1. What are some adjustments to be made with respect to the investee's operations?

ADJUSTMENT OF INVESTEE'S OPERATIONS

a. The most recent available financial statements of the associate are used by the investor in
applying the equity, method.
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 investor 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 uses accounting policies other than those 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 investor's financial statements only to the extent of the
unrelated investors interests in the associate.

The investor's share in the associate's profits and losses resulting from these transactions is eliminated.

2. Explain upstream transactions.

Upstream transactions

• Upstream transactions are sales of assets from an associate to the investor.

For example, the associate sells inventory or noncurrent asset to the investor.

• The unrealized profit from these transactions must be eliminated in determining the investor's
share in the profit or loss of the associate.

3. Explain downstream transactions.

Downstream transactions

Downstream transactions are sales of assets from the investor to an associate.

Unquestionably, the unrealized profit from these transactions must be also eliminated as prescribed by
Paragraph 28 of PAS 28.

4. Explain the treatment of unrealized profit from upstream and downstream transactions in relation
to investment in associate.

• The accounting issue is how to eliminate the unrealized profit from downstream, transactions. 
Unfortunately, PAS 28 does not offer a crystal clear guidance on the accounting issue.
• Up to this writing, this issue is still the subject of a discussión paper for an IFRIC interpretation.

• It is believed that computation of the investor's share in the profit of the associate and the
journal entries are exactly the same whether upstream or downstream.
 • The point is that the unrealized profit must be eliminated in determining the investor's share in
the profit or loss of the associate.
• There is no good argument for this approach apart from simplicity and the economic
relationship of the investor and the associate viewed as a "single economic entity".

5. Explain the discontinuance of the equity method.

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 any of the following:

a. Financial asset at fair value through profit or loss.

b. Financial asset at fair value through other comprehensive income.
c. Nonmarkeble investment at cost or investment in 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 associate is 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.

6. Explain the measurement of the investment in associate when significant influence is lost.

Measurement after loss of significant influence

• PAS 28, paragraph 22, provides that on the date the significant 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 is lost and the fair value of the retained investment shall be included in
profit or loss.
• Of course, the difference between the net proceeds from disposal of part of the investment and
the carrying amount of the investment sold is also included in profit or loss.
• Paragraph 22 further provides that the fair value of the investment at the date it ceases to be an
associate shall be regarded as the fair value on initial recognition as a financial asset.

7. What are the circumstances where the equity method is not applicable?

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 consolidated financial
statements or if all of the following apply:

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. The investor's debt and equity instruments are not traded in a public market or "over the
counter" market.
c. The investor did not file or it is not in the process of filing financial statements with the SEC for
the purpose of issuing any class of instruments in a public market.
d. The ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with Philippine Financial Reporting Standards.

In these circumstances, the investment is accounted for as any of the following:

a. Financial asset at fair value through profit or loss.

b. Financial asset at fair value through other comprehensive income.
c. Nonmarketable investment at cost or investment, in unquoted equity instrument.

8. Explain the treatment of investment in associate classified as held for sale.

Associate held for sale

• PAS 28, paragraph 20, provides that if the investment, in associate is classified as held for sale, it
is accounted for in accordance with PFRS 5.
• The investment in associate classified as held for sale shall be measured at the lower of carrying
amount and fair value less cost of disposal.

9. Explain the accounting for an 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.

10. Explain the treatment of cash dividend from preacquisition retained earnings if the investment is
less than 20%.

• There is no longer a distinction between 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 retained
earnings or postacquisition retained earnings.

11. Explain the cost method of accounting for equity investment.

Cost method

The cost method is usually applied with respect to investment in unquoted equity instrument or
nonmarketable equity investment.

12. Explain a change from cost method to equity method of accounting.

• The cost method is usually applied with respect to investment in unquoted equity instrument or
nonmarketable equity investment.
 • 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.
13. Explain a change from fair value method to equity method of accounting.

Fair value method

This is applicable to financial asset measured at fair value through profit or loss and financial
asset measured at fair value through other comprehensive income

14. Explain investment in associate achieved in stages.

Investment in associate achieved in stages

• An investor owned a 10% interest in an investee on January 1, 2021. The investor acquired
additional 10% interest in the same investee on January 1, 2022 enabling the investor to
exercise significant influence over the investee.
• In 2021, the investment is accounted for under the cost or fair value method. However, in 2022,
the investment must be accounted for under the equity method because the investee is now an
associate.
• This scenario or phenomenon is known as "investment in associate achieved in stages."
• The investment in associate achieved in stages is not covered by PAS 28. However, this is
parallel to a business combination achieved in stages.
• PFRS 3, paragraph 42, provides that in a business combination achieved in stages, the acquirer
shall remeasure the previously held 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.

15. Explain the fair value approach in accounting for investment in associate achieved in stages.

Fair value approach

a. The existing interest in the associate is remeasured at fair value with any change in fair value
included in 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.
c. 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.
d. The total cost of the investment for the initial application of the equity method minus the
carrying amount of the net assets acquired at the date significant influence is obtained equals
excess of cost over carrying amount or excess net fair value.