CHAPTER 17:

INVESTMENT IN
ASSOCIATE
BASIC PRINCIPLES

By: Valix, Peralta and Valix

INTERCORPORATE SHARE INVESTMENT
An intercorporate share investment is the
purchase of the equity shares of one entity
by another entity.
In other words, it is a case of one entity
investing in another entity through the
acquisition of share capital.
An entity may purchase enough shares of
another entity in order to exert significant
influence over the financial and operating
policies of the investee entity.
 SIGNIFICANT INFLUENCE
The assessment of significant influence is a matter of judgment.
Significance influence is the power to participate in the financial and
operating policy decisions of the investee but not control or joint control
over those policies.
If the investor holds, directly or indirectly through subsidiaries, 20% or
more of the voting power of the investee, it is presumed. that the
investor has significant influence unless it can be clearly demonstrated
that this is not the case.
Conversely, 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.
A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
Beyond the mere 20% threshold of
ownership, PAS 28, paragraph 6, provides
that the existence of significant influence
18 usually evidenced by the following
factors:

a. Representation in the board of

directors

b. Participation in policy making process

c.Material transactions between the

investor and the investee

d. Interchange of managerial personnel

e. Provision of essential technical

information
 POTENTIAL VOTING RIGHTS
An entity may own share warrants, debt or equity instruments that are
convertible into ordinary shares that have the potential, if exercised or
converted, to give the entity additional voting power over the financial and
operating policies of another entity.

PAS 28, paragraph 7, provides that the existence of such potential voting
rights is considered in assessing whether an entity has significant influence.

The potential voting rights should be currently exercisable or convertible.

Potential voting rights are not currently exercisable or convertible when the
rights cannot be exercised or converted until a future date or until the
occurrence of a future event.

However, when potential voting rights exist, the investor's share of profit or
loss of the investee and of changes in the investee's equity is determined on
the basis of "present ownership interest" and does not reflect the possible
exercise or conversion of potential voting rights.
LOSS OF SIGNIFICANT
INFLUENCE
An entity loses significant influence
over an investee when it loses the
power to participate in the financial
and operating policy decisions of the
investee.

The loss of significant influence can

occur with or without change in the
absolute or relative ownership
interest.

The loss of significant influence could

also occur as a result of a contractual
agreement.
 EQUITY METHOD
The equity method is based on the economic
relationship between gthe investor and the investee.

The investor and the investee are viewed as a single

economic unit. The investor and the investee are one
and the same.

The equity method is applicable when the investor has a

significance influence over the investee.
 ACCOUNTING PROCEDURES
a. The investment is initially recognized at cost.
b. The carrying amount is increased by the investor's share of the
profit of the investee and decreased by the investor's share of the
loss of the investee.
The investor's share of the profit and loss of the investee is
recognized as investment income.
c.Distributions or dividends received from an equity investee is
reduced the carrying amount of the investment.
d. Note that the investment must be in ordinary shares.
If the investment is in preference shares, the equity method is not
appropriate regardless of the percentage because the preferrence
share is a nonvoting equity.
The investment in preference shares may be accounted for as at fair
value through profit or loss or at fair value through other
comprehensive income or at cost.

e. Technically, if the investor has significant influence over the

investee, the investee is said to be an associate. Accordingly, under the
equity method, the investment in ordinary shares should be
appropriately described as investment in associate.

f. The investment in associate accounted for using the equity method

shall be classified as noncurrent asset.
 EXCESS OF COST OVER
CARRYINHG AMOUNT
An accounting problem arises if the investor pays more or less for an
investment than the carrying amount of underlying net assets.

If the investor pays more than the carrying amount of the net assets
acquired, the difference is commonly known as "excess of cost over
carrying amount" and may be attributed to the following:

a. Undervaluation of the investee's assets, such as building, land, and

inventory.

b. Goodwill
 In practice, it is often difficult to determine which specific
identifiable assets are undervalued.
If the assets of the investee are fairly valued, accountants frequently attribute the
excess of cost over carrying amount of the underlying 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 land, it is not amortized because
the land is nondepreciable.
The amount is expensed when the land is sold.
If the excess is attributable to the inventory, the amount is expensed when the
inventory is already sold.
If the excess is attributable to goodwill, it is included in the carrying amount of
the investment and not amortized.
However, the entire investment is associate including the goodwill is tested for
impairement at the end of each reporting period.
 EXCESS OF NET FAIR VALUE
OVER COST
PAS 28, paragraph 32, provides that any excess of the
investor's share of the net fair value of the associate's
identifiable assets and liabilities over the cost of the
investment is included as income in the determination of the
investor's share of the associate's profit or loss in the period in
which the investment is acquired.

Appropriate adjustments to the investor's share of the

associate's profit or loss after acquisition are also made to
account, for example, for depreciation of depreciable
assets based on their fair value on the acquisition date.
 INVESTEE WITH HEAVY LOSSES
PAS 28, paragraph 38, provides that if an investor's share of losses of an
associate equals or exceeds the carrying amount of an investment, the
investor discontinues recognizing its share of further losses.

The investment is reported at nil or zero value.

The carrying amount of the investment in associate is not just the

balance of the account "investment in associate".

The carrying amount of the investment in associate also includes other

long-term interests in an associate, such as long-term receivables, loans
and advances, and investment in preference shares.
 INVESTEE WITH HEAVY LOSSES
However, trade receivables and any long-term receivables for which
adequate collateral exists, such as secured loans, are excluded from the
carrying amount of an investment in associate.

Additional losses are provided for or a liability is recognized, to the

extent that the investor has incurred legal or constructive obligations or
made payments on behalf of the associate.

If the associate subsequently reports income, the investor resumes

including its share of such income after its share of the income equals
the share of losses not recognized.
 IMPAIREMENT LOSS
If there is an indication that an investment in associate may be impaired, PAS 28,
paragraph 40, requires that an impairment loss shall be recognized whenever the
carrying amount of the investment in associate exceeds recoverable amount.

The recoverable amount is measured as the higher between

fair value less cost of disposal and value in use

Fair value is the price that would be received to sell an asset in

an orderly transaction between market participants at the
measurement date.

Value in use is the present value of the estimated future cash

flows expected to arise from the continuing use of an asset
and from its ultimate disposal.

The value in use of an investment in
associate is the investor's share in either of
the following:
a. Present value of estimated future cash
flows expected to be generated by the
investee, including cash flows from
operations of the investee and the
proceeds on the ultimate disposal of the
investment.
b. Present value of the estimated future
cash flows expected to arise from
dividends to be received from the
investment and from its ultimate disposal.
Under appropriate assumptions, both
methods give the same result.
PAS 28, paragraph 42, states that since
goodwill is not separately recognized from
the investment amount, the impairment loss
recognized is applied to the investment as a
whole.
The recoverable amount of an investment in
associate is assessed for each individual
associate.
An exception is when an individual associate
does not generate cash inflows from
continuing use that are largely independent
of those from other assets of the reporting
entity.
 INVESTEE WITH
PREFERENCE SHARE
When an associate has outstanding
cumulative preference shares, the
investor shall compute its share of
earnings or losses after deducting the
preference dividends, whether or not
such dividends are declared.

When an associate has outstanding

noncumulative preference shares, the
investor shall compute its share of
earnings after deducting the preference
dividends only when declared.
 OTHER CHANGES IN EQUITY
Adjustments to the carrying amount of the investment in associate
may be necessary for changes in the investor's proportionate
interest in the investee arising from changes in the investee's
equity that have not been recognized in the investee's profit or
loss.

Such changes include those arising from revaluation of property,

plant and equipment and from foreign exchange translation
differences.

The investor's share of those changes is recognized directly in

equity of the investor.
THANK YOU!