Chapter 1 Un-unnoy Co reported net unrealized loss of P42,540 on the Genesis Bonds on December 31, 2021 statement of financial position. Questions: Based on the above and the result of your audit, determine the following: 1. Gain (orloss) on sale of 12,000 Lamentations, Inc shares on March 1, 2021 westment in Debt Securities a. 712,000 c. (96,000) b. (12,000) 4. P96,000 2, Interest income on the Genesis Bonds for the year 2021 a. 7537499 c. P531,140 b. P524,254 4. 600,000 3, Interest income on the Exodus bonds for the year 2021. a 260,000 c. 285,473 b, P282,150 4. 247,410 4, The gain (loss) on reclassification on January 1, 2022? a. P228,590 c. P9137 b. 185,460 @. Nil 5, The carrying value of the trading securities and Financial assets at FVTOCL as of December 31, 2021 should be ‘Trading securities FAat FVTOCI a 496,800 15,280,000 b 496,800 P17,300,000 © 540,000 P 5,166,794 4 540,000 15,280,000— chapter 17 - Investment in Associate CHAPTER 17 INVESTMENT IN ASSOCIATE TOPIC OVERVIEW: ‘this chapter discusses investment in associate, the methods of accounting for such investment and its financial statement presentation. LEARNING OBJECTIVES: After studying this chapter, you should be able to: 4, Describe investment in associate and significant influence. 2. Identify the situations which will give rise to the recognition of investment in associate. 3, Apply equity, cost and fair value method in accounting for investment in associate. 4, Compare and contrast the equity method and the cost method of accounting for investment in associate. 5. Describe the initial recognition, initial measurement, subsequent measurement, derecognition and financial statement presentation of investment in associate. 6. Differentiate investment in associate under full PFRS and PFRS for SMEs. 7. Calculate the correct amount of investment in associate and its related accounts. INVESTMENT IN ASSOCIATE Anassociate is an entity over which the investor has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. Identification of Associates Ifan investor holds, directly or indirectly (e.g. through subsidiaries), 20% or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case, Conversely, if the investor holds, directly or indirectly (eg. through subsidiaries), less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence. ‘The existence of significant influence by an investor is usually evidenced in one or more of the following ways: 645owexinnnmnae —__ (a) representation on the board of of the investet ; : hk ) participation in policy-making processes, includin, e decisions about dividends or other distributions; (c) material transactions between the investor and the investeg, (a) interchange of managerial personnel; or (c) provision of essential technical information, ctors oF equivalent goyeyn, ing bg 8 Participation iy EQUITY METHOD ; Under the equity method, the investment in an associate is: > Initially recognized at cost } Increased or decreased to recognize the investor's share of the loss of the investee after the date of acquisition > Decreased for distributions received (e.g,,cash or property dividends > Increased or decreased to recognize the investor's share for change, the investor's proportionate interest in the investee arising fro, changes in the investee’s equity that have not been recognized in thy investee’s profit or loss (i.e. other comprehensive income) > Increased for gain on acquisition of associate > Decreased for impairment loss Profit g, Changes in the investor's proportionate interest in the investee arising fron changes in the investee’s equity that have not been recognized in the investee's profit or loss 1. Other comprehensive income that will not be reclassified to profit o loss (ie. reclassified within equity or retained earnings) a. Changes in revaluation surplus; b, Remeasurements of defined benefit plans; ¢ Gains and losses from investments in equity instruments designate! at FVTOCI; 4. Change in fair value of financial liabilities designated as at FVT- attributable to credit risk; © Gains and losses on hedging instruments that hedge investmetts!* equity instruments measured at FVTOCI; and Changes in the value of the forward elements of forward cont bees Separating the forward element and spot element ° forward contract and designating as the hedging instrument * the foreign kai eee element, and changes in the Se ‘viet excluding it fan asis Spread of a financial instrament ast hedging instrumect” designation of that financial instrum™ 2. Other comprehensive 1 fit ot! reclassification adjustreag will be reclassified to pr a. Gains and losses arisi : arising from t i inancial state a foreign operation; sae ne 646 Athat hedge investments in equity inst 4. Changes in the value of the time val the intrinsic value and time valu designating as the hedging instru intrinsic value. Tuments; and ue of options when separating le of an option contract and ment only the changes in the ‘The investor's share of those changes is reco, ni: i i ‘ comprehensive income. gnized in the investor's other Note: Under PAS 28 Investment in Associate and Joint Venture, an investment in associate and joint venture should be accounted for under equity method. PFRS 11 joint Arrangement should be used in identifying whether there is a joint arrangement and in classifying whether a joint arrangement isa joint venture. Under PAS 27 Separate Financial Statements, investment in associate, joint venture and subsidiary may be accounted at a) cost, b) fair value or o) equity method. Although the discussions in this chapter focuses on investment in associate accounted using the equity method, same principles will apply in accounting for the investment in joint venture and investment in subsidiary in the separate FS using the equity method. 647a Chapter 17 - Investment in Associate OY fue MIN WH HUNRY Ay OULPOY poiphdy SItoWO IS jeu awAEdos, 94 U1 poKnoU anzen aie aya duysn ayeDosse UF WaUNSoAUy 40} HupUNODD" WY GL “airpposse jo siiujusea uy nba poye> sie st porpiaut Aymbe tapu “atuoouy PUOPIAIp 4p Sty TOPOL YS 194 91) 51 porous Ayynba ayy pun attoous wuoUNsaAu a4 4809 a4) Japun oplya ‘ouodUy you Uy a4e AAEYD OYAO}A asLaIG A Nad Wausau, {TT Anus ou | Kijao owioyy [= — [xx aIEPOSSe UP WaUSSAU] | XX xX ssojuounneduy | 7 Xx Wounysonuy jo yuouyeduat Xx | Gaydinstonenjenay OWOSSE Jo yWouoduod Anuo [euINO! ON Xx | Slepesse Wi WatNSaNGT | 199 UF aseaiour ur oueys “s xx ‘auloauT puapialg xT ‘d1eDOSse UF WaUNSaAUT paninoe XX | eIMeAIODa1 puapiaig 7 yse> Xx | eideatssor puopitd 74385 | 40 poaiooas _spuapima “> | Xx aWODUy WOMTSaAT| (woneznioure azjoq) Aue jeunol on Xx MWHOSSe UN USUNTSAATT | auiosus you ayy ur aueys -¢ Tempood weg taqioy Xx aieposse uy juauisaaut | yasse jo uonenjeiapun ‘Anue [euANOT ON XX _ sttiosu} TuaUTASaAuT | jo woneaniomy 2 xX, Qunoase ayo ao) sey |XX Qunos38 19410 10) BSED _| Xe —_aweunsanut |XX] oieposse uruaunsaauy | wousaby tT] t pouieN se) Tt ‘poweW Gby | suonpesuea ] GOHASW ALND’ UNV GOHLaW 41509 40 NOSIHVdWOD 648chapter 17 - Investment in Associate gate -Wesner magnets T-ACCOUNTS ARISING FROM THE JOURNAL ENTRIES Investment in Associate @ Equity Method Impairment loss Balance end OL “Beginning balance XK J XK Dividends received o accrued share in net income XX]}XX Share in net loss ain on acquisition XXX Amortization of excess share in increase in OCT Xx I] XX Share in decrease in OCI share in decrease in OCL, XX PX Share in increase in OCL x XX Amortization of excess Impairment loss Total Investment in Associate @ Cost Method Beginning balance XX [XX Impairment loss XX__ Balance end aoe ee Total XX =XX ——————————— Net Investment Income @ Cost Method Impairment loss XX T XX_ Dividend received or accrued £70 Total XX_= XX —— Goodwill (Gain) on Acquisition At the date of acquisition, the goodwill or gain should be computed as follows: Acquisition cost (or purchase price) x Less: Book value of the net asset acquired On) Excess of cost over book value wx Less: Undervaluation of Assets OX) Add: Overvaluation of Assets ae Goodwill (gain on bargain purchase) XXL Goodwill is not shown separately but it is subsumed in the carrying amount of the investment. However, for the gain, itis presented as part of P&L and included as an increase in the amount of the investment. 649Chapter 17 - Investment in Associate Adjustments for Amortization / Fair Value Adjustments (FVA): Assets Recognition of Amortization Inventory Upon disposal or sale (as cost of saleg Land Upon disposal or sale Depreciable asset Every year through depreciation Goodwill When there is impairment ILLUSTRATION Rhayven Pharmaceutical paid P68 million on January 2, 2021, for 4 milion shares of Luke Corporation ordinary shares. The investment represents a 25% interest in the assets of Luke and gave Rhayven the ability to exercise significant influence over Luke Corporation. On the date of acquisition the following data are available: The book value of Luke's net assets was P192 million. The fair value of Luke's depreciable assets exceeded their book valueby P32 million. These assets had an average remaining useful life of eight ears. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill. Luke paid P1.50 per share dividends on August 25, 2021. Luke reportedet income of P40 million for the year ended December 31, 2021. The matit value of Luke's ordinary shares at December 31, 2021 was P18.50 per stare Required: L *Preparé all appropriate journal entries related to the investment during 2021. 2. Compute for the following: a, Investment income for the year 2021 b. Carrying amount of the investment on December 31, 2021. . SOLUTION: 0 0,00 ‘Acquisition cost Pr a Less: Book value of net assets acquired (P192M x 25%) 0,000,000 Excess of cost over book value Dis Less: Undervaluation of depreciable asset (P32M x 25%) 000 Goodwill zoo Requirement No, 1 2021 Jan. 2 Investment in associate 68,000,000 90,000 Cash oy ‘Aug.25 Cash (4M xP1.5) 6,000,000 99,00 Investment in associate 650 |(372 Investment in Associate Investment in associate 10,000,000 ee Investment income (P40M x 25%) 10,000,000 Investment income 1,000,000 gec3! “Investment in associate [(P32M x25%)/8 yrs} 1,000,000 jrement No. 2a fee net income P 40,000,000 Assled by: Percentage share 25% wl net income before amortization 10,000,000 Si mrtization of excess (P32M /8 years x 25%) 1.000.000 wrest ent income / Equity in earnings of associate 9,000,000 (nt gn alternative, the adjusted net income can be adjusted first before plying the share as follows: i alte net income P 40,000,000 {esx Amortization of excess (P32M /8 years) 4,000,000 agjusted net income 36,000,000 ultiplied by: Percentage share 25% Investment income / Equity in earnings of associate B_9,000,000 | gequirement No. 2b | joquisition cost P 68,000,000 ‘Add: Share in net income before amortization (P40M x 25%) — 10,000,000 Less: Amortization of excess (P32M x 25%)/8 years 1,000,000 | Less: Dividend received (4M x P1.50) 6,000,000 | Investment in associate ~ 12/31/2021 P_Z1.000,000 4s an alternative, the carrying amount can be computed by using the adjusted investment income as follows: Acquisition cost P- 68,000,000 Add: Investment income (P32M x 25%) 9,000,000 | less: Dividend received (4M x P1.50) 6,000,000 Investment in associate - 12/31/2021 271,000,000 ILLUSTRATION OnJanuary 1, 2021, Blade Company purchased 25,000 shares ofthe 100,000 outstanding shares of Razor Company for a total of P2,000,000. At the time af purchase, the book value of Razor Company's equity was 6,000,000. | Razor Company assets having a market value greater than book vale atthe time of the acquisition were as follows: Bookvalue = Marketvalue Remaininglife | lventory 800,000 P1,000,000 Less than 1 year | Eauipment 4,000,000 4,500,000 ‘S years land 200,000 700,000 Indefinite Goodwitt 0 800,000 Indefinite 651Chapter 17 - Investment in Associate Razor Company's net incomes in 2021 and 2022 were 1,400,000 ang 71,600,000 respectively. Dividends per share paid by Razor Company amounted to P4 in 2021 and P5 in 2022. The inventory was sold in 202) while the land was sold at the end of 2022 at a gain on sale of P50,000. Required: 1, What amount should Blade record as investment income for the year ended December 31, 2021? 2. What amount should Blade report as investment in associate for the year ended December 31, 2021? 3. What amount should Blade record as investment income for the year ended December 31, 2022? 4, What amount should Blade report as investment in associate for the year ended December 31, 2022? SOLUTION: Acquisition cost P 2,000,000 Less: Book value of net assets acquired (P6,000,000 x 25%) _1,500,009 Excess -undervaluation of tangible asset 500,000 Less: Undervaluation of: Inventory {(P1M - P800,000) x 25%] P 50,000 Equipment [(P4.5M - P4M) x 259%] 125,000 Land [(P700,000 -P200,000) x 25%] __125,000 __ 300,000 Goodwill (P800,000 x 25%) 2P_200,000 Requirement No. 1 Associate net income P 1,400,000 Multiplied by: Percentage share 25% Share in net income before amortization 350,000 Less: Amortization of undervalued inventory (P50k x 25%) 50,000 Less: Amortization of undervalued equipment (P100k x 25%). 25,000 Investment income / Equity in earnings of associate As an alternative, the adjusted net income can be computed first before multiplying the entity's share as follows: Associate net income P 1,400,000 Less: Amortization of undervalued inventory 200,000 Less: Amortization of undervalued equipment —— 100,000 Adjusted net income 1,100,000 Multiplied by: Percentage share Investment income / Equity in earnings of associate P__275,000 Note that in the first solution, since the P350,000 was derived after multiplying the net income into 25%, adjustments for amortization should also be multiplied to 25%. In the alternative solution, the starting point is 652oll chapter 17 - Investment in Associate 1,400,000 or it represents 100% of the net income of the associate, hence, adjustments for amortization should be also 100%. Requirement No, 2 Acquisition cost 2,000,000 Add: Share in net income after amortization (P32M x 25%) 275,000 Less: Dividend received (25,000 x P4) ——100,000 Investment in associate - 12/31/2021 P_2.175,000 Requirement No. 3 Associate net income P 1,600,000 Multiplied 25% Share in net income before amortization 400,000 Less: Amortization of undervalued equipment (P100kx 25%) 25,000 Less: Amortization of undervalued land (P500k x 25%) 125,000 Investment income / Equity in earnings of associate Note: The undervaluation of inventory is no longer adjusted in the net income because it is already realized in 2021 as stated in the problem that the inventory will be sold within one year (ie, remaining life is less than one year). Hence, this will no longer have an impact on future net income. Also, since this undervaluation exists on January 1, 2021, it is the same as December 31, 2020 and in applying the concepts of counterbalancing error, it will only affect 2020 and 2021, Requirement No. 4 Beginning balance ~ 01/01/2022 P 2,175,000 Add: Investment income 250,000 Less: Dividend received (25,000 x P5) 125.000 Investment in associate ~ 12/31/2022 P_2,300.000 ASSOCIATE HAVING OUTSTANDING PREFERENCE SHARES If an associate has outstanding preference shares that are held by parties other than the investor and classified as equity, the investor computes its share of profits or losses after adjusting for the dividends as follows: 1. Cumulative = Fixed rate x total par value of outstanding preference shares for only one year, declared or not. 2. Noncumulative = Actual dividends declared (i., deducted only when declared) Computation of Share in Net Income Net income of the associate Less: Preference share dividend* Net income to ordinary share Multiply by: Percentage of ownership - Ordinary shares Share in net income of the associate BRB 653Chapter 17 - Investment in Associate Redeemable Preference Shares Redeemable preference shares are accounted as financial liability. Thus, any _ dividends declared shall be accounted as finance cost in the SCI. ‘Therefore, the preference dividends shall no longer be deducted from the net income of the associate because such were already deducted as an expense (ie, finance cost) in computing for the net income during the period, In summary, the following should be observe Classification Preference dividends 1. Equity a. Cumulative | Fixed rate x total par value of outstanding preference shares for only one year, declared or not b.Noncumulative | Actual dividends declared 2. Financial liability | None. This was already deducted in arriving at the net income ILLUSTRATION: On January 1, 2021, Jonel Company acquired 20% of the outstanding ordinary shares of Nuezca Company for P4,000,000. This investment gave Jonel the ability to exercise significant influence over Nuezca. The book value of the acquired shares was P3,000,000. The excess of cost over book value was attributed to a depreciable asset which was undervalued on Nuezca's statement of financial position and which had a remaining usefil life often years. For the year ended December 31, 2021, Nuezca’s share capital outstanding isas follows: 10% cumulative preference share capital P 2,500,000 Ordinary share capital 10,000,000 Nuezca reported net income of ?1,500,000 for the year ended December 31, 2021. Required: Case No, 1: Assuming the cumulative preference share is accounted as equity by Nuezca and that Nuezca declared dividends of P300,000 on the preference shares, answer the following: 1) What amount should Jonel record as investment income for the yeat ended December 31, 2021? 2) What amount should Jonel record as investment in associate for the year ended December 31, 2021? 654chapter 17 - Investment in Associate case No. 2: Assume instead that the preference shares are non-cumulative reference share accounted as equity by Nuezca and that Nuezca declared dividends of P300,000 on the preference shares. Answer the following: 4) What amount should Jonel record as investment income for the year ended December 31, 20217 2) What amount should Jonel record as investment in associate for the year ended December 31, 2021? ase No, 3: Assuming the cumulative preference share is accounted as a nancial liability by Nuezca, answer the following: 4) What amount should Jonel record as investment income for the year ended December 31, 20217 2) What amount should Jonel record as investment in associate for the year ended December 31, 20217 SOLUTION: ‘Acquisition cost P 4,000,000 Less: Book value of the net asset acquired 3,000,000 Excess attributable to Depreciable assets 21,000,000 CASE NO.1 Requirement No. 1 Netincome 1,500,000 Less: Preference dividends (2,500,000 x 10%) —250,000 Net income to ordinary shares P 1,250,000 Multiply by: Percentage of ownership 20% Share in the net income of associate 250,000 Less: Amortization of undervalued asset (P1,000,000/10) __ 100,000 Investment income / Equity in earnings of associate B_150,000 Requirement No, 2 Acquisition cost P 4,000,000 Add: Investment income 150,000 Less: Dividend received : Investment in associate - 12/31/2021 24,150,000 CASE NO.2 Requirement No. 1 Net income P 1,500,000 Less: Actual preference dividends declared — 300,000 Net income to ordinary shares P 1,200,000 Multiply: Percentage of ownership 20% Share in the net income of associate P 240,000 Less: Amortization of undervalued asset (P1,000,000/10) __ 100,000 Investment income / Equity in earnings of associate B_ 140,000 655Chapter 17 - Investment in Associate Chapter Den vesiment in Associate Requirement No. 2 Acquisition cost P 4,000,000 Add: Investment income 140,000 Less: Dividend received i. Investment in associate - 12/31/2021 24,140,009 CASENO.3 Requirement No. 1 Net income P 1,500,000 Multiply by: Percentage of ownership 20% Share in the net income of associate P 300,000 Less: Amortization of excess (P1,000,000/10) 100,009 Investment income / Equity in earnings of associate B_200,009 Requirement No. 2 Acquisition cost P 4,000,000 ‘Add: Investment income 200,000 Less: Dividend received : Investment in associate - 12/31/2021 B_4.200.009 Possible Scenarios of Changes in Ownership Interest 1. Commencement of Equity method 10% plus acquisition of 20% = 30% interest. This should be accounted under PAS 28. 2. Discontinuance of Equity method = 30% minus 20% sold = 10% retained interest. This should be accounted under PFRS 9. = 30% plus acquisition of 30% = 60% interest. This should be accounted under PFRS 3 and PFRS 10. CHANGE FROM COST TO EQUITY METHOD Inaccounting for change in ownership of an investment at cost or fair value to equity method (ie. step acquisition), the rules in step acquisition or business combination achieved in stages under PFRS 3 should be applied. Ina business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in P&L or OCI, 3s appropriate. In prior reporting periods, the acquirer may have recognised changes in the value of its equity interest in the acquire in OCI. If so, the amount that was recognized in OCI shall be recognised on the same basis would be required if the acquirer had disposed directly of the previously held equity interest. 656Zé chapter 17 - Investment in Associate ILLUSTRATION on January 1, 2019, David Company bought 10% of the outstanding ordinary shares of Jean Construction Company for P3 million. Their book value was ®8 million and the difference was attributable to the fair value of Jean's buildings exceeding book value. Jean's net income for the year ended December 31, 2019, was P10 million. During 2019, Jean declared and paid cash dividends of P2 million. The buildings have a remaining life of 10 years. The investment in Jean is to be held as Investment in equity securities designated as at FVTOCI. Also, Jean’s net income for the year ended December 31, 2020 was P12 million and Jean declared and paid cash dividends of P2.5 million, ‘The fair value of David's investment in Jean securities is as follows: December 31, 2019, P3,200,000; December 31, 2020, P3,100,000; and December 31, 2021, P13 million. On January 2, 2021, David purchased an additional 20% of Jean's stock for 5,600,000 cash when the carrying amount of Jean's net assets was 25,000,000. The excess was attributable to building having a remaining life of 8 years. Jean's net income for the year ended December 31, 2021 was P15 million and Jean declared and paid cash dividends of P3 million. Required: 1. Based on the above and the result of your audit, determine the following: a. Unrealized gain or loss to be included in the other comprehensive income as of December 31, 2019. b. Income from investment in Jean Company to be recognized in 2020 profit or loss. Adjustment to retained earnings as of January 2, 2021 as a result of the acquisition of the additional 20% interest in Jean Company. d. Income from investment in Jean Company to be recognized in 2021, profit or loss. e. Carrying amount of the investment in Jean Company as of December 31,2021. 2. Prepare all appropriate journal entries related to the investment from 2019 to 2021. SOLUTION: Requirement No. 1a Fair value, Dec. 31,2019 P 3,200,000 Less: Acquisition cost —3,000,000 Unrealized gain - OCI 200,000 657 eeeter 17 - Investment in Associate Requirement No. 1b “Income from investment in 2020 idend income (2.5M x 10%) | Requirement No. 1 Zero, no retroactive adjustment to retained earnings. The gain ot loss tp profit o loss may be computed as follows: Fair value, 1/2/2021 (P5,600,000 / 20% x 10%) P 2,800,000 | Less: Carrying value or fair value, 12/31/2020 _ 3,100,000 Loss on remeasurement - OCI Note that the loss on remeasurement is recognized in the OCI since the original investment of 10% was classified as investment in equity designated as at FVTOCI. If the same was initially classified as FVTL, the los onremeasurement would have been recognized in the P&L. Requirement No. 1d Share of profit for 2021 (P15,000,000x 30%) P 4,500,000 ‘Amortization of excess (see computation below) | Investment income P__4,387,500 Fair value of investment - 1/2/2021 (10%) P 2,800,000 Acquisition cost - 2021 (20%) mM 5,600,000 Total cost P 8,400,000 Less: Carrying amount of net assets acquired, | 1/2/2021 (P25,000,000 x 30%) 7,500,000 Excess attributable to depreciable assets B__900,000 | Amortization of excess (P900,000/8) P__112,500 | Requirement No. 1e Total cost (see no. 4) P 8,400,000 Investment income - 2021 4,387,500 Dividends received in 2021 (P3M x 30%) (900,000) Carrying amount, 12/31/2021 P_11,887,500 Requirement No. 2 Journal entries are: 01/01/2019 FA@EVTOCI 3,000,000 Cash 3,000,000 12/31/2019 FA@FVTOCI (P3.2M - P3M) 200,000 ‘ Unrealized Gain - OCI 200.0 12/31/2020 Unrealized Gain-OCI(P3.2M-3.1M) 100,000 FA@FVTOCI 100,00" 658mm Chapter 17 - Investment in Associate 01/02/2021 Investment in associate (10%) 2,800,000 Loss on remeasurement - OCI 300,000 FA@FVTOCI 3,100,000 Unrealized gain - OCI 100,000 Retained earnings 100,000 To close the unrealized gain to the retained earnings Retained earnings 300,000 Loss on remeasurement - OCI 300,000 To close the loss on remeasurement to retained earnings 01/02/2021 Investment in associate (20%) 5,600,000 Cash 5,600,000 12/31/2021 Investment in associate 4,500,000 Investment income (15,000,000 x 30%) 4,500,000 Investment income (900,000/8) 112,500 Investment in associate 112,500 To record amortization of excess Discontinuance of Equity Method - Change from Equity According to PAS 28 par. 22, “an entity shall discontinue the use of the equity method from the date when its investment ceases to be an associate ora joint venture as follows: (@) If the investment becomes a subsidiary, the entity shall account for its investment in accordance with PFRS 3 Business Combinations and PERS 10 Consolidated Financial Statements. (b) If the retained interest in the former associate or joint venture is a financial asset, the entity shall measure the retained interest at fair value. The fair value of the retained interest shall be regarded as its fair value on initial recognition as a financial asset in accordance with PFRS 9, The entity shall recognize in P&L any difference between: (i the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture; and (ii) the carrying amount of the investment at the date the equity method was discontinued.” The formula in computing for the total gain or loss to be recognized in the Profit or loss is as follows: Fair value of retained investments Add: Net proceeds, Total Less: Carrying amount of the investment Total gain or loss - P&L RERRS 659Chapter 17 - Investment in Associate The total gain or loss may be divided into gain or loss on sale and on reclassification as follows: Net proceeds Xx Less: Carrying amount of the investment sold ox) Gain (Joss) on sale - P&L x And Fair value, retained investments xX Less: Carrying amount of the retained investment OX) Gain orloss on reclassification - P&L. x When an entity discontinues the use of the equity method, the entity shal account for all amounts previously recognized in OCI in relation to that investment on the same basis as would have been required if the investee had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in OCI by the investee ‘would be reclassified to profit or loss on the disposal of the related assets or liabilities, the entity reclassifies the gain or loss from equity to profit orloss (asa reclassification adjustment) when the equity method is discontinued If a gain or loss previously recognized in OCI by the investee would be , reclassified within equity or retained earnings on the disposal of the related assets or liabilities, the entity reclassifies the gain or loss from OCI to retained earnings when the equity method is discontinued. Please refer the list of other comprehensive income items in the earlier part of this chapter ILLUSTRATION 1: Discontinuance of Equity Method | On January 1, 2020, James Company bought 200,000 ordinary shares out of the 1,000,000 outstanding ordinary shares of Lyn Construction Company for ?30 million, Their book value was P130 million and the difference was attributable to the fair value of Lyn's buildings and its land exceeding book value, each accounting for one-half of the difference. Lyn's net income for the year ended December 31, 2020 was P150 million, other comprehensive of P20 million arising from revaluation surplus. During 2020, Lyn declared and paid cash dividends of P30 million. The buildings have a remaining life of 10 years, On January 2, 2021, James sold half of its investment at P28 million and reclassified its remaining investment to fair value through other comprehensive income. The fair value of the shares this date amounted 285 per share. Lyn's net income for the year ended December 31, 2021, was P160 million, During 2021, Lyn declared and paid cash dividends of P28 nillion, On December 31, 2021, the fair value of the shares amounted t0 290 per share. 660 / |17 Investment in Associate os rat! pete for the following: 1 favestment balance on December 31, 2020. 4 otal amount that should be recognized in profit or loss on January 2021. 2 non sale ofthe 100,000 shares on January 2,2021. © Gain on reclassification of remaining 100,000 shares on January 2, 2021. ‘nrealized gain to be recognized in the December 31, 2021 SFP. ui zeus + 190 $50] juouuredwy + ‘aqeposse au jo s6ujusea ut Anda + rad owosuy onsuoyasduios go quowo3eas ad - (Ss: qunowe BurAs1e> DPN > PORTIA PUBPIAIP USED isontansy 6uneiedo: ppy ~ ales wos sidienas use) + Jonpad - uoRsINbe yseD_ + tsonianpy BUNS@AUT ey g S SarTATTE 6unesado ¥ Bunsenut S014 sep yo 2u9U02e9S aivpossv NE ANSWISSANT onpSP = sounes sayersosse ut ANS + ‘ppv - paniaoa Spuapinip use) + pouIeW 329s1DUL ‘5 JO1S3AUI 10} D2 spouyeus AND, soo vonesuen 4 Snjen ated = 3809chapter 17 - Investment in Associate - ADDITIONAL NOTES ON PFRS FOR SMEs investment in Associate and Joint Venture of an SME is accounted using the cost model, equity model, or fair value model. Cost model ¥ Measured initially at the transaction price plus transaction cost. Y Measured subsequently at cost less any accumulated impairment losses, ¥ Dividends received from the associate are accounted for as income. ¥ Net income and changes in OCI component of the associates does not affect the investment balance. ¥ Not applicable if the investment in associate has a published price quotation. Equity model ¥ Measured initially at the transaction price plus transaction cost. ¥ Dividends received from an associate are accounted for reduction in the carrying amount of the investment. ¥ Adjustments are made to reflect the investor's share in the associate's net income or loss and change in the OCI component. ¥ Subject to impairment testing. Fair value model ¥ Measured initially at the transaction price only. ¥ Subsequently measured at fair value and changes in fair value are recognized in P&L. ¥ Notsubject to impairment testing. Comparison of Cost, Equity and Fair Value Model Cost Equit Fair Value 1. Transaction cost Capitalized Capitalized Expensed 2 Dividends Income Deduction —_Income 3. Share in net income (loss) N/A P&L N/A 4, Share in changes in OCI N/A oct N/A 5. Change in fair value of the N/A N/A Pa investment 6. Subject to impairment Yes Yes No review 7. Impairment loss Pal P&L N/A 679— Chapter 17 - Investment in Associate ee CHAPTER 17: REVIEW QUESTIONS - COMPUTATIONAL eee PROBLEM 17-1 Different Cases-Investment in Associate At the beginning of the current year, the Catherine Company purchased 40% of the ordinary shares of Buban Company for P7,000,000. [At the acquisition date, the carrying amounts of the identifiable assets ang liabilities ofthe investee were equal to their fair value, except for equipment for which the fair value was P3,000,000 greater than the carrying amount and the inventory whose fair value was P1,000,000 greater than cost. The equipment has a remaining life of 4 years and the inventory was all sold during the current year. The investee reported net income of P8,000,000 and paid P2,000,000 dividends on October 1 of the current year. Required: ‘Assume the following independent cases, determine the balance of: 1, Investment income during the current year. 2. Investment account balance at the of the current year. CASE NO. 1; Assume that the investment is accounted for as investment in ‘equity designated as at FVTOCI and the fair value of the share is P8,000,000. CASE NO. 2: Assume instead that the carrying amount of net assets of the investee on the date of acquisition is P10,000,000. CASE NO. 3: Assume instead that the carrying amount of net assets of the investee on the date of acquisition is 10,000,000 also assume that the date of acquisition is April 1 of the current year. CASE NO. 4: Assume instead that the carrying amount of net assets of the investee on the date of acquisition is P14,000,000. CASE NO. 5: Assume instead that the carrying amount of net assets of the investee on the date of acquisition is P18,000,000. CASE NO, 6: Assume instead that the carrying amount of net assets of the investee on the date of acquisition and at the end of the reporting period is: January1_| December 31 Share capital 8,000,000 | _8,000,000 Revaluation surplus 3,000,000 Retained earnings 4,000,000 | 10,000,000 The revaluation surplus is the result of revaluation of the land recognized by Buban Company on December 31, ofthe current year. Additionally, depreciation is provided by Buban Company on the diminishing balance method whereas Catherine Company uses straight-line method. Had Buban Company used the straight-line, the accumulated depreciation would be increased by P400,000, The tax rate is 30%. 680