PHINMA University of

Pangasinan and
PHINMA Upang College of
Urdaneta
INVESTMENT IN ASSOCIATES

LEARNING OBJECTIVES:
● Define an investment in associate
● Identify when an entity has significant influence
● Account for investment in associates
INVESTMENT IN ASSOCIATE

Associate – entity over which an entity has significant

influence
SIGNIFICANT INFLUENCE

● Power to participate in the financial and operating policy decisions of

the investee but is not control or joint control of those policies

● Presumed to exist if the investor holds, directly or indirectly 20% or

more of the voting power of the investee.

Note:
○ Voting power are usually obtained from holding ordinary shares.
○ Partnership interest is accounted for under PAS 28 if it gives the investor significant
influence over the partnership
TYPES OF INVESTMENTS
TYPES NATURE OF APPLICABLE Percentage of
RELATIONSHIP STANDARD ownership
WITH interest
INVESTEE
Investment Regular Investor PFRS 9 Less than 20%
measured at
Fair Value
Investment in Significant PAS 28 20% -50%
Associates influence
Investment in Control PFRS 3 and 51%-100%
Subsidiary PFRS 10
Investment in Joint Control PFRS 11 and Contractual
Joint Venture PAS 28 agreed sharing
of control
SIGNIFICANT INFLUENCE

● 20% or more ownership interest presumption

● Not absolute
● May arise even in the absence of 20% or more voting power

Note: Potential Voting rights ( share warrants, share options, convertible equity or
debt instrument) held by investors that are currently exercisable or convertible are
assumed to have been exercised or converted even if the management does not
intend to actually exercised or convert them in assessing whether significant
influence exists
SIGNIFICANT INFLUENCE

● Representation on the BOD or equivalent governing body of the investee

● Participation in policy-making processes including participation in
decisions about dividends or other distributions
● Material transactions between the entity and its investee
● Interchange of managerial personnel
● Provision of essential technical information
DETERMINING THE OWNERSHIP INTEREST

● CASE 1: On January 1, 20x1, BTS Co. acquired 3,000

shares of EXO Co’s 10,000 oustanding shares at 10 pesos.

● CASE 1: On January 1, 20x1, BTS Co. acquired 3,000 newly

issued shares of EXO Co’s at 10 pesos. Before the
acquisition, EXO had 10,000 ordinary shares outstanding
Account for Investment in Associate

● Investment in Associates are accounted for using equity method

● An investor starts applying the equity method from the date it obtains
significant influence over an investee
How equity method is applied?
• Investment is initially measured at cost
• Subsequently adjusted for the investor’s share in he investee’s
changes in equity.
EQUITY METHOD NOT APPLICABLE

● Equity Method is required when an investor has

significant influence over an investee.
● Equity Method is not applicable:
Investment classified as held for sale under PFRS 5

Investor is a parent exempted from presenting consolidated FS

Investor is a subsidiary whose parent allows it not to apply the equity

method, ( investor’s securities are not traded in a public market/ process
of enlisting as publicly listed)
Investment elected to measure at FVPL in accordance with PFRS 9
EQUITY METHOD

Beginning Balance, Owner’s Equity Initial Measurement: Investment

in Associate @ Cost
Add: Additional Investments
Add: Share in profit/loss
Profit
Share in OCI of associate
Less: Withdrawal/ Dividends
Less: Share in Dividends
Ending Balance, Equity
CA, investment in Associate
EQUITY METHOD

SHARE IN EFFECT ON INVESTMENT EFFECT ON INVESTMENT

ASSOCIATES IN ASSOCIATES INCOME
PROFIT OR LOSS INCREASE ( Share in profit) INCREASE ( Share in profit)
DECREASE ( Share in DECREASE ( Share in Loss)
Loss)
DIVIDENDS DECREASE NO EFFECT

OCI INCREASE ( Share in Gain) NO EFFECT ( Included in the

DECREASE ( Share in investor’s OCI)
Loss)
 EQUITY METHOD
TRANSACTION JOURNAL ENTRY

Initial Recognition/Measurement Investment in Associates Investing Associate

Cash
To Record the Share in Associate’s Profit Investment in Associates
Share in profit of associate Beg. Bal
To Record the Share in the Loss of the Share in loss of associate
Associate. Investment in associate
Share in Profit Dividends
To Record the OCI ( Gain) e.i revaluation Investment in Associates
surplus Share in OCI of associate- of Associate received
Revaluation Surplus
To Record the OCI ( Loss) e.i Share in OCI of associate- Translation Share in OCI
Translation loss Loss of Associate
Investment in associate
To Record the Dividend Received from Cash
Associates Investment in Associate
Ending. Bal
FINANICIAL STATEMENT PRESENTATION
Statement of Financial Position
Non-Current Assets:
Investment in Associate
Statement of profit or loss and other
comprehensive income
Share in gain/loss of associate
Loss of the year

Equity Share in OCI of associate

Other Components of Equity Total comprehensive gain/loss

Statement of Changes in Equity

Share RE Revaluation Translation of foreign Total equity

Capital Surplus operations
Total Profit/Loss Share in OCI- RS Share in OCI- Translation
comprehensive loss
gain/loss
APPLICATION OF EQUITY METHOD-BASIC
APPLICATION OF EQUITY METHOD - BASIC
APPLICATION OF EQUITY METHOD -BD

● On acquisition date, the difference between the cost of the

investment and the share in the Fair Value of the Identifiable Net
Asset ( identifiable asset – liabilities) is accounted for as:
○ Goodwill , Cost > FVINA ( Not Accounted for separately)
○ Negative Goodwill/ Gain on Bargain , Cost < FVINA

● Adjustment are subsequently made on entity’s share in the

investee’s profit or loss to account for the depreciation or
amortization of any undervalued or overvalued assets and liabilities
APPLICATION OF EQUITY METHOD

Undervalued Asset , CA < FV Deduction: Share in profit of

associate ( investment income) and
investment in associate account

Overvalued Asset, CA > FV Addition: Share in profit of associate

( investment income) and
investment in associate account

Undervalued Liabilities , CA > FV Addition: Share in profit of associate

( investment income) and
investment in associate account

Overvalued Asset, CA < FV Deduction: Share in profit of

associate ( investment income) and
investment in associate account
APPLICATION OF EQUITY METHOD

● On January 1, 20x1 BTS Co. purchased 25% interest in the

ordinary shares of EXO Inc. for 2,000,000. XYZ’s assets and
liabilities approximate their Fair values except for the
following:
○ Inventories with CA of 500,000 have a FV of 100,000
○ A depreciable asset with CA of 3M has a FV of 5M. The asset has a
remaining life of 10 years.
EXO Inc. net assets have a book vale of 5M
○ On December 31, 20x1 EXO Inc. reported 1,200,000 profit and declared
and paid dividends of 500,000.
APPLICATION OF EQUITY METHOD
Requirement 1: Compute for Goodwill/ Gain on Bargain Purchase
Consideration/ Purchase Cost P2,000,000
Less: FVINA acquired 1,650,000
Goodwill (Gain of Bargain Purchase) 350,000

BV of Net Assets 5,000,000

Overvaluation of Inventory (400,000)

Undervaluation of Depreciable 2,000,000

Assets
FVINA of EXO Inc. 6,000,000
Multiply: Interest acquired 25%

FVINA acquired 1,650,000

APPLICATION OF EQUITY METHOD
Requirement 1: Compute for CA of Investment in Associates on
December 31, 20x1

Investment in Associates, Jan 1, 20x1 P2,000,000

Add: Share in profit of Associates 350,000
Less: Dividends Received 125,000
Investment in Associates, Dec 31, 20x1 2,225,000 Un-adjusted Share in profit of Associate P 300,000
Share in the overvaluation of inventory 100,000

Depreciation of the Share in the 50,000

undervaluation of Depreciable asset
Adjusted Share in profit of Associate 350,000
Cumulative Preference Shares

CUMULATIVE NON-CUMULATIVE REDEEMABLE

PREFERENCE PREFERENCE PREFERENCE
SHARES SHARES SHARE
Deduct 1 year Deduct dividends only Do not deduct
dividend, whether when declared before dividends when
declared or not, computing the share in computing for share in
before computing the the associate’s profit of associates'
share in the profit/loss Profit/Loss
associate’s profit/loss
Cumulative Preference Shares

BTS Co. owns 20% of EXO Inc.’s ordinary shares. EXO also has outstanding cumulative
6% preference shares of 2 million. Non of the preference shares is held by BTS.
Dividends are in arrears for 3 years. XYZ reported profit of 1Million and declared no
dividends
1. Compute the share in profit or loss of the associates?
2. Assume the preference shares are non-cumulative, Compute for share in profit
or loss of the associates?
3. Assume the shares are redeemable preference shares and Exo declared 150,000
cash dividends on those shares. Compute for share in profit or loss of the
associates?
 Cumulative Preference Shares
REQ. 1 Unadjusted Profit of the Associates P1,000,000
One year dividends ( Cumulative (120,000)
Preference Shares)
Adjusted profit of Associates 880,000

Multiply: Ownership interest 20%

Share in profit of associate 176,000

REQ. 2 REQ. 3
Unadjusted Profit of the Associates P1,000,000 Unadjusted Profit of the Associates P1,000,000
0 0
Adjusted profit of Associates 1,000,000 Adjusted profit of Associates 1,000,000

Multiply: Ownership interest 20% Multiply: Ownership interest 20%

Share in profit of associate 200,000
Share in profit of associate 200,000
Cumulative Preference Shares

BTS Company owned 20% of EXO Inc.’s preference share capital and 30% of
the ordinary share capital on Dec 31, 2016. The investee reported net income
600,000 for the year ended Dec 31, 2016.
10% cumulative preference share capital 1,000,000
Ordinary share capital 7,000,000
What is the equity in earning of the investee for 2016?

Unadjusted Net income of P600,000

Associate
1 year dividend ( Cumulative Pref.) (100,000)

Adjusted Net income of Associate 500,000

Multiply: Ownership interest 30%

Share in profit of Associates P150,000

COMPREHENSIVE PROBLEM
On January 1, 2016, BTS Co. acquired 25% of the outstanding shares of an investee at a total cost
of 7 million. At the time, the Carrying Amount of the net assets of the investee totaled 24million.

The investee owned equipment with 5 year remaining life and with a fair value of 2 million more than
carrying amount. The investee owned land with fair value of 1 million more than carrying amount.

The investee earned net income of 5 million evenly during the current year. The investee declared
and paid a cash dividend of 3 million to shareholders at year-end. The fair value of the investment at
year-end if 7.5 million

1. What is the goodwill arising from the investment in associate?

2. What is the investment income for 2016?
3. What is the CA of the investment in associates on Dec 31, 2016?
COMPREHENSIVE PROBLEM
REQ. 1
Consideration/ Purchase Cost P7,000,000
Less: FVINA acquired 6,750,000
Goodwill P 250,000

CA of the identifiable net assets P 24,000,000

Undervaluation of Equipment 2,000,000

Undervaluation of Land 1,000,000

FVINA of investee 27,000,000

Multiply: Interest Acquired 25%

FVINA acquired P 6,750,000

COMPREHENSIVE PROBLEM
REQ. 2

Unadjusted Net Income of Associate P 5,000,000

Depreciation of Undervalued (400,000)

Equipment
Adjusted Net income of Associate 4,600,000

Multiply: Ownership Interest 25%

Share in Profit of Associate P 1,150,000

Reminders:
1. Excess attributable to land and Goodwill are not amortized. Goodwill is not recognized separately.
2. Excess attributable to depreciable assets are amortized over the assets remaining life.
3. Excess attributable to inventory are recognized in full because it is assumed
that all inventories have been sold during the year
COMPREHENSIVE PROBLEM
REQ. 3
Investment in Associates Jan 1, 2016 P 7,000,000

Share in profit of Associate 1,150,000

Cash Dividend Received (750,000)

Multiply: Ownership Interest 25%

Share in Profit of Associate P 7,400,000

 DISCONTINUANCE OF EQUITY METHOD
● An entity stops applying the equity method from the date it loses significant
influence over the investee.
● It can occur with or without a change in the percentage of ownership
○ Associates becomes subject to the control of a government , court, administrator or
regulator
○ Result of contractual agreement

Loss of significant influence due to Accounting treatment

Decrease of ownership interest FA at Fair Value under PFRS 9
below 20%
Increase of ownership above 50% Investment in subsidiary under
PFRS 3 and PFRS 10
Accounted for prospectively
DISCONTINUANCE OF EQUITY METHOD

● The difference between

○ FV of the retained interest and any proceeds from disposing part of
the investment
○ CA of the investment at the date the equity method discontinued

Accounting Treatment: Recognized in profit or loss ( Gain on

reclassification)
IMPAIRMENT LOSSES

● Goodwill as part of the CA of investment Associate is neither

amortized nor tested for impairment separately
● Investment in Associate is tested for impairment under PAS36
by comparing Investment’s CA with its recoverable amount.
● The total impairment is treated as a decrease in the amount
of investment in associate
IMPAIRMENT LOSSES

● Investment in Associate is impaired if the CA exceeds

the recoverable amount.
● Recoverable amount is the higher of a)Fair value less
Cost of disposal (FVLCD) and b) Value in Use
THANK YOU FOR LISTENING
PHINMA University of
Pangasinan and
PHINMA Upang College of
Urdaneta