INVESTMENT IN ASSOCIATE part

1
REF: INTERMEDIATE ACCOUNTING VOL. 1, 2020 ED.
BY C. VALIX, J. PERALTA, C.A. VALIX
Objectives:
• To understand intercorporate share investment
• To know the meaning of significant influence
• To identify the factors that indicate significant influence
• To understand the equity method of accounting for equity investment
0% to <20% No SI / FVPL /
voting power Control FVOCI

20% to <50% Significant Investment

voting power Influence in Associate

50% or more Control Investment in

voting power Subsidiary
If the voting power percentage is not clearly
evident…
• But with indication of the following, PAS 28, par. 6 states that it is also with significant
influence, therefore, it is to be considered as investment in associate.
 P – Participation in policy making process

 R – Representation in the board of directors

 I – Interchange of managerial personnel

 M – Material transaction between the investor and the investee

 P – Provision of essential technical information

Other considerations in determining the significant
influence:
• Potential voting rights should be currently exercisable or
convertible
• Should be in Ordinary Share. (Preference Share is a non voting
equity
Investment in Associate uses Equity Method, in which:
• Investment is initially recorded at COST.
• Share in Net Income of the Investee increases investment in associate
and investment income
• Dividend declaration of the Investee is not an income but treated as if it
is a return of capital of the investor.
Excess of Cost over Carrying Amount will be:
 Charged to Goodwill, not amortized, but tested for impairment, if assets
of the investee are fairly valued;
 Amortized over the remaining life of the depreciable asset, if the excess
is related to a depreciable asset;
 Not to be amortized, if the excess is related to Land;

 Expensed if sold, if the excess is related to Inventory;

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.
Excess of Net Fair Value over Cost

• Recorded as:

Investment in associate XXX

Investment Income XXX
Investee with heavy losses
• PAS 28, paragraph 38, provides that if an investor’s share of
losses of an associate equals or exceed the carrying amount of
an investment, the investor discontinues recognizing its share
of further losses.
• The investment is reported at nil or zero value.
• If the associate subsequently reports profit, the investor
resumes recognizing its share of profit only after the share of
profit equals the share of losses not previously recognized.
Impairment Loss
• If there is an indication that an investment in associate may be impaired,
PAS 28, par. 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 VS value in use.
Fair value vs 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.
Investee with preference share
• When an associate has outstanding cumulative preference
share, 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 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.