INVESTMENT IN

ASSOCIATE
LEARNING OBJECTIVES
Define investment in associate and significant influence.

Identify the situations that will give rise to the recognition of investment in associate.

Apply the equity method and cost method in accounting for investment in associate.

Discuss the initial recognition, initial measurement, subsequent measurement,

derecognition, and financial statement presentation of investment in associate.

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DEFINITION OF TERMS
Intercorporate share investment is the purchase of the equity shares
of one entity by another entity.
Significant 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.
20% or more of the voting power of the investee, presumed to have
significant influence.

Evidence of Existence of Significant Influence:

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

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POTENTIAL VOTING RIGHTS
Stems from convertible instruments, options, or other mechanisms
that grants the holder the right to obtain voting rights as an investee.
They are considered when assessing control only if they are
substantive. It’s crucial to understand that potential voting rights can
grant power to a minority shareholder as well as strip power from a
majority shareholder.

Loss of Significant Influence can occur with or without change in the

absolute or relative ownership interest. It can also occur as a result of
a contractual agreement.

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 EQUITY METHOD
1.The equity method is based on the economic
relationship between the investor and the investee.
2.The investor and the investee are viewed as a single
economic unit. The investor and the investee are one
and the same.
3.The equity method is applicable when the investor has a
significant influence over the investee.

The equity method is a method of accounting whereby the investment is initially recognized at cost and
adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets.

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ACCOUNTING PROCEDURES
1. Investment is initially recognized at cost.
2. The carrying amount is increased by the investor’s share of the profit
of the investee decreased by the investor’s share of the loss of the
investee.
3. Distributions or dividends received from an investee reduce the
carrying amount of the investment. (dividends received from an equity
investee are NOT recognized as dividend income but as return of
investment).
Entry to record receipt of cash dividend from investee:
Cash xxx
Investment in Associate xxx
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ACCOUNTING PROCEDURES CON’T.
4. The investment must be in ORDINARY SHARES. If the investment is in
PS, the equity method is NOT appropriate regardless of the percentage
because the PS is a nonvoting equity.
The investment in PS may be accounted for at FVPL or at FVOCI or at
cost.
5. Under the equity method, investment in OS should be appropriately
described as investment in associate if investor has significant influence
over the investee.
6. Investment in associate is classified as noncurrent asset.

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CARRYING AMOUNT OF THE INVESTMENT
IN ASSOCIATE AT YEAR END

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ILLUSTRATION 1
On Jan. 1, 2023, Mr. Z acquired 50,000
ordinary shares of Company A’s 250,000
outstanding shares at P100 per share.

On September 30, 2023, Company A

declared 15% share dividend for distribution
on Dec. 1, 2023.

On December 31, Company A reported a

net income of P10 million.

Prepare all the necessary journal entries.

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EXCESS OF COST OVER CARRYING
AMOUNT
• If the investor pays more than the carrying amount of the net assets acquired,
the difference is Excess of Cost Over Carrying Amount. This may be attributed
to:
a. Undervaluation of the investee’s assets
b. Goodwill
• If the assets are fairly valued, it is often attributed 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 expensed when the
land is sold.
• Same goes for inventory, amount is expensed when inventory is sold.
• If attributable to goodwill, included in the CA of the investment and NOT
amortized.
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FORMULA TO COMPUTE FOR
GOODWILL OR GAIN ON BARGAIN
PURCHASE

Amortization of excess of cost attributable to undervaluation of equipment is recorded as a reduction of

investment income and invesrtment account over the remaining life of the depreciable asset.

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ALTERNATIVE FORMULA TO COMPUTE
FOR GOODWILL OR GAIN ON BARGAIN
PURCHASE
Acquisition cost xxx
Less: carrying amount of net assets acquired xxx
Excess of cost over CA (implied GW) xxx

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ILLUSTRATIVE PROBLEM 2
• Company A purchases 30% of the outstanding shares of Company B for
P10,000,000. Company B's net assets are valued at P20,000,000, but the
fair value of its identifiable assets is P24,000,000. Calculate the implied
goodwill and the carrying amount of Company A's investment in Company
B.
• Implied Goodwill = Fair Value of Identifiable Assets - Net Assets
• Carrying Amount of Investment = Cost of Investment + Share of Goodwill

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ILLUSTRATIVE PROBLEM 3
• refer to problem 17-1 on page 470

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EXCESS FAIR VALUE OVER COST
• Any excess of the investor’s share of the FV of the associate’s identifiable net
assets over the cost of the investment is included as income in the
determination of the investor’s share of the associate’s P/L in the period in
which the investment is acquired.
• Recognize Investment income if FV of the NA acquired > cost of acquisition

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ILLUSTRATION 4
• ABC Company purchased 30% of the OS of DEF Company for P20,000,000 when
the net assets of the investee amounted to P50,000,000. At that time, the carrying
amount of the identifiable net assets were equal to the FV, except for building
whose FV was P15,000,000 and equipment whose FV was P3,600,000 greater than
the CA. The building’remaining life is 10 years while the equipment is 3 years. The
investee reported a net income of P25,000,000 for the year and paid cash dividend
of P6,000,000 at year-end.
• Required:
1. Calculate the excess of FA over cost
2. Calculate the net investment income
3. Prepare all the necessary journal entries

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INVESTEE WITH HEAVY LOSSES
• PAS 28, paragraph 38, provides that if an investor’s share of losses of an
associate equals or exceeds the CA of an investment, the investor
discontinues recognizing its share of further losses.
• The investment is reported at zero value.
• The CA of the investment in associate also includes other long-term
interests in an associate (LT receivables, LT loans and advances and
investment in PS) except LT AR for which adequate collateral exists (secured
loans) are excluded from the CA of an investment in associate.

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LOSSES RECOGNIZED USING THE EQUITY
METHOD ARE APPLIED IN THE
FOLLOWING ORDER:
1. Investment in associate
2. Investment in PS of associate
3. Loans and advances to associate

The recognition of losses is in accordance with the corporate liquidation

procedure that the ordinary shareholders shall absorb the losses first, followed
by preference shareholders and creditors.

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• Additional lossses 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 shall resume including
its share of such income after its share of the income equals the share of the losses
not recognized.
• The subsequent recognition of the investor’s share in the net income of the
associate is recorded as a reversal of the loss previously recognized respectively for
the following:
a. Loans and advances to associate
b. Investment in preference shares of associate
c. Investment in associate
• The recognition of income related to a and b shall be limited to the share of losses
previously applied to such interests.

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ILLUSTRATION 5
• Refer to Problem 17-7 on page 473

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IMPAIRMENT LOSS
• 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.
• 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.

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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.

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 except 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.

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INVESTEE WITH PREFERENCE SHARES

• 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.

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ILLUSTRATION 6
Investee reported the following capital accounts at the beginning of the year:
Preference shares, 10% cumulative, P200 par, 30,000 shares issued P6,000,000
Ordinary shares, P100 par, 250,000 shares authorized, 120,000
shares issued 12,000,000
Retained earnings 7,500,000

An investor acquired 30,000 ordinary shares for P3,600,00. the net assets of the
investee are fairly valued. The investee reported a net income of P3,000,000 and
paid cash dividends of P500,000.

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OTHER CHANGES IN EQUITY
• Adjustments to the CA 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.
• Changes arising from:
1. revaluation of PPE
2. foreign exchange translation differences
• The investor’s share of those changes is recognized directly in equity of the
investor.

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KNOWLEDGE CHECK 1
When an entity holds between 20% and 50% of the voting power of an
investee
a. The investor must use the equity method
b. The investor should use the equity method unless circumstances indicate
that it is unable to exercise significant influence over the investee.
c. The investor must use the cost method
d. The investor must use the fair value method

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KNOWLEDGE CHECK 2
An investor uses the equity method to account for an investment in
ordinary shares. After the date of acquisition, the investment account of
the investor would
A. Be increased by its share of the earnings of the investee, and decreased
by its share of the losses of the investee.
B. Not be affected by its share of the earnings or losses of the investee
C. Be increased by its share of the earnings of the investee, but not be
affected by its share of the losses of the investee.
D. Not be affected by its share of the earnings of the investee, but be
decreased by its share of the losses of the investee.

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KNOWLEDGE CHECK 3
If there is 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,
that is, negative goodwill, how should that excess be treated?
A. It should be written off against retained earnings.
B. It should be included in the carrying amount of the investment.
C. It should be included as income in the determination of the investor's share
of the associate's profit or loss for the period.
D. It should be disclosed separately as part of the investor's equity.

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LEARNING ACTIVITY 1

Break out into 3 groups:

Group 1 - Answer problem 17-2 on page
470
Group 2 - problem 17-3 on page 471
Group 3 - problem 17-4 on page 472

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