CHAPTER 18

INVESTMENT IN ASSOCIATE
Other accounting issues ~

TECHNICAL KNOWLEDGE

To know the treatment of upstream and downstream

transactions between the investor and assbciate.

*Toknow
3*

when
theprocedure
*
the
investor tohave
ceases
significant influence. r, .

To understand the recognition of an investment in associate

achieved in stages.

Toknowtheaccounting
for equityanestment
of lessthan
~ 20% under the fair value and cost method.

To recogane a change from fair value or cost method to

equity method. ' .
Adjustment of investee's operations

w The most recent available financial statements of the

associate are used by the investor in applying the equity
method. w

When the reporting dates of the investor and the investee '
are different, the associate shall prepare for the use of
the investor financial statements as of the same date
'
as the financial statements of the investh unless it is
impracticable to do so. , .

In any case, the difference between the reporting date of

the associate and that of the investor shall be no more
than three months.

b. If an~associate
usesaccounting thanthose
other
policies
_ of the investor, adjustments shall be made to conform the
associate's accounting policies to those of the investor.

c. Profits and losses resulting from upstream and

downstream transactions between an investor and an
associate are recognized in the investors financial
statements only to the extent of_the. unrelated investors'
intefests in the associate. _ x h
''
,1

r L k '. t
The investors share in the associate's profits and losses
resulting from these transactions is eliminated. a

Upstream transactions

Upstreamtransactionsare sales of assetsfrom an associate

* - -
to the investor.

the associate
Forexample, sellsinventeryor noncurrent
asset to the investor. #

The unrealized, profit from these transactions must be

eliminatedin determining the investbrs share in the profit or
of theassociate.
1.088
%
g
Sale of inventory from associate to investor

On January 1, 2019, an investor acquired 20% interest in an

investee enabling the investor to exercise significant
influence over the investee. .

On this date, the identifiable assets and liabilities of the

investee at recorded at fair value.

Duringthe year, the'investeereportednet incomeof

- , ,
P2,000,000 and paid no dividend.

Also, during the year, the investée sold inventory costing

P200,000 for P300,000 to the investor. The inventory is'
unsold by the investor on December 31, 2019.

Ignoring mcome 1ntheprotit

9share
tax,theinvestor ofthe
associate for 2019: j /

'
for2019
Netincome . 2,000,000
Unrealizedprofit onendinginventoryon12/31/2019 '( 100,000)
" .
Adjustednet income j _. f. 0., ,ki 1,900,000
x 1,900,000)J , 3v
éhare(20%
Investor's 1 380,000
Another approach x . _
v -
«
Sharein hetincome .,
(20%3:2,000,000) 400,000
Share in unrealized profit (20% x , 100,000) , ( 20,000)
'
Investor's share . . 380,000
Sale price , , 300,000
Cost of mventory -
_ ( 200,000)
'
Unrealizedprofit on endinginventqry 100,000

The journal entry to recognize the investor's share in the

profit of the associate for 2019 is:

Investmentin associate 380,000

Investment income ' ~
380,000
A
 Continuing the illustration, the investee reported net
income of P2, 500, 000 for 2020.
The inventory sold by the associate to the investor in 2019 is
subsequently sold by the investor in 2020.
The investor' 8 share 1n the p1oiit of the associate for 2020 is
determined as follows;
Net 1ncome for 2020 2,500,000
'
Realized profit m be ginning inventory on
January 1,2020 100,000
Adjusted net income - 2,600,000
'
Investor's share (20% X 2,600,000) 520,000

entrytorecognize
Thejourhal share
theinvestor's in the
- -
p1ofit of the associate for 2020 is:
' ' . '
Investmentmassoc1ate 520,000
Investment income 1 520,000
.
- Downstream transactions
Downstream transactions ere sales of assetsfrom the investor
to an assoc1ate. .

Unquestionably, the unrealized profit from these

transactions must be also eliminated as prescribed by
*
28 of PAS 28. . 4 « «~
Paragraph
,- -
Accounting issue 1 1.
Theaccountingissueis howto e1iminatethe un1eahzedproht .
. from downstream transactions.

Unfortunately, PAS 28 does not offer a crystal clear guidance

on the accounting issue 1;
Up to this writing, this Issueis still the subjectof a discussion
,
paper for an IFRIC interpretation.
It 1s believed that computation of the investor' 5 share 1n the
profit of the associate and the journal entries are exactly the
same whether upstream or downstream 11

The point is that the unrealized profit must be eliminated m

determining the investor 3 share in the profit or loss of the
associate.

There is no good argument for this approach apart from

simplicity and the economicrelationship of the investorand
the associate viewed as a single economic entity",
Sale of depreciable asset
On January 1, 2019, an investdr acquired 20% interest in an
associate. During the year, the investee sold an equipment
with carrying amount of P4,500,000 to the investor for
P7,000,000.
hasa remaining
Theequipment usefullife of.5 years.The
investee reported net income of P6,000,000 for 2019.
income
.Ignoring tax,theinvestor's
shareiii theprofitofthe
associate in, 2019 is determined as follows:
"
Net income for 2017 , , 6,000,000
' -
Unrealized-profit on sale of equipment (2,500,000)
Realized profit oh sale of equipment
-
(2,500,000 / 5 years) 500,000
- -
Adjusted net income 4,000,000

share(20%x 4,000,000)
Investor's 800,000
' 5'
'
saieprice
ofequipment . x " 7,000,000
Carrying amount , ,, »
. I (4,500,000)
1
profitonsaleofequipment A
Unrealized . 2,500,000
Notethattheprofitonthesaleoftheequipment
ishunrealiz
because the equipment is not sold to an unrelated party.
The proht 0n the sale of the equipment. is realized as the
asset is used or over the remaining life of the asset.
ona straightlixiebasisover
is depreciated
Thus,astheequipment
a 5-year,period, one-fifth of the profit is also realized each
year. After a 5-year period, the whole of the profit is realized.
the illustration,if.theinvestee
Continuing net
.reported
incomeof P8,000,000for 2020, the investor'ssharein the proflt
of the associate in 2020 is determined as follows:

Net incomefor 2018 ' 8, 000,000

Realized prom on sale of equipment
(2,500,000!
5) ' 500.000
.
netincome
Adjusted , 8,500.000
Investor's
share(20%x8,5oo,000) M
1,700,000
.
 Discontinuance of equity method - change from equity
PAS 28, paragraph 22, provides that an investor shall
discontinue the use of the equity method from the date that it
ceases to have significant influence over an associate.

Consequently, the investor shall account for the investment as

follows:

asset
a. Financial profitorloss.
at fairvaluethrough
b. Financial asset at fair value through other comprehensive
income.

6. Nonmarkeble investment at costor investmentin unquoted

equity instrument.
PAS 28, Basis for Conclusion 18, requires an investor that
continues to have significant influence over an associate to
apply the equity method even if the associateis operating
under severe long-term restrictions that significantly impair
the ability to transfer funds to the investor

Significant influence must be lost before the equity method

ceases to be applicable.

Measurement after loss of significant influence

' PAS thatonthedatethesigmhcant
28,paragraph
22,13rovides
influence is lost, the investor shall measure any retained
investment in associate at fair value.

'
The difference between the carrying amount of the retained
investment at the date the significant influence 13 lost and the
fair value of the retained investment shall be included in
profit or loss. . .

Of course, between
the.difference thenet proceeds
from
disposalof part of the investment and the carrying amount of
the investment sold is also included in profit or loss.

thatthefair valueof the

22 furtherprevides
Paragraph be
investment at the date it ceases to be an associate shall
mgardedas the fair value on initial recognitionas a financial
asset.
 Illustration

An entity purchased 30, 000 ordinary shares of the 100,000

outstanding shares of another entity representing 30% interest
several years ago. At year-end, the investment in assomate has
a carrying amount of P6,000,000. , L,
On the same date, the investor sold 20, 000 shares for net
proceeds of P5, 000, 000 resulting to a loss of significant
influence.

The qu0ted market price for such investment is P260 per share
on the date of sale.

Journal entries

1. To record the sale of 20,000 shares or 20% interest:

, (20,000 / 100,000)
Cash -- 5,000,000
'
Investment in associate 4,000,000
Gain on sale of investment *' 5 1,000,000
i;
' I
Saleprice . 5,000,000.
sold 4t a - 3! '
Carryingamount
of20,000shares ,
.
/
(20,000 30,000x 6,000,000) , 4,000,000
Gainon sale r , , V , ~ . '
, w 1,000,000

2. To remeasure the retained investment of 10,000 shares

or 10% interest (10,000! 100,000):
Inveétment in associate 600,000 .
Gain from remeasurement to fair value 600,000

retained(10,000
Fairvalueof shares x 260) 2,600,000
'
Carrying amount of retained investment
-
(6,000,0004,000,000) 2,000,000
Gaiti from remeasu'rement 600,000

The gain from remeasurement to fair' value is included

in profit or loss. ..

3. T0 reclassify the retained investment as financial asset

~
,at fair value through proflt or loss,
Financial asset - FVPL 2,600,000
Investmentin associate- 2,600,000
Il

1;
 Equity method not applicable
PAS 28, paragraph 17, provides that an investment in associate
shall not be accounted for using the equity method if the
investor, is a parent that is exempt from preparing'
or if all ofthefollowingapply:
financial statements
consolidated
a. 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.

. b Theinvestor'
s debtandequity arenottraded
instruments
in a pubhc market or "over the counter" market.

6. Theinvestor
didnotfileorit isnotin theprocess
offiling
financial statementswith the SEC for the pqrposeof issuing-
any class of instruments in a public market.
d. The ultimate or any intermediate parent of the~investor
'produpes consolidated financial statements available for
public use that comply with Philippine Financial Reporting
. Standards . . J ; up

In these circumstances, the inVestment is accounted for as

"
follows: i _ ., s ,
. _ f .

h. Financial asset at fair value throughprofit or loss.

0. Financial assetat fair valuethrough
.othercomprehexieive
income. , -
4L

c. Nonm'arketable investment atcost or investment in

'
unquoted equity instrument.
9 ~
.L

Associate held for sale .

.
PAS28,paragraph thatif theinvestment
20,provides in
associate is classified as held' for sale, it is accounted for in
with PERS 5.
accordance

The investment in associateclassifiedas held for sale shall be

measured at the lower of oanying amount and fair value less
cost of disposal.
 Investment of less than 20%

If the investor holds, directly or indirectly, 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.

Accounting for investment of less than 20%

a. Fair value method

This is-applicable to fmancial asset measured at fair value

through profit or loss and financial asset measured at
fair value through othernomprehensive income ,

b. Cost method
The cost method is usually applied With respect to
investment in unquoted eduity instrument or
nonmarketable - *
equity investment. x

Under the fair value and cost method, the investor does not
share in the profit or loss of the investee because of the legal
relationship between the investor and the investee.

The investor 'and the investee are independent of the other.

- Accordingly, dividends received 'by the investor from the

investee are accounted for as dividend income.

Dividend from preacquisition retained earnings

There is no longer a distinctionbetween preacquisition

dividends and postacquisition dividends.

In applying the fair value and cost method, dividends

received from an investee are recognized as dividend
income, regardless of whether the dividends originated from
preacquisition retamed earnings or postacquisition retained
earnings.

Ann
 -- cost method
Illustration
1. 1,2019,aninvesthr
OnJanuary shares
10,000
purchased
of the 100,000 outstanding ordinary shares of another
entity at P200 per share. The investment is unquoted and
a 10% equity interest.
represents
Investmentin shares 2,000,000
Cash 2,000,000

The investee reported net income of P1, 000, 000 for 2019
No entry is required. 1

The investor does not recognize a share m the net mco'me

of the investee.

Theinvestor
received
:120%share onDecembe
dividend
31, 2019.

. Memo- Received2,000ordinary shaiesfrom investeeas

20% share dividend on 10,000 origmal shares. Shares now
held, 12, 000 shares. 3'

The investee reported a net loss of P3,000,000 for 2020. -

'
_ S

No entry is required. 1
l
._ '1
0

Theinvestor doesnot a share'in

thenetlossof
~ the mvestee. ° + recegnize
t
i | ?-
f
41' '1 '3

The investee declared and paid a cash dividend of

P1, 500,000 on December 31, 2020
'
Cash(109311500000) 150,000 -
« '
, Dividend income 150,000

Theinvestorsold 3,000ordinaryshares2t P250pershare

on December31,
2020.
~ '
Cash 750,000 .
Investmentinshares , * 500,000'
GainonsaleofInvestment 250,000
Saleprice (3,000x250) 750000
Less:Costofsharessold (3,000I12,000x 2,000,000) 500......»000
Gainonsaleofinvestment ~ 250000
g,

i
 Investment in associate achieved in stages
An investorowneda 10%interestin an investeeon January
1, 2019. The investor acquired additional 10% interest 1n the
same investee on January 1, 2020 enabling the investor to
exercise significant influence over the investee.
In 2019, the investment is accounted for under the cost or
fair value method. However, in 2020, the investment must
be accounted fer under the equity method because the
investee is now an associate.
This scenario or phenomenonis known as "investment In
"
associate achieved 1n stages

The investment in associate achieved in stages is not covered

by PAS 28. However, this is parallel to a businesscombination
achieved in stages.

PFRS 3, paragraph 42, pioV1dns that in a business

combination achieved 1n stages, the acquirer shall remeasure
the previouslyheld equity interest at fair value and recognize
the resulting gain or loss in profit or loss

By inference, this fair value approach"should be followed

when an associate is acquired in stages. -
'
Fair valueapproach 9 h
X

intheassociate
interest
a.-Theexisting at
isremeasured
fair value with any change m fair value included 1n profit
or loss

b. However, if the existing interest is accounted for at fair

value through other comprehensive income, any
unrealized gain or loss at the date the investee becomes
an associate is reclassified to retained earnings.
The fair value 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 theequitymethodminus the carryingamountof the
net assets acquired at the date significant influence is
obtained equals excess of cost over carrying amount or
excess net fair value.
 - Cost
Illustration method
to Equity
method
0"??211?
In fir mvesm
$02303 a
vauired10%
000 Theinvestment
in
interes
an for,
18accounted
underthecost
me th01because
the Investment
1sunquoted
OnJamar?1 .2021»
theInvestora a 0
20/0
further
1nthe
interest Investeefor134,000,053lunred
3)

Onsuch
date,thecarrying 0
f thenet of
assets
th0.
isP18,
investee 000
000 amount.
A

.Anyexcess Of 0031over carrying amountis attributable to

an undervalued equipment with remainingusefullife of 5
years

OnJanuary the10%
1,2021, hasafair
investment
exist1ng
value of P2, 500,000 .1,

Theinvesteereported the following 1101:

incomea11d,
dividends: -- . . , t
2,
- H= . .
', 1 m
m1 1: '
. " v v h

. , ,y i
.
NetIncome
33,5? dividend
Cash
2019., . ,, 0.20000002 '0 800,'OOO
2020 . - 2 . I33:3000, .
000 0 1; 1,000,000
,2021 , 2 4,000,0002 .; 3 2,000,000,

Journal
entries Z- 2 /
,
':
2019 .
'
shares,
Investmentin '2;ooo,ooo
Cash 1 , 3 2,000,000
Cash(10%x800,000) - 80.000
Dividendincome 8090?
2020

Cash(10%2 1,000,000) 100.000

100.000
Dividend income
 2021 , .

1. To recordthe new 20% interest:

in associate
Investment 4,000,000
Cash 4,000,000
2. Toremeesurethe10%existinginterestat fair value:
~ 500;000'
~Investmentinshares .' 500,000
to
Gainonremeasurementeqmty
'
(2,500,000 -~2,000,000) I

3. To reclassifythe 10%existinginterest:
investmentin associate 2,500,000 _
in shares
Investment . 2,500,000

4. To record the share in 2021 net income:

Investmentinassociate . 1,200,000
Investmentincome .
. 1,200,000
(30%;;4,000,000)

5. To record the share in 2021 cash dividend;

Cash * '-
' 600,000
Investment in associate . \

(30% x 2,000,000)

6. To record the amortization of excess of cost:

Investmentixieome
' , /
220,000.
Investmentinassociate 220 000
Fairvalue
0f10% interest '
existing
Cost
of20%
new
interest - , , -
121,333
Totalcostofinvestment
Carrying ofnetassets
amount 6,500,00
acquired
(30% x 18,000,000)
.
5,400,000
Excess
ofcost
attributable
toequipment
II 100000
9

Amortization(1,100,000/ 5) - 220 000

 OnJanuary
1,2019 '
an investee for 1,3,0h(igolavestor acqun'eda 10% interest in

The investment ie 0000unted °

foratfcur
comprehensive
income. value other
through
'
fa' of themvestment
onDecember
31, 2019is
00,1000?1ue
11311:)
On'January1,2020,1,119 .. .' , 0,
inthe
interest investee invest a further
§O/o
forP8,50%f0%%0111red
'
A.

Onsuchdate,theca amount
of net
isP25,000,06'3'1ng
investee the asseteof
the
I

The fair value of het assetsof the investeeis equalto carrying

ameunt. Any excess of cost over carrying amount is _
attnbutable to goodwill.

and cash
. The investeereported the following net income
dividend:

Net income Cashdividend

- ' ~ ,, 3,500,000
2019 , _ 5,000,000 '
2020 r . 6,000,000 . , 4,000,000
, g
I 3' Q '
_J0urnalentries _
' 1 .1
2019 , ,
J, » 1
'
assetFVOCI ;
Financial 3,000,000
-
Cash , , . , , 3,000,000

Cash(10%
x3,500,000)_
: 350,000
income
_ Dividend , 350.000

Financialasset-FVOCI * _ 1,000,000
UnrealizedgainOCI 1,000,000

. Fair valueDecember 31, 2019 4,000,000

Carrying amount 3,000,000
Unrealized gain - other comprehensive income 1,000,000 .
V
 2020.

1.. To record the new 30% interest:

' ' ~. 8,500,000
I
nveéz'xfilfntmassoctate 2 ~ 8,500,000
23k, O
I
2. To reclassify the unrealized gain to retamed earmngs:
'
UnrealizedgainOCI 1,000,000
Retainedearnings 1,000,000

Application. Guidance of PFRS 9, paragraph 35.7..1,

provides that amount recognizedin o'thel:comprehenswe
income for financial asset measuregiat far value through
other compreheneive income LS not subsequently
neclassified to profit or loss.

However, the cumula_tivegain _orlegs may be transferi'ed

wzthm equzty 0r retamed earnmgs. ,E. 4.

3. To reclassify the 10% interest:

Investmentin associate ** . 4,000,000
/ Financial asset ~FVOCI , » 4,000,000
h
4. To recordthe sharein 2020net'income: ,
" .
i-j' -
in associate
Investment 2 "2,400,000
. 4 .
Investment income - ,'' K x 2,400,000
(40% 1: 6,000,000) \

5..Torecordtheshare102020cashdividend:
- '
Cash (40% x 4,000,000) 1,600,000
Investment in associate 1,600, 000
6. The excessof cost over carrying ammint attributable to
goodwill is not amortized.
Fair value of 10%existing-interest
4,000,000
Costof 30%new interest
§500,000
Total cost of investment
_ 12,500,000
Carrymgamount of net assetsacquired
(40%x 25,000,000)
.
I 10,000,000
Goodwdl
2,500,000