influence
The loss of significant influence can occur with or without change in the absolute or relative ownership
interest.
Example:
An associate becomes subject to control of a government.
Loss of significant influence as a result of contractual agreement.
Treatment of Potential Voting Rights (PAS 28, par. 7)
 Share warrants and convertible debt or equity instruments are considered in assessing whether an entity has
significant influence.
Note: The investor’s share of profit or loss of the investee and of changes in investee’s equity is determined based on present
ownership interest, thereby not reflecting potential voting rights.
Equity Method – Applicable when the investor has significant influence over the investee
Initial Recognition and Measurement
The investment is initially recorded at cost.
Classification
The investment in associate shall be classified as noncurrent asset.
The carrying amount of investment in associate also includes other long-term interests in an associate such as
long-term receivables, loans and advances.
Note: Trade receivables and secured loans (where there is adequate collateral) are excluded in the carrying amount of the
investment in associate.
When the investor has incurred legal or constructive obligations or made payments on behalf of the associate, additional
losses and liabilities are recognized.
Subsequent Measurement
1. Excess of cost over carrying amount of interest acquired
Theory of Accounts Practical Accounting 1

44 USL Blue Notes Chapter 12 – Investment in Associate
a. Attributable to undervaluation of the investee’s depreciable assets

 The excess is amortized over the remaining life of depreciable assets.
b. Attributable to goodwill – when the investee’s assets are fairly valued
 The excess is tested for impairment at each reporting date.
2. Excess of net FV over cost
The excess is included as income in the determination of the investor’s share of the associate’s profit or
loss in the period in which the investment is acquired. (PAS 28, par. 32)
3. Share of investor from investee’s net income/loss
a. When the investee has an outstanding preference shares
 If the preference share is cumulative, preference dividends is deducted from share of profit or loss
(whether declared or not).
 If the preference share is noncumulative, preference dividends is deducted from share of profit or loss
(only when declared)
b. Amortization of excess attributable to investee’s depreciable assets
 Decrease in investment and share of income
c. Excess of net FV over cost
 Increase in investment and share of income
d. When the investee is with heavy losses
 If share of losses ≥ CA of Investment, discontinue recognizing share of losses
 The investment is reported at nil or zero value.
 The investor resumes recognizing share of income (if share of income = share of unrecognized losses)
when the associate subsequently reports income.
e. Some adjustments in the investee’s operations before computing share of income
 The most recent available financial statements of associate are used by the investor in applying equity
method.
 When reporting dates of investor and associate are different, the associate shall prepare financial
statement as of the same date as the financial statements of the investor (if practicable).
 If impracticable, difference in reporting dates shall be no more than 3 months.
 Adjustments shall be made to conform associate’s accounting policies to those of the investor.
 The unrealized profit and loss from upstream and downstream transactions must be eliminated in
determining share in the profit or loss of the associate.
4. Share of investor from investee’s dividend payments - ↓ Investment in Associate
a. When the investee has an outstanding preference shares
Share in dividend = % share (Total dividends declared – Preference share dividend)
5. Impairment(See PAS 36 Impairment of Assets)
6. Other changes in investee’s equity
 The investor’s share of changes in equity of investee is recognized directly in equity (OCI) of the
investor.
7. Loss of significant influence
a. Measurement of investment in associate at the date significant influence is lost (PAS 28, par. 22)
 The investor shall measure any retained investment in associate at fair value.
 The investment may be accounted for as at FV through P/L or OCI or Nonmarketable Investment
 FV of Financial Asset at FV = FV of Investment in Associate at the date it ceases to be an associate
 CA of Investment in Associateat the date significant influence is lost – (FV of Retained Investment +
Disposal Proceeds) = Included in Profit or Loss
b. Treatment of OCI of an associate previously recognized by investor in OCI when significant influence is lost
 Gain or loss in OCI is reclassified to P/L when gain or loss in OCI would be subsequently reclassified to
P/L upon disposal of related asset.
Practical Accounting 1 Theory of Accounts
Chapter 12 – Investment in Associate USL Blue Notes 45
 Otherwise, it would not be subsequently reclassified. (See Line Items of OCI)

Specific circumstances when investment in associate is not accounted for using equity method(PAS 28, par. 17)
The investment is accounted for as at FV through P/L or OCI or Nonmarketable Investment when:
1. The investor is a wholly-owned subsidiary, or a partially-owned subsidiary of another entity and its other
owners do not object to the investor not applying the equity method.
2. The investor’s debt and equity instruments are not traded in a public market.
3. The investor did not file or it is not in the process of filing its financial statements with the SEC for the
purpose of issuing any class of instruments in a public market.
4. The ultimate or any intermediate parent of the investor produces consolidated financial statements
available for public use that comply with PFRS.
Classified as Held for Sale

 The investment in associate is accounted for in accordance with PFRS 5.
 When the investment in associate no longer qualifies for “held for sale” classification, it is accounted for
using the equity method retrospectively from the date of classification as held for sale.
 Financial statements for the periods since classification as held for sale shall be amended accordingly.
Cost Method
 It is usually applied to investment in unquoted or nonmarketable equity instruments.
 The investor does not share in the profit or loss of the investee.
 Dividend received by the investor from the investee is accounted for as dividend income (regardless of
whether the dividends originated from preacquisition or postacquisition retained earnings).
Investment in Associate Achieved in Stages(not covered by PAS 28; PFRS 3, par. 42 applies by inference)
 The acquirer shall remeasure the previously held equity interest at fair value and recognize the resulting
gain or loss in P/L.
 The investor shall remeasure the previously held equity interest using the equity method.
 Remeasured Equity Amount = Considered FV of Investment in Associate
 Recognized Gain or Loss in P/L = Remeasured Equity Amount – CA of Investment
 Recognized Gain or Loss in P/L = Income previously reported – Income to be reported under Equity
Method
Theory of Accounts Practical Accounting 1

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CHAPTER

Theory of Accounts Practical Accounting 1

a. Attributable to undervaluation of the investee’s depreciable assets

 Otherwise, it would not be subsequently reclassified. (See Line Items of OCI)

Classified as Held for Sale

Theory of Accounts Practical Accounting 1

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