Lesson 9 Introduction To Equity Method

IAS 28 Investment in Associates and
Joint Venture
Equity Method
Investments in equity instruments
Active participation
Level of Definition Type of entity

participation
Significant Power to participate Associate
influence
Joint control Agreed sharing of Joint venture
control
Control Power to govern Subsidiary
Significant influence
The power to participate in the financial and operating

policy decisions of the investee but is not control or joint
control over those policies.
IAS 28 par 3 (definitions)

Presence of significant influence
▪ If an entity holds, directly or indirectly (eg through
subsidiaries), 20 per cent or more of the voting power of the
investee, it is presumed that the entity has significant
influence, unless it can be clearly demonstrated that this is not
the case.
▪ If the entity holds, directly or indirectly (eg through
subsidiaries), less than 20 per cent of the voting power of the
investee, it is presumed that the entity does not have
significant influence, unless such influence can be clearly
demonstrated.
IAS 28 par 5
Evidence of significant influence
a. representation on the board of directors or equivalent
governing body of the investee;
b.participation in policy-making processes, including participation
in decisions about dividends or other distributions;
c. material transactions between the entity and its investee;
d.interchange of managerial personnel; or
e.provision of essential technical information.
IAS 28 par 6
Potential voting rights
The existence and effect of potential voting rights that are
currently exercisable or convertible, including potential
voting rights held by other entities, are considered when
assessing whether an entity has significant influence.
Potential voting rights are not currently exercisable or
convertible when, for example, they cannot be exercised or
converted until a future date or until the occurrence of a
future event.
IAS 28 par 7
Joint arrangements
An arrangement where two

or more parties have
contractually agreed to joint
control is a joint
arrangement.
IAS 28 par 3
Joint operations
the joint arrangement constitutes

joint control over rights to assets,
and obligations for the liabilities,
relating to the arrangement. The
parties that exert joint control
over joint operations are referred
to as joint operators.
IFRS 11 par 15
Joint venture
the joint arrangement constitutes

joint control over rights to net
assets of the arrangement. The
parties that exert joint control
over joint operations are referred
to as joint operators.
IFRS 11 par 16
Accounting for investments where joint control and
significant influence are exercised
An entity with joint control of, or significant influence

over, an investee shall account for its investment in an
associate or a joint venture using the equity method
except when that investment qualifies for exemption in
accordance with paragraphs 17–19.
IAS 28 par 16
Illustration 1
Ina Corporation acquired 25% of Anak Company. The following are taken from the
due diligence report prepared by a consultant hired by Ina.
BOOK VALUE FMV
JANUARY 1, 2014 JANUARY 1, 2014
Current assets 2,000,000 2,000,000
Plant assets 12,500,000 12,500,000
Total assets 14,500,000
Current liabilities 1,450,000 1,450,000
Bonds Payable 8,000,000 8,000,000

Additional information:
• Ina was able to acquire Anak on January 2, 2014 for a
total cost of ₱ 1,262,500.
• Anak reported net income of ₱ 180,000 and ₱ 250,000 at
the end of 2014 and 2015, respectively.
• Anak also declared and paid cash dividends amounting to
₱ 20,000 in 2015.
Equity method
on initial recognition
the investment in an
associate or a joint
venture is recognized
at cost
Ina was able to acquire Anak on January 2, 2014 for a total
cost of P1,262,500.
Ina’s Dr Cr
books Investment in Anak ₱1,262,500
Cash ₱1,262,500
Book value of Anak’s NIA, January 2014 ₱ 5,050,000
Excess of FMV over book value 0
Fair value of Anak’s NIA, January 2014 5,050,000
Proportionate share of Ina 25%
Investment in associate 1,262,500
Equity method
▪ the carrying amount is

increased or decreased to
recognize the investor’s share
of the profit or loss of the
investee after the date of
acquisition. The investor’s
share of the investee’s profit or
loss is recognized in the
investor’s profit or loss.
Anak reported net income of ₱180,000 for 2014.
Ina’s Dr Cr
books Investment in Anak ₱45,000
Share in Associate’s NI ₱45,000
Book value of Anak’s NIA, ₱ 5,050,000 Investment in associate
January 1, 2014 January 1, 2014 1,262,500
Net income for 2014 180,000 Share in associate’s 45,000
Book value of Anak’s NIA, 5,230,000 net income
December 31, 2014 Investment in 1,307,500
Excess of FMV over book 0 associate
value
5,230,000
Investment in associate ₱ 1,307,500
Ina’s Dr Cr
Equity method
▪ distributions received from

an investee reduce the
carrying amount of the
investment.
Dividends of ₱20,000 were declared and paid.
Ina’s Dr Cr
books Cash ₱5,000
Investment in Anak ₱5,000
Book value of Anak’s NIA, ₱ 5,230,000 Investment in associate
January 1, 2015 January 1, 2015 1,307,500
Add: Net income for 2015 250,000 Share in associate’s 62,500
Less: Dividends 20,000 net income
Book value of Anak’s NIA, 5,460,000 Share in dividends (5,000)
Excess of FMV over book 0 associate
value
5,460,000
Investee’s stockholders’ equity as of date of acquisition
Common stock
Investment in Associate
Share premium
25%
Retained earnings
Investee’s stockholders’ equity as of end of year
Common stock
Pre-acquisition
SHE
Share premium
Retained earnings
Post acquisition
SHE Retained earnings (net income – dividends)
Investee’s stockholders’ equity as of end of year
Common stock
Share premium
25%
Retained earnings
Retained earnings (net income – dividends)
25%
Illustration 2
BOOK VALUE FMV

Current assets 2,000,000 2,000,000
Plant assets 12,500,000 15,000,000
Bonds Payable 8,000,000 8,000,000

• Anak depreciates plant assets over the remaining life of
20 years.
total cost of ₱1,887,500.
• Anak reported net income of ₱180,000 and ₱250,000 at
₱20,000 in 2015.
cost of P1,887,500.
Ina’s Dr Cr
Cash ₱1,887,500
Book value of Anak’s SHE, January 2014 5,050,000
Excess of FMV over book value 2,500,000
Fair value of Anak’s SHE, January 2014 7,550,000
Ina’s Dr Cr
Appropriate adjustments to the entity’s share of the associate’s or
joint venture’s profit or loss after acquisition are made in order to
account, for example, for depreciation of the depreciable assets
based on their fair values at the acquisition date. Similarly,
appropriate adjustments to the entity’s share of the associate’s or
joint venture’s profit or loss after acquisition are made for
impairment losses such as for goodwill or property, plant and
equipment.
IAS 28 par 32
Ina’s Dr Cr
Compound Dr Cr
entry Investment in Anak ₱13,750
Book value of Anak’s SHE, ₱ 5,050,000 Investment in associate
January 1, 2014 January 1, 2014 1,887,500
Book value of Anak’s SHE, 5,230,000 net income
Excess of FMV over book 2,375,000 associate
value (2,500,000 X 19/20)
7,605,000
Anak reported net income of ₱250,000 for 2015. Dividends
of ₱20,000 were declared and paid.
Ina’s Dr Cr
Cash ₱5,000
January 1, 2015 January 1, 2015 1,901,250
Add: Net income for 2015 250,000 Share in associate’s 31,250
Book value of Anak’s SHE, 5,460,000 Share in dividends (5,000)
Excess of FMV over book 2,250,000 associate
value (2,500,000 X 18/20)
7,710,000
Introduction to Equity
Method part 2
Goodwill
Illustration 3
BOOK VALUE FMV
Current assets 2,000,000 2,000,000
Plant assets 12,500,000 15,000,000
Bonds Payable 8,000,000 8,000,000

Illustration 3.1
• Ina was able to acquire Anak on January 2, 2014 for a total cost of
₱2,000,000.
• Anak reported net income of ₱180,000 and ₱250,000 at the end

of 2014 and 2015, respectively.
• Anak depreciates plant assets over the remaining life of 20 years.

₱20,000 in 2015.
cost of ₱ 2,000,000.
Ina’s Dr Cr
Cash ₱2,000,000
Book value of Anak’s NIA, January 2014 5,050,000
Proportionate share of the FVINA 1,887,500
Consideration paid 2,000,000
? 112,500
An investment is accounted for using the equity method from the date on
which it becomes an associate or a joint venture. On acquisition of the
investment, any difference between the cost of the investment and the
entity’s share of the net fair value of the investee’s identifiable assets and
liabilities is accounted for as follows:
a. Goodwill relating to an associate or a joint venture is included in the
carrying amount of the investment. Amortization of that goodwill is not
permitted.
IAS 28 par 32
Acquisition cost of common stock
BV of FV of unrecorded Goodwill:
Excess of FV over BV of
net recorded net assets
identifiable net unrecorded and
assets unidentifiable
assets
Goodwill:
Fair value of identifiable net assets unrecorded and
unidentifiable
Ina’s Dr Cr
Book value of Anak’s SHE, ₱ 5,050,000
January 1, 2014 Investment in associate
Net income for 2014 180,000 January 1, 2014 2,000,000
Book value of Anak’s SHE, 5,230,000 Share in associate’s 13,750
December 31, 2014 net income
Excess of FMV over book 2,375,000 (45,000 ─ 31,250)
value (2,500,000 X 19/20) Investment in 2,013,750
7,605,000 associate
1,901,250
Goodwill 112,500
Ina’s Dr Cr
Cash ₱5,000
Book value of Anak’s SHE, ₱ 5,230,000
January 1, 2015 Investment in associate
Add: Net income for 2015 250,000 January 1, 2015 2,013,750
Less: Dividends 20,000 Share in associate’s 31,250
December 31, 2015 (62,500 ─ 31,250)
Excess of FMV over book 2,250,000 Share in dividends (5,000)
7,710,000 associate
1,927,500
Goodwill 112,500
2,040,000
Illustration 3.2
total cost of ₱1,800,000.
• Anak reported net income of ₱180,000 and ₱250,000 at
₱20,000 in 2015.
cost of P1,800,000.
Ina’s Dr Cr
Cash ₱1,800,000
An investment is accounted for using the equity method from the date on
which it becomes an associate or a joint venture. On acquisition of the
investment, any difference between the cost of the investment and the
entity’s share of the net fair value of the investee’s identifiable assets and
liabilities is accounted for as follows:
b. Any excess of the entity’s share of the net fair value of the investee’s
identifiable assets and liabilities over the cost of the investment is included as
income in the determination of the entity’s share of the associate or joint
venture’s profit or loss in the period in which the investment is acquired.
IAS 28 par 32
Book value of Anak’s NIA, January 2014 5,050,000
Fair value of net identifiable assets 1,887,500
Consideration paid 1,800,000
Gain on bargain purchase 87,500

Share in associate’s NI ₱87,500
Investment in associate
January 1, 2014: acquisition date 1,800,000
Adjustment for negative goodwill 87,500
Acquisition cost of common stock GBP
BV of FV of unrecorded
Excess of FV over BV of
net recorded net assets
identifiable net
assets
assets
Fair value of identifiable net assets

Ina’s Dr Cr
January 1, 2014 January 1, 2014 1,800,000
December 31, 2014 (45,000 ─ 31,250) +
Excess of FMV over book 2,375,000 87,500
7,605,000 associate
Ina’s Dr Cr
Cash ₱5,000
January 1, 2015
January 1, 2015 1,901,250
Add: Net income for 2015 250,000
Share in associate’s 31,250
Book value of Anak’s SHE, 5,460,000 (62,500 ─ 31,250)
December 31, 2015 Share in dividends (5,000)
Excess of FMV over book 2,250,000 Investment in 1,927,500
value (2,500,000 X 18/20) associate
7,710,000

Lesson 9 Introduction To Equity Method

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IAS 28 Investment in Associates and

Level of Definition Type of entity

The power to participate in the financial and operating

IAS 28 par 3 (definitions)

An arrangement where two

the joint arrangement constitutes

the joint arrangement constitutes

An entity with joint control of, or significant influence

Current assets 2,000,000 2,000,000

Plant assets 12,500,000 12,500,000

Total assets 14,500,000

Current liabilities 1,450,000 1,450,000

Bonds Payable 8,000,000 8,000,000

▪ the carrying amount is

▪ distributions received from

BOOK VALUE FMV

Current assets 2,000,000 2,000,000

Plant assets 12,500,000 15,000,000

Total assets 14,500,000

Current liabilities 1,450,000 1,450,000

Bonds Payable 8,000,000 8,000,000

Current assets 2,000,000 2,000,000

Plant assets 12,500,000 15,000,000

Total assets 14,500,000

Current liabilities 1,450,000 1,450,000

Bonds Payable 8,000,000 8,000,000

• Anak reported net income of ₱180,000 and ₱250,000 at the end

• Anak depreciates plant assets over the remaining life of 20 years.

• Anak also declared and paid cash dividends amounting to

Investment in Anak ₱87,500

Fair value of identifiable net assets

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