Chapter 22

Investments in Associates

Rowena Buan-Yost, CPA-MBA

Definitions

Definitions

4
Significant influence
Determining if significant (SI) influence
exists requires judgement
SI presumed if investor holds, directly or
indirectly, 20% of voting power of
associate, unless clearly demonstrate this
is not the case
conversely, if the investor holds <20%...
a majority ownership by another investor
does not preclude an investor from
having SI

Significant influence continued

Determining if SI exists requires
judgement. This means considering all
factors, eg

potential voting rights (currently exercisable or

convertible
representation on the board of directors or
equivalent governing body
participation in policy-making processes,
including participation in decisions about
dividends or other distributions
material transactions between the investor
and the investee
providing essential technical information
interchange of managerial personnel

Loss of Significant influence

Factors
Loses the power to participate in
the financial and operating policy
decisions of the associate
Can occur with or without change
in the absolute or relative
ownership interest
As a result of a contractual
agreement

Equity method

Based on the economic relationship between the

investor and the investee
Investor and investee are one and the same
SI exists
Investment must be in ordinary shares
Investment in associate shall be classified as
noncurrent asset
Parent investor has control over the investee
(Subsidiary)

Equity method

(Illustration on Page 753)

In the books of investor:

Initial recognition : At cost
Subsequent recognition :
Increase / decrease carrying amount with profit /loss of the associate
Recognize profit / loss of subsidiary in P& L account of investor
Reduce the carrying amount with dividends received from associates
Adjust the carrying amount for the following:
changes in the investees other comprehensive income due to :
Changes arising from the revaluation of property, plant and
equipment
foreign exchange translation differences.
Adjust investors other comprehensive income:
With the investors share of those changes arising from revaluation
exchange difference etc.

Excess of Cost over CA

Investor pays more for an investment than the carrying amount of the asset
Undervaluation of the investees assets (bldg, land, inventory)
Goodwill
If the assets of the investee are fairly valued
attribute the excess of cost over CA of the net assets to goodwill
If the excess is attributable to undervaluation of depreciable asset
It is amortized over the remaining life of the depreciable asset
If the excess is attributable to undervaluation of land
It is not amortized because land is nondepreciable
If the excess is attributable to inventory
It is expensed when the inventory is already sold
If the excess is attributable to goodwill
It is included in the CA of the investment and not amortized
The entire investment is tested for impairment at the end of each period.

Excess of Net Fair Value over Cost

10

Included as income in the determination of

the investors share of the associates profit or
loss in the period in which the investment is
acquired
Investment in Associate
Investment Income

xxx
xxx

Investee with Heavy Losses

11

Share of losses equals or exceeds the CA of

investment
Investor discontinues recognizing its share of further
losses
The investment is reported at nil or zero value
Subsequently reports income

- Investor resumes recognizing income if its share of

income equals the share of losses not recognized

Impairment Loss

12

Impairment loss shall be recognized

When the CA of investment in associate exceeds its
recoverable amount
Recoverable amount = higher between (FV cost of
disposal) and (value in use)
FV = proceeds of sale at measurement date
Value in use = PV of the estimated future cash flows
expected to arise from the continuing use of an asset and
from its ultimate disposal
Allocated first to remaining goodwill

Investee with Preference Share

13

Cumulative
Investors share of profit or loss is computed
after deducting the preference dividends,
declared or not

Non Cumulative
Investors share of profit or loss is computed
after deducting the preference dividends only
when declared

Other Changes in Equity

14

Changes arising from Revaluation of PPE

and from Foreign translation differences
Changes are recognized directly in equity of the
investor

Adjustment of Investees Operations

15

The most recent available FS of the associate are used by

the investor in applying the equity method (difference shall
be not > 3 mos)
Adjustments shall be made to conform the associates
accounting policies to those of the investor
Investors share in the associates P/L resulting from
upstream/ downstream transactions is eliminated
Upstream transactions are sales of assets from an associate to the investor
Downstream transactions are sales of assets from the investor to an
associate

When Equity Method Not Applicable

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If the investor is a parent that is exempt from preparing

consolidated FS
The investor is a wholly-owned or partially-owned
subsidiary of another entity and the other owners do not
object to the investor not applying the equity method
The investors debt and equity instruments are not traded
in a public market or over the counter market
The investor did not file or in the process of filing FS with
SEC for the purpose of issuing any class of instruments in
a public market
The parent of the investor produces consolidated FS
available for public use that comply with PFRS

Discontinuance of equity method

17

Stop using equity method when SI

ceases, account for the investment as:
Financial asset at FV through profit
or loss
Financial asset at FV through other
comprehensive income
Nonmarketable investment at cost or
investment in unquoted equity
instrument

Measurement after loss of SI

18

Any retained investment shall be

measured at FV included in P&L
If disposal, derecognise Associate &
recognise in profit or loss the difference
between (i) proceeds + fair value of
retained interest & (ii) CA when SI lost.
without disposal regard FV at that
date as a new cost

Associate Held for Sale

19

Accounted for in accordance with PFRS 5

Shall be measured at the lower of CA and FV
less cost of disposal

Investment of less than 20%

20

The investor does not share in the P/L of the investee

Dividends received by the investor is regarded as dividend
income
Fair Value Method:
Financial assets are measured at FV through P/L
Financial assets are measured at FV through OCI
Used when associate is acquired in stages
Cost Method:
Applied to investment in unquoted equity instrument or
nonmarketable equity investment

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