Investments in

Associates
I N REFERENCE TO PAS 28
What is an Associate?

An entity (including an unincorporated entity
such as a partnership) which the investor has
significant influence and that is neither a
subsidiary nor an interest in a joint venture.

What is considered as a
Significant Influence?

The power to participate in the financial and
operating policy decisions of the investee but
is not control or joint control of those policies.
Significant Influence
Entity has, directly or indirectly, 20% of the voting power.
Representation on the governing body of the investee.
Participation in the policy making process.
Interchange of managerial personnel
Material transaction between the entity and investee.
Provision of technical information.

Potential Voting Rights are considered.

Equity Method
ANG METHOD SA PAG- AACCOUNT NG I NVESTMENT I N
ASSOCI ATES
Ano na nga kasi yun?
It is where the investment is initially recorded at cost
and adjusted thereafter for the post-acquisition
change in the investors share of net assets of the
investee.
Under the equity method, on initial recognition the
investment in an associate is recognised at cost, and
the carrying amount is increased or decreased to
recognise the investors share of the profit or loss of
the investee after the date of acquisition.
Oh, tapos, ano pa?
The profit or loss of the investor includes its share of
the profit or loss of the investee and the other
comprehensive income of the investor includes its
share of other comprehensive income of the
investee.

Hindi ko gets, kamo? Ieexplain
ko na, labyu.
DON T WORRY GUYTH. MUKHA LANG MARAMI NG SLI DES PERO
MABI LI S LANG TO. PRAMI S.
Illustration:
Investor purchased 20% of outstanding shares for
P5,000,000.00.
Net assets are fairly values except for a depreciable
asset that had a FV of P2,000,000.00 greater than
CA. (remaining life 5 years)
CA of net assets was P20,000,000.00
Illustration:
Acquisition cost 5,000,000.00
CA of net assets (20mx20%) 4,000,000.00
Excess of cost over CA 1,000,000.00

Illustration
If depreciable and intangible assets of investee are
undervalued decrease investment income.
Goodwill part of the CA of the investment in
Associate
Excess of Cost over CA
If depreciable and intangible assets of investee are undervalued
decrease investment income.
If the inventory has FV adjustments, adjust when SOLD.
Goodwill part of the CA of the investment in Associate.

Undervaluation of Asset (2m x 20%) 400,000
Goodwill-remainder 600,000
Excess of Cost over CA 1,000,000
Excess of Cost over CA
Under the equity method, on
initial recognition the
investment in an associate is
recognised at cost, and the
carrying amount is increased
or decreased to recognise the
investors share of the profit or
loss of the investee after the
date of acquisition.
If depreciable and intangible
assets of investee are
undervalued decrease
investment income.

Acquistion:
Investment in Assoc. 5m
Cash 5m

Post-Acquisition
Investment Income 400k
Investment in Assoc 400k
Other factors:
Share in the net income:
Investment in Associates xx
Investment Income xx

Investment income = Net income preference share dividend*

*if PS dividend is cumulative, always deduct
*if PS dividend is non-cumulative, deduct only when declared.
Other factors:
Cash Dividend
Cash xx
Investment in Associates xx

Note that only cash dividends are recorded. Stock dividends are
not included.
Pano kung sa kakadebit mo ng
loss ay nag-zero or negative
yung Investment in Associates
account?
OO NGA NAMAN.
Illustration:
Investment in Assoc beg. Bal 200,000.00
Net Losses for the current year 500,000.00
Trade A/R (30,000 is from Assoc.) 130,000.00
Loans Rec (45,000 is from Assoc. ) 155,000.00
Inventory 90,000.00
Short term investments 30,000.00
Long-term L/R from Assoc 100,000.00
Long-term L/R from Assoc (pledged as collateral) 100,000.00


Solution:
Investment in Assoc beg. Bal 200,000.00
(Net Losses for the current year) (500,000.00)
Total (300,000.00)
Trade A/R from Assoc. 30,000.00
Loans Rec from Assoc. 45,000.00
Long-term L/R from Assoc 100,000.00
Total (125,000.00)

Answer:
The investors discontinues its share of
further losses. Investment in Associate
is recorded at zero value.
Losses recognised using the equity
method in excess of the entitys
investment in ordinary shares are
applied to the other components of
the entitys interest in an associate or
a joint venture in the reverse order of
their seniority (ie priority in
liquidation).
Entry:

Loss on Investment 375,000
Investment on Assoc 200,000
Trade A/R 30,000
Loans Rec 45,000
Long-term L/R 100,000
Illustration:
Investment in Assoc beg. Bal 200,000.00
Net Losses for the current year 340,000.00
Trade A/R (30,000 is from Assoc.) 130,000.00
Loans Rec (45,000 is from Assoc. ) 155,000.00
Inventory 90,000.00
Short term investments 30,000.00
Long-term L/R from Assoc 100,000.00
Long-term L/R from Assoc (pledged as collateral) 100,000.00


Answer:
The investors discontinues its share of
further losses. Investment in Associate
is recorded at zero value.
Losses recognised using the equity
method in excess of the entitys
investment in ordinary shares are
applied to the other components of
the entitys interest in an associate or
a joint venture in the reverse order of
their seniority (ie priority in
liquidation).
Entry:

Loss on Investment 340,000
Investment on Assoc 200,000
Loans Rec 40,000
Long-term L/R 100,000
Illustration:
Investment in Assoc beg. Bal (125,000.00)
Net Profit for the Year 200,000.00
Total 75,000.00

Entry:
Investment in Assoc 75,000
Investment Income 75,000
What is the Equity Method?
The profit or loss of the investor includes its share of
the profit or loss of the investee and the other
comprehensive income of the investor includes its
share of other comprehensive income of the
investee.
On initial recognition the investment in an associate
is recognised at cost, and the carrying amount is
increased or decreased to recognise the investors
share of the profit or loss of the investee after the
date of acquisition.


What is the Equity Method?
Changes in investees P/L charged to Investment
Income Account

Changes in investees equity not in P/L recognized
directly on investors equity account
Revaluation surplus, forex gain/loss on translation, etc.
Debit/credit Investment in Assoc. to balance the entry
Adjustments in Investees Operations
Most recent available FS of the associate is used in applying
the equity method
When the reporting dates are different, the associate must
prepare an FS for the investor as of the same date, or in
anycase, at least the time difference doesnt exceed three
months.
Associate shall adjust accounting policies to conform with
the investor.
Profits from upstream and downstream transaction are
eliminated.
Upstream and Downstream
Transactions
YEHEY MALAPI T NANG MATAPOS.
Anu na nga ba yun?
Sales of Assets:
Upstream associate is seller
Downstream associate is buyer


Interentity profit must be eliminated in determining the
investors share in the profit or loss of the associate.
Profit or Loss is recorded on the year it is realized.
Example of Upstream Transaction
Net Income of investee 2,000,000.00
Sale of inventory to investee 300,000.00
Unsold for the current year
Cost of inventory 200,000.00
Unrealized Profit on End Inv 100,000.00
Solution:
Net Income of investee
2,000,000.00
Sale of inventory to investee
300,000.00
Unsold for the current year
Cost of inventory 200,000.00
Unrealized Profit on End Inv
100,000.00

Net Income 2,000,000
Unrealized Profit - 100,000
Total 1,900,000

Investors Share on NI:
1,900,000 x 20% = 380,000

Solution:
Entry:
Investment in Assoc. 380,000
Investment Income 380,000

On the next year, inventory is sold and
income is realized:
Investment in Assoc. +20,000
Investment Income +20,000
Net Income 2,000,000
Unrealized Profit - 100,000
Total 1,900,000

Investors Share on NI:
1,900,000 x 20% = 380,000

Example of Upstream Transaction
Net Income of investee 2,000,000.00
Sale of equipment to investor 300,000.00
Cost of equipment 200,000.00
Unrealized Profit 100,000.00
4 year life for equipment
Solution:
Net Income of investee
2,000,000.00
Sale of equipment to investee
300,000.00
Cost of equipment 200,000.00
Unrealized Profit on End Inv
100,000.00

Net Income 2,000,000
Unrealized Profit - 100,000
Total 1,900,000

Investors Share on NI:
1,900,000 x 20% = 380,000

Solution:
Entry:
Investment in Assoc. 380,000
Investment Income 380,000

On the next year, profit is realized
proportionate to its depreciation:
Investment in Assoc. +5,000
Investment Income +5,000
(100,000 x 20%)/4 years = 5,000
Net Income 2,000,000
Unrealized Profit - 100,000
Total 1,900,000

Investors Share on NI:
1,900,000 x 20% = 380,000

Discontinuance of Equity
Method
KONTI NA LANG TALAGA!
When to stop using the Equity Method:

When there is no significant Influence.
Measurement after loss of Significant
Influence

Investor shall measure retained investment in associate at
fair value
Excess of CA and fair value is included in the P/L
Amounts recognized in other comprehensive income
reclassified to profit or loss
Illustration
To measure remaining investment in assoc account to fair value:
Investment in Associates xx
Gain from remeasurement for fair value xx

To reclassify the remaining investment in assoc
Investment in Equity Securities xx
Investment in Associates xx
When is Equity Method
Unapplicable?
KONTI NG GAPANG PA!
Investment in Associate not accounted using
the Equity Method when:
Investment is classified as held for sale
Investor is a wholly or partially owned subsidiary of another entity an
the entity are ok with the investor not applying the equity method.
Investors debt and equity instruments are not on the stock exchange
or o-t-c market
investor did not (or at least not in the process of) file its FS with the
SEC for the purpose of issuing any class of instruments in the public
market
Parent of investor produces consolidated FS available for public use
and complies with PFRS
Cost Method
Literally recording the investment at cost
Uses investment in equity securities account
No entry kapag net income
Memo Entry for Stock Dividends
Entry to record cash dividends:
Cash xx
Dividend Income xx




Cost Method to Equity Method
Investor shall remeasure the previously held interest in an
investee using the equity method.
Illustration 1
2011:
10% interest
Acq cost 2,000,000
CA 1,600,000
Net Income 2,000,000
Cash Dividend 800,000

*Excess of 2m and 1.6m = 400k,
attributable to depreciable asset

2013
20% interest
Acq cost 4,000,000
CA 2,800,000
Net Income 4,000,000
Cash Dividend 3,000,000

2012
Net Income 3m, Cash Div 1m
Illustration 1
2011:
10% interest
Acq cost 2,000,000
CA 1,600,000
Net Income 2,000,000
Cash Dividend 800,000

*Excess of 2m and 1.6m = 400k,
attributable to depreciable asset

2011 Entries
Investment in ES 2m
Cash 2m

Cash 80k
Dividend Income 80k
Illustration 1
2012 Entries
Cash 100k
Dividend Income 100k
2013
Investment in Assoc 4m
Cash 4m
Investment in Assoc 2m
Investment in ES 2m
2013
20% interest
Acq cost 4,000,000
CA 2,800,000
Net Income 4,000,000
Cash Dividend 3,000,000

2012
Net Income 3m, Cash Div 1m
Illustration 1
2013 Entries
Investment in Assoc 160k
Gain on remeas. To Eq 160k
2013
20% interest
Acq cost 4,000,000
CA 2,800,000
Net Income 4,000,000
Cash Dividend 3,000,000

2012
Net Income 3m, Cash Div 1m
Illustration 1
2013 Entries
Investment in Assoc 160k
Gain on remeas. To Eq 160k

Share in the Net Income:
2011 (10% x 2m) 200,000
2012 (10% x 3m) 300,000
Amortization of Excess of cost=
(400,ooo x 2yrs/5yrs) -160,000
Dividend inc recorded -180,000
Gain on remeasurement 160,000
Illustration 1
2013 Entries
Investment in Assoc 160k
Gain on remeas. To Eq 160k

Investment in Assoc 1.2m
Investment Inc 1.2m
Cash 600k
Investment in Assoc 600k

Share in the Net Income:
2011 (10% x 2m) 200,000
2012 (10% x 3m) 300,000
Amortization of Excess of cost=
(400,ooo x 2yrs/5yrs) -160,000
Dividend inc recorded -180,000
Gain on remeasurement 160,000
Illustration 1
2013 Entries
Investment Inc 360k
Inv in Assoc 360k

First acq
2011 40,000
2012 40,000
2013 40,000
Second acq (1.2m/5) 240,000
Total Amortization 360,000
Illustration 2
2011:
10% interest
Acq cost 2,000,000
CA 1,600,000
Net Income 2,000,000
Cash Dividend 800,000

*Excess of 2m and 1.6m = 400k,
attributable to goodwill
*FV of investment end of 2011 = 3m

2012
20% interest
Acq cost 4,000,000
CA 2,800,000
Net Income 4,000,000
Cash Dividend 3,000,000

Illustration 2
2011:
10% interest
Acq cost 2,000,000
CA 1,600,000
Net Income 2,000,000
Cash Dividend 800,000

*Excess of 2m and 1.6m = 400k,
attributable to goodwill
*FV of investment end of 2011 = 3m

2011
Investment in ES 2m
Cash 2m
Cash 800k
Dividend Inc 800k
Investment in ES 1m
Unrealized gain OCI 1m
Illustration 2
2012
Investment in Assoc 4m
Cash 4m
Unrealized gain-OCI 1m
Investment in Assoc 2m
Investment in ES 3m
Investment in Assoc 1.2m
Gain on remeasurement 1.2m
2012
20% interest
Acq cost 4,000,000
CA 2,800,000
Net Income 4,000,000
Cash Dividend 3,000,000

Illustration 2
2012
Investment in Assoc 4m
Cash 4m
Unrealized gain-OCI 1m
Investment in Assoc 2m
Investment in ES 3m
Investment in Assoc 1.2m
Gain on remeasurement 1.2m
=Share in the Net Income 2011
Divdends recorded

=2,000,000 800,000

=1,200,000