ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-15

PAS 28 Investments in Associate and Joint Venture

1. Intercorporate share investment – purchase of the equity shares of one entity by another entity
2. Significant influence1 – power to participate in the financial and operating policy decisions of the investee but not control or joint control
over those policies
- If the investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee
- Evidences of significant influence
 Representation in the BOD
 Participation in the policy making process
 Material transactions between the investor and the investee
 Interchange of managerial personnel
 Provision of essential technical information
3. Accounting for investment with significant influence – equity method 2
- Under this method, the investor and investee are viewed as a single economic unit
- Initially, the investment is measured at cost [recognized as Investment in Associate]
 The excess of cost over carrying amount: investor pays more than the carrying amount of the net assets acquired can be
attributed to (1) undervaluation of the investee’s assets 3, or (2) goodwill4
 The excess net FV over cost is included as income in the determination of the investor’s share of the associate’s profit or
loss in the period in which he investment is acquired
- The carrying amount is increased/decreased by the investor’s share in the profit/loss of the investee [recognized as investment
income]
- Distributions/receipt of dividends reduce the carrying amount of the investee
4. Classification: the investment in associate is a noncurrent asset
5. Investee with heavy losses – if the investor’s share of the losses of an associate is  the carrying amount5 of an investment, the investor
discontinues recognizing its share of the further losses
- Investment is reported at NIL
- Additional losses are provided for or a liability is recognized to the extent that the investor has incurred legal or constructive
obligations or made payments on behalf of the associate
- If the associate subsequently reports income, the investor resume including its share in such income after its share in the income
equals the share of losses not recognized
6. Impairment Losses: If there is an indication that an investment in associate may be impaired, an impairment loss shall be recognized
whenever the carrying amount of the investment in associate exceeds recoverable amount
- Recoverable amount6: higher between fair value7 less cost of disposal and value in use
- Value in use is the present value of the estimated future CFs expected to arise from the continuing use of an asset and from its
ultimate disposal. This is the investor’s share in either of the following:
 PV of estimated future CFs expected to be generated by the investee, including CFs from the operations of the investee and
the proceeds on the ultimate disposal of the investment
 PV of estimated future CFs expected to arise from dividends to be received from the investment and from its ultimate
disposal
- The recoverable amount is assessed for each individual associate 8
7. Investee with preference share:
- when an associate has outstanding cumulative preference shares, the investor shall compute its share of earnings or losses after
deducting the preference dividends, whether or not such dividends are declared;
- when an associate has outstanding noncumulative preference shares, the investor shall compute its share of earnings or losses
after deducting the preference dividends only when declared
8. Other changes in equity: adjustments to the carrying amount may be necessary for changes in the investor’s proportionate interest in the
investee arising from changes in the investee’s equity that have not been recognized in the investee’s profit or loss
- Include those arising from revaluation of PPE, and from forex translation differences

1
The determination of significant influence should include currently exercisable/convertible potential voting rights. However, in the computation for the share of the
investor over the net P/L of the investee, potential voting rights are excluded.
2
Only applicable to investment in ordinary shares; investment in preference shares may be accounted at FVPL or FVOCI but not equity method since these are non-
voting share
3
If the excess is attributable to an undervaluation of a depreciable asset, the excess is amortized over the remaining life of the depreciable asset; when the excess is
attributable to nondepreciable asset, the excess is expensed when the asset is sold. When the assets of the investee is undervalued, depreciation and amortization
or COGS are normally understated resulting to overstatement of the investee’s net income. The amortization is charged to/against with the Investment Income and
Investment in Associate accounts.
4
If the assets of the investee are fairly valued, the excess of cost over the carrying amount is attributed to goodwill. Goodwill is not amortized but the entire
investment is tested for impairment at the end of each reporting period (since goodwill is not recognized as a separate account).
5
Includes share in other long-term interest in an associate such as long-term receivables, loans and advances, and investment in preference shares, excluding trade
and other long-term receivables with adequate collateral.
6
Under appropriate assumptions both methods give the same result
7
Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date
8
Except when an individual associate does not generate cash inflows from continuing use that are largely independent of those from other assets of the reporting
entity.
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ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-15

- The investor’s share of those changes is recognized directly in equity of the investor
9. Adjustment of investee’s operations
- The investor uses the most recent FS of the associate in applying the equity method.
 Different reporting dates: the associate shall prepare for the use of the investor FS as of the same date as the FS of the
investor unless impracticable9
- Adjustments shall be made to conform the associate’s accounting policies to those of the investor’s, if their policies are different.
- P/L from upstream and downstream transactions between an investor and an associate are only recognized in the investor’s FS to
the extent of the unrelated investors’ interest in the associate 10.
10. Upstream transactions: sales of assets from the associate to the investor
- The unrealized profit from these transactions must be eliminated in determining the investor’s share in the P/L of the associate 11
11. Downstream transactions12: sales of assets from the investor to the associate
- The unrealized profit from these transactions must be eliminated in determining the investor’s share in the P/L of the associate
12. Sale of depreciable asset: the profit on sale of the equipment is realized as the asset is used over the remaining life of the asset
13. Loss of significant influence – occurs when the investor loses the power to participate in the financial and operating policy decisions of
the investee
- Can occur with or without change in the absolute or relative ownership interest
- Can occur as a result of contractual agreement.
14. Discontinuance of equity method13: from the date it ceases to have significant influence over the associate. The entity shall account for
the investment as follows:
- FVPL, or FVOCI, or Nonmarketable investment at cost or investment in unquoted equity instrument
- Measurement: on the date of loss of significant influence, the investor shall measure any retained investment in associate at fair
value14 . This shall be treated as the fair value at initial recognition.
15. Equity method not applicable15: if the investor is a parent that is exempt from preparing consolidated FS or if all of the following apply
- The investor is a wholly-owned subsidiary, or a partially owned subsidiary of another entity and the other owners do not object to the
investor not applying the equity method
- The investor’s debt and equity securities are not traded in a public market or over the counter market
- The investor did not file, or it is not in the process of filing FS with SEC for the purpose of issuing any class of instruments in the
public market
- The ultimate or any intermediate parent of the investor produces consolidated FS available for public use that comply with PFRS
16. Associate held for sale: it is accounted for under PFRS 5 Non-current Assets Held for Sale and Discontinued Operations
- Measured at lower of the carrying amount and fair value less cost of disposal
17. Investment of less than 20%: it is presumed that the investor does not have significant influence, unless such influence can be clearly
demonstrated. The investment shall be accounted at
- FAIR VALUE METHOD: FVPL and FVOCI
- COST METHOD: usually applied with respect to investment in unquoted equity instrument or nonmarketable equity investment
- The investor and investee are treated as separate entities
- No distinction between preacquisition and postacquisition dividends. Dividends are treated as dividend income 16.
18. Investment in associate achieved in stages17: the acquirer shall remeasure the previously held equity interest at FV and recognize the
resulting gain or loss in P/L (referred to as Fair Value Approach)
- The existing interest in the associate is remeasured at FV, any changes in FV is included in P/L 18
- The FV of the existing interest plus the cost of the additional interest acquired constitutes the total cost of the investment for the
initial application of the equity method
- The total cost of the investment for the initial application of the equity method minus the carrying amount of the net asset acquired at
the date significant influence is obtained equals excess of cost over carrying amount or excess of net FV

9
The difference between the reporting date of the associate and that of the investor shall be no more than three montπhs.
10
The investor’s share in the associate’s P/L resulting from upstream and downstream transactions are eliminated.
11
Will only be considered when the same has been sold to third parties; then it is deemed realized.
12
No clear-cut guidance on how to eliminate downstream profits but it is to be treated like that of upstream transactions profit.
13
PAS 28, Basis for Conclusion 18, requires an investor that continues to have significant influence over an associate to apply equity method even if the associate is
operating under severe long-term restrictions that significantly impair the ability to transfer funds to the investor.
14
The difference between the carrying amount of the retained investment and the fair value shall be included in profit or loss.
15
The investment is accounted either by FVPL, FVOCI, or Nonmarketable investment at cost or investment in unquoted equity instrument
16
Unless share dividend and cash received in lieu of share dividends
17
No guidance in PAS 28. Shall follow the provisions of PFRS 3 Business Combination
18
If the existing investment is accounted for at FVOCI, any unrealized gain or loss at the date the investee becomes an associate is reclassified to retained earnings.
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