INTERMEDIATE ACCOUNTING 1B 2019 edition BASSO si PHILIPPINE FINANCIAL REPORT! t .§ DARDS(PFRSs) AEA ONE LRN Scanne d with CamScannerINTERMEDIATE ACCOUNTING 1B 2019 Edition BASED ON PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs) Nation’s Foremost CPA Review Inc. (NCPAR) 4F Pelizloy Centrum, Lower Session Road, Baguio City 2600, Philippines Mobile Number: (0917) 870 6962 a Like us on Facebook Nation's Foremost CPAR Scanned with CamScannerALL RIGHTS RESERVED 2019 No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means - electronic or mechanical, including photocopying -. without the written permission of the author. ISBN 978-621-8029-16-3 Any copy of this book not bearing the signature of the author shall be considered as proceeding from an illegal source. a Published by: BANDOLIN ENTERPRISE aw™. (Publishing and Printing) "21 PARAMOUNT VILL., STO. TOMAS, BAGUIO CITY CONTACT NOS. SMART (0928) 374 7571; GLOBE (0917) 813 6037; AUTHOR: (0917) 870 6962 Scanned with CamScanner[Dear Reader, This bogk is intended for students taking up the CHED- required subject “Intermediate Accounting.” This book is a part of the following series of textbooks: "Title ofbook equity | nr SMES This book is based on current Philippine Financial Reporting Standards (PFRSs). It is a labor of love and it is dedicated to you, my reader. I have written this book with the following goals in mind: completeness, conciseness, simplicity, fun to learn and practical application. Complex accounting concepts are not eliminated simply because they are too difficult to comprehend but rather they are simplified to the highest possible extent. Your thoughts about this book are important to me. If later on you have queries, comments, or suggestions on how I can improve my work, I would be glad-if you inform me. Here are my contact details: [email protected] and (0917) 870 6962. Good luck in your learning and best wishes in your journey through life......thank you for making me a part of it.§© Sincerely, Zeus Vernon B, Millan Scanned with CamScanner\ Acknowledgementy I would like to extend my sincere gratitude to my family and relatives for their support all throughout the writing of this book; to my wife Eureka, my son Devin Joshua, and my daughter Athena for their sacrifices; to my Dad and Mom for the source of inspiration; to my in-laws Engr. John L. Socalo, Sr. and Dominga S. Socalo* for the assistance and trust; to my sister Donna Pamela for the extra help; to my college instructors who have taught me most of the techniques I have incorporated in this book; to Mr. Darrell Joe Asuncion, Dean Renante D. Balocating, Mr. Rex B. Banggawan, Mr. Christopher U. Ismael, Mr. John Carlo G. Bandolin, and Mr. Einroul Aljohnza A. Bandolin for the much needéd encouragement and support; to my fellow instructors at NCPAR; colleagues in the profession; previous clients; previous students; to the staff of the Bandolin Enterprise; and friends who in one way or another have contributed, directly or indirectly, to the completion of this book. PPD RS? EI EES OPED Pop SO About the Author The author is a 6" Placer in the October 2006 CPA board examinations. He is a co-founder of, and a CPA reviewer at, Nation’s Foremost CPA Review Inc. (NCPAR), a teacher, and an entrepreneur. Scanned with CamScanner“ - : Tips ow using thi book To get the most out of this book, I strongly suggest you do the following: 1. Re-solve the illustrations independently. After reading a chapter, re-solve the _ illustrations independently by covering the suggested solutions with a piece of paper. N . Read and reread the chapter summaries Be sure to read the summary after reading each chapter. This will reinforce what you have just learned. It is also advisable to reread the chapter summaries from time to time to ensure that you are not forgetting the concepts you have learned as you learn additional concepts. Long-term memory is invaluable in passing the board exams (as well as making professional judgments in -the exercise of the profession). However, the human memory is not without limit. The human brain tends to forget information as new information is learned. To avoid this, one will need to recall information previously learned repeatedly as many times as needed. Studies show that when one forgets information previously learned, he will need to spend the same effort in learning that information again! . 3. Enjoy learning. Nothing is difficult if you have the passion in doing it. Scanned with CamScannervi TABLE OF CONTENTS CHAPTER 14 7 INVESTMENTS IN ASSOCIATES... INVESTMENT IN ASSOCIATE... EQUITY METHOD ..sssssssseseee APPLICATION OF THE EQUITY METHOD. EQUITY METHOD NOT APPLICABL! POTENTIAL VOTING RIGHTS..... CUMULATIVE PREFERENCE SHARES . RELATIONSHIP BETWEEN INVESTMENT IN ASSOCIATE ACCOUNT AND. ASSOCIATE’S EQUITY ... Reclassification of cumulative other comprehensive income... 25 CHANGE TO EQUITY METHOD - GAIN OF SIGNIFICANT INFLUENCE INTERCOMPANY TRANSACTIONS WITH AN ASSOCIATE ‘SHARE IN LOSSES.. IMPAIRMENT LOSSES. CHAPTER 14: SUMMARY PROBLEMS:.. CHAPTER 15 PROPERTY, PLANT AND EQUIPMENT (PART 1)... RECOGNITION. INITIAL MEASUREMENT. INCIDENTAL OPERATIONS. ‘SELF-CONSTRUCTED ASSETS .:. CLASSES OF PPE ..... Land (Property) Demolition costs ACQUISITION THROUGH EXCHANGE ACQUISITION THROUGH TRADE-I ACQUISITION THROUGH ISSUANCE OF OWN EQUITY INSTRUMENT «.....+sseee000 97 iii Scanned with CamScannervii ACQUISITION THROUGH ISSUANCE OF BONDS PAYABLE ... ACQUISITION BY DONATION CHAPTER 15: SUMMARY PROBLEM: CHAPTER 16 PROPERTY, PLANT AND EQUIPMENT (PART 2) SUBSEQUENT MEASUREMENT. CosT MODEL..... Kinds of depreciation Recognition of depreciation Depreciation Methods.. Straight line method Sum-of-the-years’ digits (SYD} Double declining balance method Units of production method (Activity or Variable-charge method) ... : Group depreciation CAPITALIZATION POLICY. LEASEHOLD IMPROVEMENTS CHANGES IN DEPRECIATION METHOD, USEFUL LIFE, & RESIDUAL VALU! IDLE, TEMPORARILY TAKEN OUT OF USE, AND ABANDONED PROPERTIE: FULLY DEPRECIATED ASSETS ..... CosTs SUBSEQUENT TO INITIAL RECOGNITION MAJOR TYPES OF SUBSEQUENT EXPENDITURE: Additions..... Improvements. Replacements of major parts. Major inspections .... Rearrangement and reinstallation. Repair and maintenance... REVALUATION MODEL... Basis for revaluation Highest and best use Fair value hierarchy. Valuation techniques . Scanned with CamScannerviii Accounting for revaluations of PPE . Methods of recording revaluation... Frequency of revaluation... Revaluation applied to all assets in a class Subsequent accounting for revaluation surplus _Reversal of revaluation... Additional illustrations: DERECOGNITION.... COMPENSATION FOR IMPAIRMENT. DiscLosure.... 182 CHAPTER 16: SUMMARY 185 PROBLEMS: . CHAPTER 17 - DEPLETION OF MINERAL RESOURCES EXEMPTION FROM HIERARCHY OF REPORTING STANDARDS UNDER PAS 8.. 208 INITIAL MEASUREMENT... : : SUBSEQUENT MEASUREMENT. CHANGES IN ACCOUNTING POLICIES... CLASSIFICATION OF EXPLORATION AND EVALUATION ASSETS .. NATURAL RESOURCES DEVELOPMENT Costs. DEPLETION...... CHANGES IN ESTIMATES .... DEPRECIATION OF MINING EQUIPMEN LIQUIDATING DIVIDENDS. ACCOUNTING FOR DECOMMISSIONING AND RESTORATION COSTS.. CHAPTER 17: SUMMARY PROBLEMS: .. CHAPTER 18 qv Wa daos, /GOVERNMENT GRANTS... 252 RECOGNITION. 253 MEASUREMEN’ 254 APPROACHES TO THE ACCOUNTING FOR GOVERNMENT GRANTS 255 Scanned with CamScannerACCOUNTING FOR GOVERNMENT GRANTS PRESENTATION .... Grants related to assets. Grants related to income REPAYMENT OF GRANTS. CHAPTER 18: SUMMARY PROBLEMS: CHAPTER 19 BORROWING COSTS... CORE PRINCIPLE ... CAPITALIZATION OF BORROWING COSTS Specific borrowing General borrowing. Specific and General borrowings. Specific borrowing used for general purpose: LIMITATION ON EXPENDITURES ... CAPITALIZATION DURING EXTENDED PERIOD OF CONSTRUCTION FINANCIAL STATEMENT PRESENTATION .. CHAPTER 19: SUMMARY PROBLEMS:... CHAPTER 20 AGRICULTURE. BIOLOGICAL ASSET. AGRICULTURAL PRODUCE MEASUREMENT .....« BIOLOGICAL ASSETS ATTACHED TO LAND. GOVERNMENT GRANTS ENCOURAGED DISCLOSURES FINANCIAL STATEMENT PRESENTATION CuapreR 20: SUMMARY... PROBLEMS:...... Scanned with CamScannerx CHAPTER 21 INVESTMENT PROPERTY..... PARTLY INVESTMENT PROPERTY AND PARTLY OWNER-OCCUPIED ANCILLARY SERVICES TO OCCUPANTS .. INVESTMENT PROPERTY IN CONSOLIDATED FINANCIAL STATEMENTS. INITIAL MEASUREMENT +357 359 . 360 360 SUBSEQUENT MEASUREMENT. 363 TRANSFERS ....-sssesee0ee - 369 DERECOGNITION...... 379 ‘SUBSEQUENT EXPENDITURE: 381 IMPAIRMENT... CHAPTER 21: SUMMARY PROBLEMS... CHAPTER 22 INTANGIBLE ASSETS. INTANGIBLE ASSET..... ASSETS WITH BOTH INTANGIBLE AND TANGIBLE ELEMENTS FINANCIAL STATEMENT PRESENTATION . RECOGNITION. INITIAL MEASUREMENT .. Separate acquisition Acquisition as part of a business combination Acquisition by way of a government grant. Exchanges of assets...... Internally generated intangible assets Research and development (R&D) expense Items not recognized as intangible assets Cost of an internally generated intangible asset Subsequent expenditures SUBSEQUENT MEASUREMENT. Useful life Amortization .. Residual Value. IMPAIRMEN Scanned with CamScannerxi DERECOGNITION .. MAJOR CATEGORIES OF INTANGIBLE ASSET: Trademark or Trade name. Masthead... Internet domain name (Web site) Noncompetition agreement. Customer list. Copyright... Franchise. Patent.. Computer software. ORGANIZATIONAL Csr: ACQUISITION OF INTANGIBLE ASSETS IN LUMP SUM SUMMARY OF ACCOUNTING FOR SPECIFIC TYPES OF INTANGIBLE ASSETS .. CHAPTER 22: SUMMAR) PROBLEM: CHAPTER 23 IMPAIRMENT OF ASSETS.. 477 CORE PRINCIPLE 477 IDENTIFYING AN ASSET THAT MAY BE IMPAIRED .. 478 Required testing for impairment... MEASURING RECOVERABLE AMOUNT.. Fair value less costs of disposal (FVLCD, Value in use (VIU). Estimates of future cash flow: Discount rate. : RECOGNIZING AND MEASURING AN IMPAIRMENT LOSS CASH-GENERATING UNITS... Recoverable amount and Carrying amount of a CGU Goodwill... Impairment of a CGU CORPORATE ASSETS «1.1» REVERSAL OF IMPAIRMENT LOSS Chapter 23: SUMMARY PROBLEMS: Scanned with CamScannerREFERENCES... Scanned with CamScannerInvestments in Associates 1 Chapter 14 Investments in Associates Related standard: PAS 28 Investments in Associates and Joint Ventures Learning Objectives 1. Define an investment in associate. 2, Describe the accounting requirement for investments in associates. 3,_ Account for the investor's share in the losses of an associate. Investment in Associate An associate.is “an entity over which the investor has significant influence.” (PAS 28.3) The existence of significant influence distinguishes an investment in associate from all other types of investments. Nature of Applicable Type of investment relationship with reporting investee standard * Investment measured at fair Regular investor PERS 9 value * Investment in associate Significant PAS 28 influence * Investment in subsidiary Control PERS 3 and PFRS 10 * Investment in joint venture Joint control .| PFRS11and PAS 28 i Significant influence is “the power to participate in the financial and operating policy decisions of the investee but is not “ontrol or joint control of those policies.” (pas233) *“““" Significant influence is presumed to exist if the investor holds, directly or indirectly (e.g., through subsidiaries), 20% or Scanned with CamScanner2 Chapter 14 more of the voting power of the investee. Conversely, significant influence is presumed not to exist if the voting power is less than 20%. Percentage of ownership interest Type of investment Less than 20% 2 Financial assets at fair value 20% to 50% i Investment in associate 51% to 100% Investment in subsidiary Contractually agreed sharing of control Investment in joint venture It should be noted that significant influence arising from ownership interest of “20% or more” of the voting rights of the investee is just a presumption, meaning it is generally held true in the absence of evidence to the contrary. An investor may have " significant influence even if it has less than 20% voting power, and conversely, may not have significant influence even if it has more than 20% voting power, if these can be clearly demonstrated. Case #1: ABC Co. owns 30% of the voting shares of Alpha Co., the other 60% is held by XYZ, Inc. and all seats on the board of directors are appointed by XYZ, Inc. -» s * In this situation, significant influence cannot be demonstrated despite the ownership interest of more than 20%. The investment shall not be accounted for under PAS 28. Case #2; ABC Co. owns 15% of the voting shares of Alpha Co., all other shares are held in very small blocks and therefore ABC Co. has many seats on the board of directors. _ %& In this situation, significant influence can be demonstrated despite the ownership interest of less than 20%. The investment is accounted for under PAS 28, Scanned with CamScannerInvestments in Associates other evidences of significant influence Any of the following may provide evidence of the existence of significant influence even if the percentage of ownership interest is Jess than 20%: a on the board of directors or equivalent of the investee; b. parti in processes, including a, in about dividends or other ¢, material transactions between the d its investee; d interchange of ; or As 28.6) Voting rights For significant influence to exist, the investment should provide the investor voting rights. Thus, investment in preference shares, regardless of the percentage of ownership, is not accounted for under PAS 28 because preference shares do not give the investor (unincorporated entity) is accounted for under PAS 28 if it gives the investor significant influence over the partnership. Illustration: Determining the ownership interest Case #1: On January 1, 20x1, ABC Co. acquired 30,000 shares of XYZ, Inc.'s 100,000 outstanding shares at P10 per share. Requirement: Compute for the percentage of ownership acquired. pie Solution: Number of shares acquired 30,000 * Outstanding shares oom ship interest 30% Scanned with CamScanner4 Chapter 14 Case #2: On January 1, 20x1, ABC Co. acquired 30,000 newly issued shares of XYZ, Inc. at P10 per share. Before the acquisition, XYZ had 100,000 ordinary shares outstanding. Requirement: Compute for the percentage of ownership acquired. Solution: Newly issued shares acquired 30,000 + Outstanding shares after acquisition (100,000 + 30,000) _ 130,000 Ownership interest 23.08% Equity method Investments in associates are accounted for using the equity Under the equity method, the investment is initially recognized at cost and subsequently adjusted for the investor's share in the investee’s changes in equity (e.g., profit or loss, dividends and other comprehensive income). ae Effect on Share in associate’s investment in . : : investment income associate a. Profit or loss - increase for share’ | - increase for share in profit; decrease in profit; decrease for share in loss for share in loss b._ Dividends - decrease -_no effect c. Other - increase for share | - no effect; the share comprehensive | in gain; decrease in OCT is included “income for share in loss in the investor's OCI Scanned with CamScannerInvestments in Associates Illustration: Purchase cost equal to fair value of interest acquired On January 1, 20x1, ABC Co. purchased 20,000 shares of the 100,000 total outstanding shares of XYZ, Ine. for P1,000,000, XYZ’s assets and liabilities approximate their fair values. oe 2h The entry to record the purchase is as follows: Jan.1, | Investment in associate 1,000,000 20x1 Cash 1,000,000 In 20x1, XYZ, Inc. reported profit of P3,000,000 and declared and paid cash dividends of P200,000. The entry to record the share in the profit of the associate is as follows: Dec.31, | Investment in associate 600,000 oo Share in profit of associate (3M x 20%") 600,000 * Interest acquired = (20,000 shares acquired + 100,000 shares outstanding) = 20%. The entry to record the receipt of cash dividends is as follows: Dec. 31, | Cash (200,000 x 20%) 40,000 iil Investment in associate 40,000 Notes: © Both the share in the associate's profit and cash dividends received are recorded to the investment in associate account. © Under the equity method, cash dividends are not income but rather a deduction to the “Investment in associate” account. The carrying amount of the investment on December 31, 20x1 is determined as follows: Investment in associate Mba 1,000,000 Sh.in20x1 profit 600,000 40,000 Cash dividends - 20x1 1,560,000 12/31/x1 Scanned with CamScanner6 Chapter 14 Continuation of illustration: In 20x2, XYZ reported loss of ?2,000,000, declared and issued 10% stock dividends, and recognized gain on property revaluation of P500,000 and loss on exchange differences on translation of foreign operations of P100,000 in other comprehensive income. The entry to record the share in the loss of the associate is as follows: Dec. 31, | Share in loss of associate (2M x 20%) 400,000 eat Investment in associate 400,000 Share in associate's other comprehensive income The entry to record the share in the ‘associate’ s other comprehensive income from property revaluation is as follows: Dec. 31, | Investment in associate (500K x 20%) 100,000 bod Share in OCI of associate - 100,000 revaluation surplus The entry to record thé share in the associate's other comprehensive income from exchange differences on translation of foreign operations is as follows: Dec. |. Share in OCI of associate - translation of 3 “ i . sey | foreign operation 20,000 Investment in associate (100K x 20%) 20,000 The share in the associate’s other compréhensive income is presented as a separate line item in ABC Co.'s statement of profit or loss and other comprehensive income under the caption “Share of other comprehensive income of associate.” The related disclosures are made in the notes. The shares in the revaluation surplus and translation difference are included as part of any revaluation surplus and translation difference recognized in ABC’s equity. These are presented in the statement of financial position under the “Other components of equity” line item. Scanned with CamScannerInvestments in Associates Z Observe that all of the transactions recognized above jnvolved either debiting or crediting the “Investment in associate” account. Associate’s share dividends Share dividends do not result to a change in the total equity of the investee. Accordingly, they do not affect also the investment in associate account. Moreover, even though share dividends increase the number of shares held, they do not affect the investor's ownership interest. This is because, in share dividends, all shareholders are given shares of stocks in proportion to their current holdings. Thus, their ownership interests remain the same before and after the distribution of share dividends. The share dividend is record through memo entry as follows: “received 2,000 ordinary shares from associate representing 10% shave dividends on 20,000 shares originally held. Total shares wow held ave 22,000 shares.” | No special accounting is given to share dividends under the equity method because, theoretically, the total value of the shares held would be the same as it was before the dividend. T-account analyses are shown below: Investment in associate _ Vid : 1,000,000 Sh. In 20x1 profit 600,000 40,000_ Cash dividends - 20x1 400,000 Sh. In 20x2 loss i Sh. in revaluation 100,000 20,000_. Sh. In translation loss 1,240,000 12/31/x2 Share in profit or loss of associate - 20x2 Shin loss - 20x2 400,000 12/31/x2 Scanned with CamScanner8 Chapter 14 The December 31, 20x2 financial statements will show the following: Statement of financial position |, Statement of profit or loss and other comprehensive income Noncurrent assets: Share in loss of associate (400,000) Investment in associate 1,240,000 | Loss for the year (400,000) Share in OCI of associate —__80,000 Equity: Total comprehensive loss (320,000) Other components of equity 80,000 Investments in associates are classified as noncurrent assets. Statement of Changes in equity Translation Share Retained Revaluation of foreign Total capital earnings ‘surplus __ operations __—_equity Total comprehensive loss (400,000) 100,000__(20,000)__(320,000) Application of the Equity method An investor starts using the equity method from the date it obtains significant influence over an investee. On acquisition, the difference between the cost of the investment and the entity’s share in the net fair value of the investee’s identifiable assets and liabilities is accounted for as follows: > If cost is greater than the fair value of the interest ra the excess is goodwill. > IE cost is Jess than the fair value of the interest acquired, the deficiency is included as income in determining the entity's share in the investee’s profit or loss in the period of acquisition. Scanned with CamScannerInvestments in Associates Any resulting goodwill is included in the carrying amount of the investment and is not accounted for separately. Meaning, the goodwill is neither amortized nor tested for impairment separately. Adjustments are subsequently made on the entity’s share ‘in the investee’s profit or loss to account for the depreciation or amortization of any undervaluation or overvaluation in the investee’s identifiable assets and liabilities. If the carrying amount of an associate's asset is less than its fair value (i.e., undervalued), the investor’s share on the undervaluation is recognized on a rational basis as deduction to both investment income and investment account over the remaining life of the asset. The opposite treatment is applied if the asset is overvalued. If the carrying amount of-an associate's liability is less than its fair value, the investor's share on- the undervaluation is recognized on a rational basis as addition to both investment income and investment account over the remaining term of the liability. The opposite treatment is applied if the liability is overvalued. @ Remember the following: : © Share in undervaluation of | 4 Deduction to both: asset a. share in the profit of associate (investment income); and b. investment in associate- account Illustration: Purchase cost exceeds fair value of interest acquired . On January 1, 20x1, ABC Co. purchased 25% .interest in the Ordinary shares of XYZ, Inc. for P2,000,000. XYZ’s assets and liabilities approximate their fair values except for the following: ~~ 2. Inventories with a carrying amount of P500,000 have a fair Value of P100,000. Jrval not ie ae wl ‘ Cat Scanned with CamScanner10 Chapter 14 b, A depreciable asset with a carrying amount of P3,000,000 has a fair value of P5,000,000. The asset has a remaining useful life of 10 years. XYZ’s net assets has a book value of P5,000,000. The entry to record the purchase is as follows: ee . Investment in associate 2,000,000 Cash 2,000,000 The goodwill is computed as follows: Purchase cost 2,000,000 Less: Fair value of net assets acquired (1,650,000) Goodwill 350,000 «The fair value of the net assets acquired is computed as follows: Book value of net assets 5,000,000 Overvaluation of inventory (500K -100K) (400,000) Undervaluation of depreciable asset (5M -3M) 2,000,000 Fair value of net assets 6,600,000 Multiply by: Interest acquired 25% Fair value of net assets acquired 1,650,000 Alternative solution: The excess of purchase cost over book value of interest acquired is allocated as follows: Purchase cost 2,000,000 Book value of interest acquired (5M x 25%) (1,250,000) Excess of cost over book value 750,000 Share in overvaluation of inventory [(500K - 100K) x 25%] 100,000 Share in undervaluation of depreciable asset [(6M-3M) x 25%] . : (500,000)* Goodwill 350,000 *Undervaluation of asset is a deduction. Scanned with CamScannerInvestments in Associates iW Goodwill arising from investment in associate is included jn the carrying amount of the investment and not accounted for separately. On December 31, 20x1, XYZ reported P1,200,000 profit and declared and paid dividends of P500,000. ‘The entries are as follows: Dec. 31, | Investment in associate 300,000 20:1 | Share in profit of associate (1.2M x 25%) 300,000 to record the share in the associate's profit Dec.31, | Cash (500,000 x 25%) 125,000 211 | Investment in associate 125,000 to record the cash dividends The overvaluation of inventory is § accounted for as follows: Dec. 31, | Investment in associate (400k, ER 100,000 2x1 | _ Share in profit of associate 100,000 The share in the overvaluation of inventory is recognized in full because the inventory is assumed to have been entirely sold during 20x1, The undervaluation of asset is accounted for as follows: Pe 31, | Share in profit of associate * 50,000 = Investment in associate 50,000 © (2M x25%) +10 yrs, Notice that the effect of the undervaluation of asset is a deduction to both the “share in associate's profit” (investment Mcorhe) and “investment in associate.” Taccount analyses are shown below: Scanned with CamScanner12 Chapter 14 Investment in associate Jan.1 2,000,000 Sh. in profit, gross 300,000 125,000 Cash dividends Overvaluation of Undervaluation of 100,000 50,000 depreciable asset 2,225,000 Dec. 31 inventory Share in profit (loss) of associate — net 300,000 ‘Sh. in profit, gross Undervaluation of Overvaluation of depreciable asset 50,000 | 100,000. inventory Dec. 31 350,000 % Notes: @ The net change in the investment in associate account is equal to share in profit of associate (net of amortization of over/undervaluation) minus share in the cash dividends. Investment, end. 2,225,000 ‘Sh. in profit, net 350,000 Investment, beg. (2,000,000) Sh. in dividends (125,000) Net change 225,000 = 225,000 @ Cash dividends affect only the investment in associate account. They do not affect the investment income or share in the profit of associate. Equity method not applicable Equity method is required when an investor has significant influence over an investee. However, the equity method is not applicable under the following: *a. The investment is classified as held for sale under PFRS 5 Non- current Assets Held for Sale and Discontinued Operations. b. The investor is a parent that is exempted from presenting consolidated financial statements. c. The investor is a subsidiary whose parent allows it not to apply the equity method; the investor's securities are not traded in a public market nor the investor is in the process of Scanned with CamScannerInvestments in Associates 13 enlisting its securities to be traded in the market; and the investor's parent produces consolidated financial statements in accordance with PFRSs. d. The investment is held by, or is held indirectly through, an entity that is a venture capital organization, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, and the entity elects to measure the investment at FVPL in accordance with PFRS 9. Investments classified under (b) and (c) above are accounted for under PFRS 9, Potential voting rights In assessing whether significant influence exists, any potential voting rights held by the investor that are currently exercisable or convertible are assumed to have been exercised or converted even if management does not intend to actually exercise or convert them. ‘ If the ownership interest increases to 20% or more if the potential voting rights are assumed to have been exercised, significant influence exists. Therefore, the equity method shall be applied. However, when computing for the investor's share in the associate's profit or loss, the present ownership interest shall be used (excluding the effect of the potential voting rights). Potential voting rights are considered only when assessing the existence of significant influence. ~ Potential voting rights include (a) share warrants, (b) share call options, and (c) debt or equity instruments that are convertible into ordinary shares which if exercised or converted, give the entity additional voting power or reduce another party’s Voting power over the financial and operating policies of another entity, Potential voting rights that are not currently exercisable or Convertible are ignored in assessing the existénce of significant influence. Potential voting rights are not currently exercisable or Scanned with CamScanner14 Chapter 4 convertible if they cannot be exercised or converted until a future date or until the occurrence of a future event. Illustration: Potential voting shares ABC Co. owns 15,000 shares out of the 100,000 outstanding shares of XYZ, Inc. ABC Co. also holds 20,000 stock rights which enable it to acquire additional XYZ shares on a “2 rights for 1 share” basis. The stock rights are exercisable immediately. However, ABC's management does not intend to exercise the stock rights. XYZ does not have any other stock rights outstanding aside from those held by ABC. XYZ reports profit of P1,000,000 and declares cash dividends of P100,000. The investment has a carrying amount of P300,000 at the beginning of the period. Requirements: Compute for the following: a. Share in the profit of the associate. b. Carrying amount of the investment at the end of the period. Solution: The existence of significant influence is assessed as follows: Shares presently held 15,000 Add: Potential voting rights assumed exercised - (20,000 rights + 2 rights. per sh.) 10,000 Total shares 25,000 Divide by: Outstanding shares after exercise of rights (100,000 sh. + 10,000 sh.) 110,000 Assumed ownership interest 22.73% The investment will be accounted for under the equity method because significant influence is assessed to exist (i.e. 22.73% is ‘20% or more’), Scanned with CamScannerInvestments int Associates 7 The entries are as follows: Dec. 31, | Investment in associate 150,000 20x1 Share in profit of associate (1M x 15%) 150,000 Dec.31, | Dividend receivable (100K x 15%) 15,000 20x1 Investment in associate 15,000 Note that the present ownership interest (i.e. 15%) is used in computing for the share in the associate's profit and dividends. Potential voting rights are considered only in assessing the _ existence of significant influence. Answers to the requirements: (a) P150,000 (refer to journal entry above) () Investment in Associate beg. 300,000 Sh. in profit 150,000 15,000 Dividends 435,000 end. Cumulative preference shares If the investee has outstanding cumulative preference shares that are held by parties other than the investor and classified as equity, the investor computes its share of profits or losses after deducting one-year dividends on those shares, whether declared or not. If the preference shares are noncumulative, the investor deducts only the dividends that were declared. If the preference shares are classified as liability by the associate, (e.g., redeemable preference shares), 10 adjustment is made because the associate recognizes dividends on these shares as interest expense. Accordingly, the associate's profit or loss is already adjusted of the interest expense. Scanned with CamScanner16 Chapter 14 Preference share is Preference share is Preference share is cumulative noncumulative redeemable @ Deduct one-year | * Deduct ® Do not deduct dividend, dividends only dividends when whether declared when declared computing for or not, before before share in the computing the computing the associate’s P/L, share in the share in the associate’sP/L. | _associate’s P/L. Illustration: Cumulative preference shares ABC Co. owns 20% of XYZ Inc’s ordinary shares. XYZ also has outstanding cumulative 6% preference shares of P2,000,000. None of the preference shares is held by ABC. Dividends are in arrears for 3 years. XYZ reported profit of P1,000,000 and declared no dividends. a. How muchis the share in the profit or loss of the associate? Answer: Profit of XYZ 1,000,000 One-year dividend on cumulative preference shares whether declared or not (2M x 6%) (120,000 Adjusted profit of associate 880,000 Multiply by: Ownership interest 20% Share in profit of associate 176,000 b. What if XYZ declared dividends that pay all the dividends in : arrears, how much is‘the share in the profit or loss of the associate? Answer: 176,000. : Still, only one-year dividend is deducted. The arrears hat already been considered by ABC in computing its share in the associates profit or loss in the previous years. Scanned with CamScannerInvestments in Associates 7 What if the preference shares are non-cumulative, how much is the share in profit or loss of associate? Answer: (IM x 20%) = 200,000. No adjustment to profit is necessary because no dividends were declared. When preference shares are non-cumulative, adjustment is made only for the dividends declared. d. What if the shares are redeemable preference shares and XYZ declared P150,000 cash dividends on those shares, how much is the share in the profit or loss of the associate? Answer: 200,000. No adjustment is necessary for preference shares that are considered debt instruments. The associate's profit for the year of PIM necessarily would have already been reduced by the dividends declared (ie., as interest expense). Relationship between investment in associate account and associate’s equity The foregoing concepts are based on the relationship between the investment in associate account and the associate’s equity. In theory, the investment in associate account will approximate the investor's interest in the carrying amount of the associate’s residual equity in the long-run (ie, ‘residual equity theory’). Dlustration: On January 1, 20x1, ABC Co. acquires 20% interest in XYZ for 71,000,000. The acquisition does not result to goodwill. The carrying amounts of the identifiable assets and liabilities of XYZ approximate their. fair values. XYZ’s financial position as of January 1, 20x1 is shown below: Scanned with CamScanner18 Chapter 14 6% Cumulative preference shares Ordinary shares Retained earnings ABC holds none of the cumulative preference shares of XYZ. No dividends are in arrears. On January 1, 20x1, the carrying amount of the investment approximates the investor's interest in the associate's residual equity because the purchase cost reflects no goodwill arid no dividends are in arrears. Total equity -Jan. 1, 20x1 7,000,000 6% Cumulative preference shares (2,000,000) Residual equity of associate : 5,000,000 Multiph 7: Investor's interest Investor's interest in residual equit 20% 1,000,000 of associate — 1.1.20x1 ing amount of investment in associate — 1.1.20x1 1,000,000 In 20x1, XYZ reports profit of P1,000,000 and declares no dividends. The carrying amount of the investment in associate on December 31, 20x1 is analyzed as follows: Investment in associate Jan. 1, 20x1 1,000,000 Share in profit* 176,000 1,176,000 Dec. 31, 20x1 “The share in profit of associate is computed as follows: £ Scanned with CamScannerInvestments in Associates 19 Profit of associate before adjustment for dividends 1,000,000 One-year dividend on cumulative preference shares (2M x 6%) (__120,000) ‘Adjusted profit of associate 880,000 Multiply by: 20% Share in associate’s profit - 20x1 __176,000 Comparison on Dec. 31, 20x1: Total equity - Dec. 31, 20x1 (7M + 1M profit in 20x1) 8,000,000 6% Cumulative preference shares (2,000,000) Residual equity of associate 6,000,000 Multiply by: Investor's interest 20% Investor's interest in residual equity of associate - 12/31/x1 1,200,000 Carrying amount of investment in associate - Dec. 31, 20x1 1,176,000 Difference 24,000 ABC's interest in the residual equity of XYZ on December 31, 20x] is not equal to the carrying amount of the investment in associate account. The difference is due to the dividend in arrears” on the cumulative preference share (i.e., 2M x 6% = 120,000°x 20% ownership interest = 24,000 difference). In 20x2, XYZ reports profit of P1,000,000 and pays 2-year dividends on the cumulative preference shares and P200,000 dividends on the ordinary shares. The carrying amount of the investment in associate as of December 31, 20x2 is analyzed as follows: Scanned with CamScanner20 Chapter 14 Investment in associate Jan. 1, 20x1 1,000,000 Share in profit - 20x1 176,000 Cash dividends on ordinary shares Share in profit-20x2* 176,000 | __ 40,000 (200,000 20%) 1,312,000 Dec. 31, 20x2 “The share in profit of associate in 20x2 is computed as follows: Profit of associate before adjustment for dividends - 20x2 1,000,000 One-year dividend on cumulative preference shares (2M x 6%) (120,000) Adjusted profit of associate — 20x2 880,000 | Multiply by: 20% Share in associate’s profit — 20x2 176.000 Comparison: Dec. 31, 20x2 Total equity - Dec. 31, 20x2« 8,560,000 6% Cumulative preference shares Residual equity of associate Multiply by: Investor's interest “(7M + 1M profit in 20x1 + 1M profit in 20x2 - 240K PS dividends — 200K OS dividends) = 8,560,000 ABC's interest in the residual equity of XYZ as of December 31, 20x2 is equal to the carrying amount of the investment in associate account because all dividends in arrears on the cumulative preference shares are paid. Scanned with CamScannervestments in Associates 4 The foregoing illustrations provide the basis for the accounting treatment of preferred dividends when determining the investor's share in the profit or loss of an associate. Discontinuance of Equity method An entity stops using the equity method from the date it loses significant influence over the investee. 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 a change in the percentage of ownership. For example: a. When an associate becomes subject to the control of a government, court, administrator or regulator. b. Asa result of a contractual agreement. > If the investment becomes a subsidiary, it is accounted for using PFRS 3 Business Combinations and PFRS 10 Consolidated Financial Statements: > If the investment becomes a regular investment, it is accounted for using PFRS 9. The fair value of the retained interest is regarded as its fair value on initial recognition under PFRS 9. The difference between the following is recognized in profit or loss: a. the fair value of the retained interest and any proceeds from disposing part of the investment; and b. the carrying amount of the investment at the date the equity method was discontinued. Loss of significant influence due to Accounting treatment * Decrease of ownership > Financial asset at fair value interest below 20%. under PFRS 9 * Inctease of ownership above | > Investment in subsidiary 50% under PFRS 3 and PFRS 10 Scanned with CamScanner22 Chapter 14 The discontinuance of equity method is accounted for prospectively. Prior year financial statements are not restated to adjust previously recognized share in profits or losses, other comprehensive income and discontinued operations of the associate. Illustration: Loss of significant influence On January 1, 20x1, ABC Co. acquired 30,000 ordinary shares of XYZ, Inc., representing 30% interest, for P3,000,000. On this date, XYZ's net assets have a carrying amount of P8,000,000 and a fair value of P10,000,000. The difference is attributable to an undervalued building with a remaining useful life of 10 years. - XYZ uses the straight-line method of depreciation. In 20x1, XYZ reported profit of P1,000,000 and paid cash dividends of P600,000. XYZ shares are selling at P100 per share on December 31, 20x1, On July 1, 20x2, ABC sold 60% of its investment in XYZ shares at the prevailing market price of P120 per share. XYZ reported interim profit of 500,000 for the six months ended June 30, 20x2. On December 31, 20x2, XYZ reported total profit of 1,200,000 for the year and declared P1,000,000 cash dividend: The shares are quoted at P135 per share at year-end. The entry to record the purchase is as follows: Jan.1, | Investment in associate 3,000,000 20x1 Cash. 3,000,000 The compound entry to record the share in profit and receipt o! cash dividends in 20x1 is as follows: Dec. | Cash (600,000 x 30%) 180,000 aah Investment in associate (squeeze) 120,000 Share in profit of associate (1M x 30%) 300,00! Scanned with CamScannerpoestments in Associates in 23 qhe entry to adjust the share in profit for the depreciation of the undervaluation of the building is as follows: Share in profit of associate Dec. 31, Investment in associate 20x1 60,000" 60,000 «The depreciation of the undervaluation of building is computed as follows: Share in undervaluation of building [(10M- sm) x 30%} Divide by: Remaining life of building Annual adjustment to share in profit of associate 600,000 10 60,000 The entries to adjust the carrying amount of the investment prior to the sale on July 1, 20x2 are as follows: of building for the six months ended June 30, 20x2 to record the depreciation of undervaluation July, | Investment in associate (500K x 30%) 150,000 22 Share in profit of associate 150,000 to record the share in the associate's profit for the six months ended June 30, 20x2 July, | Share in profit of associate 30,000 hae Investment in associate (60K x 6/12) 30,000 The carrying amount of the investment on the date of sale is computed as follows: Investment in associate Jan. 1, 20x1 3,000,000 Shate in profit - 20x1 300,000 | 180,000 Cash dividends - 20x1 60,000 Undervaluation - 20x1 Share in profit - 6/30/x2 150,000 30,000_ Undervaluation - 20x2 The entry to record the sale is as follows: 3,180,000 July 1, 20x2 Cash (80,000 sh, x 60% x 120) Investment in associate (3.18M x 60%) Gain on sale of investment (squeeze) 2,160,000 1,908,000 252,000 Scanned with CamScanner24 Chapter 14 The gain on sale is recognized in profit or loss. After the sale, the unsold portion of the investment is reclassified because it is presumed that significant influence is lost, ie, the previous interest of 30% is reduced below the 20%, threshold or reduced to 12% (30% x 40%). The entry to reclassify the remaining shares is as follows: july | Held for trading securities 1,440,000¢ | 20%2 Investment in associate (3.18M x 40%) 1,272,000 | : Gain on reclassification 168,000 | * (30,000 sh. shares originally held x 40%) = 12,000 sh. now held x P120 fair valueon | July 1, 20x2 = 1,440,000 fair value on reclassification date | The gain on reclassification is also recognized in profit or loss. | ' The entry to record dividend income on ‘December 31, 20x2 is as follows: . { Dec. 31, | Dividend receivable (1M x 12%) 120,000 aad Dividend income 120,000 | + (30% previous interest x 40% unsold portion) = 12% current interest. { | | | The entry to recognize the change in the fair value of the | investment in held for trading securities is as follows: | Dec. 31, | Held for trading securities 180,000¢ oe Unrealized gain - P/L * 180,000 |) © ((@135 - P120) x 12,000 sh.] Total investment-related income recognized in profit or loss in | 20x2 is computed as follows: Net share in profit of associate — Jan. to June (150K - 30K) 120,000 | Gain on sale 252,000 Gain on reclassification 168,000 Dividend income 120,000 Unrealized gain on change in fair value 190,000 Total income recognized in profit or loss - 20x2 840,000, Scanned with CamScannerInvestments in Associates 5 Reclassification of cumulative other comprehensive income When the equity method is discontinued, all amounts previously recognized in other comprehensive income in relation to the investment are cither reclassified to profit or loss as a reclassification adjustment or transferred directly to retained earnings using the provisions of other PFRSs. For example, revaluation surplus is transferred directly to retained earnings while exchange differences from translating foreign operations are reclassified to profit or loss. If ownership interest is reduced but significant influence or joint control is not lost, only a proportionate amount of the OCI relating to the reduction of interest is reclassified to profit or loss or transferred directly to retained earnings, as appropriate. Illustration 1: Reclassification adjustment for OCI ABC Co. owns 30% of XYZ, Inc.'s ordinary shares. On July 1, 20x2, ABC Co. sold half of its investment for P400,000. The adjusted balances of the related accounts immediately before the sale are as follows: ¢ Investment in associate 1,200,000 * Cumulative share in associate's exchange differences on translation of a foreign operation 500,000 Cr The remaining ownership of 15% (30% x 2) does not give ABC significant influence over XYZ. The entry to record the sale is as follows: Maly, | Cash * 400,000 202 | Loss on sale of investment 200,000 Investment in associate (1.2M x 1/2) 600,000 ‘The reclassification adjustment of the OCLis as follows: M1. ] Translation of foreign operation 500,000 L®? | “Gain on reclassification - P/L 500,000 The total cumulative share in OCI of associate is Teclassified to profit or loss because significant influence is lost. Scanned with CamScanner26 Illustration 2: Partial loss of significant influence Use the information in the preceding illustration, except that the remaining 15% ownership (30% x ¥) still gives ABC significant influence over XYZ. The entry to record the sale is as follows: Chapter 14 July, | Cash 400,000 702 | Loss on sale of investment 200,000 Investment in associate (1.2M x 1/2) 600,000 | The reclassification adjustment of the OCI is as follows: iy 1, | Translation of foreign operation 250,000 | x2 Gain on reclassification (500K x '4) 250,000 | Only half of the OCI is reclassified because significant influence is not lost. Illustration 3: Transfer of OCI directly in equity ABC Co. owns 30% of XYZ, Inc.'s ordinary shares. On July 1, 20x2, ABC Co. sold half of its investment for P400,000. The adjusted balances of the related accounts immediately before the sale are: 1,200,000 « Investment in associate ¢ Cumulative share in associate’s revaluation increment on property - 500,000 Cr The remaining ownership of 15% (30%-x ¥%) does not give ABC significant influence over XYZ. The entry to record the sale is as follows: July, | Cash 400,000 20x2 | Logs on sale of investment 200,000 Investment in associate (1.2M x 1/2) 600,000 The entry to derecognize the cumulative OCI is as follows: July1, | Revaluation surplus — associate 500,000 a2 Retained earnings 500,000 Scanned with CamScannerInvestments in Associates 27 The cumulative share in the OCI of associate relating to revaluation surplus is transferred directly in equity (i.e., retained earnings). Severe long-term restrictions PAS 28 does not permit an investor that continues to have significant influence over an associate not to apply the equity method when the associate is operating under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Significant influence must be lost before an entity ceases to apply the equity method. Change to equity method - Gain of significant influence Significant influence may be achieved from additional purchase of shares resulting to an increase in ownership interest. Although, not spécifically addressed in PAS 28, this type of acquisition may be accounted for by reference to PFRS 3 Business Combinations particularly on the accounting for business combination achieved in stages. : PFRS 3.42 states that “In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss or other comprehensive income, as appropriate.” Illustration 1: Change from FVPL to equity method On January 1, 20x1, ABC Co. acquired 10,000 shares out of the 100,000 outstanding shares of XYZ, Inc. for 800,000. The investment was classified as held for trading securities. In 20x1, XYZ reported profit of P5,000,000 and paid dividends of ~ P1,000,000, The fair value of the shares on December 31, 20x1 is P85 per share. The entries in 20x1 are as follows: Scanned with CamScanner28 Chapter 14 Jan. 1, | Held for trading securities 800,000 } on Cash 800,000 Dec. | Cash (1M x 10%) 100,000 - Dividend income 100,009 20x1 aes Dec. | Held for trading securities 50,000 Ban Unrealized gain — P/L {(10K x P85) - 800K] 50,000 The carrying amount of the investment on December 31, 20x1 is P850,000, equal to fair value. On July 1, 20x2, ABC Co. acquired additional 15,000 shares at the fair -value of P70 per share resulting to an increase in the ownership interest from 10% to 25%. Number of shares previously held 10,000 Additional shares purchased 15,000 Total shares held : 25,000 Divide by: XYZ’s outstanding shares 100,000 New ownership interest 25% The entry to record the purchase of additional shares is as follows: July, | Investment in associate (15,000 x P70) 1,050,000 20x2 Cash 1,050,000 The acquisition-date fair value of the previously held investment is determined as follows: Number of shares previously held 10,000 Multiply by: Fair value per share on July 1, 20x2 P70 Acquisition-date fair value of existing investment 200,000 The previously held investment is remeasured as follows: July1, | Unrealized loss — P/L (850K — 700K) 150,000 20x2 Held for trading securities 150,000 to recognize loss on remeasurement of previously held equity interest Scanned with CamScannersnvestments in Associates 29 The loss on remeasurement is recognized in profit or loss pecause the previously held equity interest was originally classified as FVPL. Investment in associate 700,000 Held for trading securities 700,000 to reclassify the previously heid equity interest to investment in associate The carrying amount of the investment in associate on July 1, 20x2 js analyzed as follows: Purchase cost of additional shares acquired 1,050,000 Reclassification date fair value of existing investment 700,000 Carrying amount of investment in associate - 7/1/x2 1,750,000 Neither PAS 28 nor PFRS 3 suggests that a change to the equity method would result in a restatement of the investment account and the retained earnings account to “catch up” to what the balances would have been had the equity method used all along. This differs from the provisions of US GAAP which requires “catch up” adjustments to the investment and related accounts. The only evidence of a retrospective accounting under PAS 28 is when an investment in associate that was previously classified-as “held for sale” asset is reclassified back to “investment in associate.” In 20x2, XYZ reported profit of P6,000,000, 4,000,000 of which was earned in the second half of the year. In addition, XYZ declared and paid dividends of P1,000,000 on December 31, 20x2. ee quoted price of XYZ shares on December 31, 20x2 is P90 per lare, The entry is as follows: Scanned with CamScanner30 Chapter 14 ‘| Dec. 31, | Cash (1M x 25%) 250,000 20x2 | Investment in associate (squeeze) 750,000 Share in profit of associate (4M x 25%) 1,000,000 The equity method is applied starting on the date significant influence is obtained. Accordingly, the share in Profit of associate is computed only on the profit earned by the associate from July 1 to December 31, 20x2. Also, the fair value on December 31, 20x2 is ignored because the equity method is used. Illustration 2: Change to equity method from FVOCI Use the information in the preceding illustration except that the investment was initially classified as FVOCI. The entries on July 1, 20x2 are as follows: July Investment in associate (13,000 x P70) 1,050,000 i} 1 Cash 1,050,000 202 | ‘To record the acquisition ofthe additional shares July | Unrealized loss - OCI 150,000 L Investment in equity securities - FVOCI 150,000 20x2_| To remensure the previously held equity interest July | Investment in associate 700,000 1, Investment in equity securities - FVOCI 700,000 20x2 | To reclassify the previously held equity interest to : investment in associate July | Retained earnings 100,000 1 Unrealized gain (loss) - OCI 100,000 20%2 | To transfer directly within equity the cumulative gains recognized in OCI (©) (800K acquisition cost - 700K fair value on July 1, 20x2) = 100K net loss in OCI Illustration 3: Change to equity method from measurement at Cost Use the information in the preceding illustration except that the investment was initially measured at cost. The carrying amount of the previously held equity interest on July 1, 20x2 is 800,000, the original acquisition cost. The entries on July 1, 20x2 are as follows: Scanned with CamScannernts it i ale: gsm in As 31 Investment in associate (15,000 x7) | 1,050,000[ Cash | 1,050,000 ‘To record the acquisition of the addition ts July | Loss on remeasurement ~ P/L 400,000 1, Investment in equity securities - Cost 100,000 20x2 | To remeasure the previously held equity interest =I July | Investment in associate 700,000 tt Investment in equity securities - Cost 700,000 2022 | To reclassify the previously held equity interest to investment in associate (b) (800K acquisition cost ~ 700K fair value on July 1, 20x2) = 100K loss Under PFRS 9, the fair value of a financial asset at initial recognition is normally equal to the transaction price. In this case, the fair value of the previously held investment is determined by reference to the acquisition price of the additional shares purchased on July 1, 20x2. intercompany transactions with an associate Gains and losses resulting from “downstream” and “upstream” transactions between an investor and an associate are recognized in the entity’s financial statements only to the extent of unrelated investors’ interests in the associate. > “Downstream” transactions are, for example, sales of assets from the investor to an associate. . > "Upstream" transactions are, for example, sales of assets from an associate to the investor. The entity’s share in the associate’s Sains or losses resulting from these transactions is eliminated. ‘™ If the seller is the investor, the transaction is downstream. 7 If the seller is the investee (associate), the transaction is Upstream. Investor Downstream Upstream Investee (Associate) Scanned with CamScanner32 Chapter 14 Pt When downstream transactions provide evidence of a reduction in the net realizable value of the assets to be sold o; contributed, or of an impairment loss of those assets, the investo, recognizes those losses in full. When upstream transactions provide evidence of , reduction in the net realizable value of the assets to be purchaseq or of an impairment loss of those assets, the investor recognizes only its share in those losses. Illustration 1: Downstream sale ABC Co. owns 20% of XYZ, Inc.’s outstanding ordinary shares. On December 31, 20x1, ABC sold equipment with a historical cost of 150,000 and accumulated depreciation of 50,000 to XYZ, Inc. for | P 120,000, equal to the fair value of the equipment. The equipment has a remaining useful life of 10 years. Both ABC and XYZ use the straight line method of depreciation. The downstream sale is recorded as follows: Dec.3i, | Cash 120,000 201) Accumulated depreciation 50,000 Equipment 150,000 Gain 20,000 The gain is eliminated up to extent of the entity’s interest as follows: Dec. 31, | Gain (20,000 x 20%) 4,000 aoe Investment in associate 4,000 The result of the elimination is that the gain recognized in the entity’s financial statements is only to the extent of unrelated investors’ interests “ in the associate, i.e., (20,000 x 80% = 16,000). The unrelated investors’ interests in the associate is 80% (100% less 20%) Scanned with CamScannerh estments i” Associates 33 i Queryy : : gince gains and losses from intercompany transactions are eliminated against the carrying amount of the investment, a yestion now arises, “what if the carrying amount of the investment is reduced below zero after a gain is eliminated?” In this regard, the IASB opined that in such case, the excess gain shall be recognized as a deferred ‘gain. To illustrate, let us assume that the carrying amount of the investment in associate is P3,000. The entry to eliminate the gain is as follows: Dec. 31, | Gain (20,000 x 20%) 4,000 20x Investment in associate 3,000 Deferred gain 1,000 The eliminated gain is recognized in profit or loss when the associate generates economic benefits from the transferred asset. Consequently, the deferred gain will be recognized in profit or loss as the associate depreciates the equipment or when it sells the equipment to an unrelated party. Illustration 2: Upstream sale Use the information in ‘Illustration 1’ except that the sale is upstream, i.e., XYZ, Inc., the associate, is the seller. ABC Co. records the purchase as follows: aon Equipment 120,000 | ; Cash 120,000 Ac Co. eliminates its share in the associate’s gain as follows: hy | Share in profit of associate 4,000 Investment in associate 4,000 Scanned with CamScanner34 Chapter 15 Share in Losses The investor shares in the investee’s losses only up to the amount of its interest in the associate. > Interest in the associate includes the following: a. Carrying amount of the investment in associate b. Investment in preference shares of the associate c. Unsecured, long-term receivables or loans Interest in the associate or joint venture does not include trade receivables and payables and secured long-term receivables or loans Shares in losses are applied first to the carrying amount of the investment in associate. After the investment is zeroed-out, shares in losses are applied to the other components of the interest in the associate in the reverse order of their seniority (i.e., reverse order of priority in liquidation). After the total balance of the interest in the associate is zeroed-out, the investor stops sharing in further losses, except to the extent that the investor a. has incurred legal or constructive obligations or b. made payments on behalf of the associate. If the investee subsequently reports profits, the investor resumes recognizing its share in those profits only after its share in the profits equals the share in losses not recognized. Illustration: Share in losses of associate ABC Co. owns 20% of the ordinary shares of XYZ, Inc. ABC's records on December 31, 20x1 show the following information before any necessary year-end adjustments: Investment in associate 200,000 Trade accounts receivable — XYZ 300,000 Investment in preference shares - XYZ 100,000 Advances to associate - XYZ 50,000 Loans receivable, secured -XYZ 120,000 Scanned with CamScanner> XYZ reported loss of P1,400,000 in 20x1. she interest in the associate as of Dec. 31, 20x1 before adjustment is computed as follows: Investment in associate 200,000 Investment in preference shares - XYZ 100,000 ‘Advances to associate — XYZ Interest in the associate - before adjustment, 12/31/x1 _350,000 The computed balance of the “interest in the associate” is the threshold in determining the share in the losses of the associate. The share in the loss of the associate in 20x1 is computed as follows: Share in loss of associate (14M x 20%) (280,000) The share in the loss of associate is charged first to the balance of the investment in associate. Any excess loss is charged to the other components of the interest in the associate in the reverse order of liquidation or to the preference shares first then to the advances to associate (unsecured long-term receivable). The entry to recognize the share in the loss is as follows: = Share in loss of associate 280,000 201 | - Investment in associate 200,000 Investment in preference shares 80,000 Alter posting the entry above, the balances of the relevant accounts are as follows: piestent in associate (200K - 200K) 0 estment i in preference shares - XYZ (100K - 80K) 20,000 pitied to associate - XYZ —50,000 “rest in the associate - after adjustment, Dec. 31, 20x1 —Z0,000 Scanned with CamScanner36 Chapter 14 The remaining threshold for recognizing further losses is 70,000. >. XYZ reported loss of P500,000 in 20x2. Share in loss of associate (500K x 20%) (100,000) The computed amount of P100,000 exceeds the P70,000 threshold. Thus, only P70,000 will be recognized as share in the associate's loss in 20x2. The excess of P30,000 is disclosed as “loss not recognized.” If the associate subsequently reports profits, the investor resumes recognizing its share of those profits only after its share of the profits equals the share of losses not recognized. The entry to recognize the share in the loss is as follows: Dec. | Share in loss of associate 70,000 Be Investment in preference shares 20,000 Advances to associate 50,000 After making the entry above, the interest in the associate has a zero balance. c > XYZ reported loss of P100,000 in 20x3. In addition, ABC incurred constructive obligation of P120,000 in favor of XYZ and made payments of P80,000 on behalf of XYZ. ABC will not recognize any share in the P100,000 loss because the balance of the “interest in associate” is already reduced to zero. The ‘should’ have been’ share of P20,000 (100,000 x 20%) is disclosed as “loss not recognized.” The cumulative balance of “losses not recognized” is P50,000 (30,000 in 20x2 plus 20,000 in 20x3). ABC will only recognize further losses arising froth any legal or constructive obligation incurred and any payments made on behalf of the associate. Thus, only the P120,000 constructive Scanned with CamScannerobligation and the P80,000 payments made on behalf of XYZ will be recognized as further losses in 20x3. The entry to recognize the additional losses is as follows: Dec.31, | Loss on associate 200,000 20x3 Cash 80,000 Liability incurred on behalf of assoc. 120,000 > In20x4, XYZ reported profit of P1,000,000. . The share in the profit of the associate is computed as follows: Share in profit of associate before adjustment (1M x 20%) 200,000 Cumulative losses not recognized (_50,000) Share in profit of associate — adjusted 150,000 The entry to recognize the share in the associate’s profit is as follows: Dec. 31, | Advances to associate 50,000 204 | Investment in preference shares 100,000 Share in profit of associate 150,000 Impairment losses Goodwill included in the carrying amount of an investment in associate is not accounted for separately, meaning it is. neither amortized nor tested for impairment separately. Instead, the entire investment in associate is tested for impairment under PAS 36 Impairment of Assets by comparing the investment’s recoverable amount with its carrying amount, whenever there are indications that the investment may be impaired. An impairment loss recognized in those circumstances is not allocated to any asset, even to goodwill.which forms part of. the carrying amount of the investment in the associate. Instead, the total impairment loss is treated as a‘decrease in the carrying amount of the investment, to which the goodwill is included. Scanned with CamScanner38 Chapter 14 Any reversal of impairment loss is recognized in accordance with PAS 36 to the extent that the recoverable amount of the investment subsequently increases. Recoverable amount is the amount to be recovered through use or sale of an asset. It is the higher of an asset's: a. Fair value less costs of disposal; and b. Value in use. ¢ Fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (PAS 36.6) * Costs of disposal are “incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.” (PAS 36.6) e Value in use is “the present value of the future cash flows expected to be derived from an asset or cash-generating unit.” (PAS 36.6) Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount: Illustration: Impairment of investment in associate ABC Co. owns 40% of the ordinary shares of XYZ, Inc. The investment in associate account has a carrying amount of P1,000,000 on December 31, 20x1. ABC assessed that the investment may be impaired. After impairment testing, ABC determined the following: Fair value less costs of disposal “800,000 Value in use of the investment 790,000 The impairment loss is determined as follows: Recoverable amount (FVLCD - higher) 800,000 Carrying amount of investment (2,000,000) Impairment loss (_200,000) Scanned with CamScanner‘The entry to recognize the impairment loss is a5 follows: Dec. 31, | Impairment loss ~ 2oxl Investment in assoc Chapter 14: Summary « An associate is an entity over which the investor has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Significant influence is presumed to exist when ownership interest is 20% | or more. e Under the equity method, the investment in an associate is initially recognized at cost and subsequently adjusted for the investor's share in the changes in equity of the associate, such as (a) profit or loss, (b) other comprehensive income, and (c) results of discontinued operations. « When an associate has cumulative preference shares, the investor computes its share in profit or loss after deducting one-year dividends on those shares, whether declared or not. * The investor's share in the depreciation of an undervaluation of asset is a deduction to both the investment income (share in profit of associate) and the investment in associate account. * Share in losses of associate is recognized up to the amount of the “interest in the associate.” * After the investor's interest in the associate is reduced to zero, additional losses are recognized only for the following: (a) legal or constructive obligations; or (b) payments made on behalf of the associate. Other losses are not recognized. * If the associate subsequently reports profits, the investor Tesumes recognizing its share of those profits only after its share of the profits equals the share of losses not recognized. | 200,000 | Scanned with CamScannerChapter 14 Investment in associate beg. Xxx Share in profit xx, Xx Dividends Share in OCI (Cr.) xx xx Undervaluation of asset xx end. Share in profit of associate Undervaluation of asset xx xx Share in profit end. xx. PROBLEMS: PROBLEM 1: TRUE OR FALSE 1. Fair value accounting is used for investments in equity securities when the investor does not exercise significant influence, joint control or control over the investee. The equity method may not be appropriate in some cases even though the investor owns more than 20 percent of the voting stock of the investee. Under fair value accounting, the investment account is periodically adjusted to reflect changes in the underlying net assets of the investee. Under the equity method, the fair value per share of the investment does not necessarily affect the measurement of the investment at the reporting date. Under the equity method, dividends received from the investee are treated as dividend income. When an investment in equity securities has been accounted for under the equity method, but a change in circumstances dictates a change to fair value accounting, retrospective application of the fair value accounting is required. When the purchase price of stock is greater than the fair value of the interest acquired, the investor makes an adjustment !0 the investee’s income when applying the equity method. Scanned with CamScannernoestments in Associates / No adjustment is made to the investment account when changing from the equity method to fair value accounting. An investor applies the equity method from the date it obtains significant influence over the investee and discontinues applying the equity method when the investor faces significant difficulty in transferring funds to the investee, even though the investor still retains significant influence. 10. The investor does not recognize a share in the loss of an associate when the balance of the investment in associate account is reduced to zero, even if the investor has an investment in the preference shares of the associate. PROBLEM 2: FOR CLASSROOM DISCUSSION Scope 1. Anentity shall apply PAS 28 Investments in Associates and Joint Ventures a. to investments that give the entity significant influence over the investee. b. to account for investments in associates in the entity’s separate financial statements. c. even in the absence of significant influence. d. any of these Significant influence . 2. According to PAS 28, significant influence is a. an entity, including an unincorporated entity such as a Partnership, over which the investor has significant influence. b, exposure or rights to variable returns from involvement with the investee and the ability to affect those returns through power over the investee. © the contractually agreed sharing of control of an arrangement, which exists only when decisions about the televant activities require the unanimous consent of the Parties sharing control. Scanned with CamScanner42 Chapter 1 d. the power to partidpate in the financial and operat; policy decisions of the invesiee but is not control or j control over those policies. 3. When investments in equity securities represent 20% to interest in the voting rights of the investee, which of following standards would most likely be applied? a. PERSO b. PAS 31 c. PFRS3 d. PAS 28 the 4. ABC Co. owns 15,000 shares out of the 100,000 outstandi shares of XYZ, Inc. ABC Co. has two representatives in board of directors of XYZ, Inc. composed of ten members. in ABC's statement of financial position, the investment in XYZ Inc. shares is most likely classified as a. Investment in subsidiary. b. Investment in held for trading securities. c. Investment in associate. d. Any of these Equity method 5. On January 1, 2002, Alsop Corp. acquired 30,000 shares out of the 100,000 outstanding ordinary shares of Stone Services Inc for P1,300,000 as a long-term investment. Data from Stone: 2002 financial statements include the following: Profit 330,000 Less: Cash dividends paid 160,00 Increase in retained earnings P1708 The fair value of Stone Services Inc. ordinary shares on Decembet 31, 2002, was P98 per share. Alsop Corp. does not have any oth? noncurrent investments in securities. Requirement: Prepare the necessary journal entries for Alsop? investment in Stone Services Inc. ordinary shares. (Adapted) Scanned with CamScannersnoestments in Associates 43 6, Peavey Corporation acquired 40% of Marshal Company’s 400,000 voting stock on January 2, 20x1 for P2,900,000 when Marshal’s net assets had a carrying amount of P8,000,000. It was determined that the fair values of the following assets were different from their carrying amounts: Assets Carrying Fair Value Estimated amount Remaining Useful Life Inventories 2,000,000 3,000,000 N/A (all items sold during 20x1) Building 12,000,000 12,500,000 20 Equipment 4,000,000 1,500,000 6 Patent 0 200,000 10 Marshal earned profit of P4,000,000 and paid dividends of 750,000 in 20x1. Requirements: a. How much is the goodwill from the acquisition? b. What is the accounting for the goodwill? c. How much is the net share in the associate’s profit or loss in 20x1? d. How much is the balance of the investment in associate on December 31, 20x1? €. Provide the journal entries. (Adapted) 7. Investments in associates are initially recognized at a cost. b. cost adjusted for share in the associate’s equity. © fair value. 4. fair value plus transaction costs. 8 Under the equity method, dividends .received from an @ssociate Scanned with CamScanner44 Chapter 14 increases the investment income for the period. increases the investment account. does not affect the investment account. does not affect the investment income for the period. aoe Cumulative preference shares 9. ABC Co. owns 20% of the outstanding ordinary shares of XYZ, Inc. XYZ, Inc. also has outstanding 10,000, 10%, ®10-par cumulative preference shares, none of which is held by ABC Co. During the period, XYZ, Inc. reported profit of P2,000,000 and paid total dividends of #100,000 to both preference and ordinary shares. Requirement: How much is the share in the associate's profit? Loss of significant influence 10. On January 1, 2001, Paxman Company purchased 10,000 shares representing 50% interest in Monroe Company for cash of P660,000. On that date the net assets of Monroe Company had a carrying amount of P1,200,000. The difference between fair value and carrying amount is attributed to goodwill. On January 1, 2002, Paxman sold 70% of its ownership in Monroe for P525,000 and reclassified the remaining stock as held for trading securities. Monroe’s profits and dividends are given below: : 2001 2002 Profits P80,000 90,000 Dividends ‘ 18,000 25,000 The fair values per share on January 1, 2002 and December 31, 2002 were P75 and P80, respectively. Requirement: Prepare all the journal entries in Paxman’s books if 2001 and 2002. (Adapted) Scanned with CamScannerReclassification of cumulative OCI 11. ABC Co. owns 20% interest in XYZ, Inc. On September 1, 20x1, ABC Co. sold all of its interest in XYZ, Inc. for P1,000,000. The adjusted balances of the related accounts immediately before the sale are: Investment in associate 800,000 2 Cumulative share in associate’s exchange differences on translation of a foreign operation 50,000 Dr Requirement: Provide the eniries on September i, 20x1. 12. On August 1, 2001, Colorite Corp. acquired 10,000 of the outstanding shares of Brown Co. On January 2, 2002, Colorite acquired an additional 20,000 shares of Brown Co., which brought the total ownership to 30,000 shares. Using the normal guidelines for percentages of ownership and assuming ~ that Brown Co. had 100,000 shares outstanding during 2001 and 2002, Colorite Corp. should account for the investment in Brown Co. in accordance with PFRSs by a. using fair value accounting in 2001 and prospectively applying the equity method starting on January 2, 2002. b. using the cost method in 2001, retroactively adjusting the investment account to the equity method at the beginning of 2002, and using the equity method in 2002. © using the equity method for 2001 and 2002. - d. using the cost method in 2001 and 2002 for the 10,000 shares acquired in 2001, and using the equity method in 2002 for the 20,000 shares acquired in 2002. : (Adapieay 13. Park Company purchased 18% of the outstanding common stock of Ray Company on January 1, 2001, when the net assets of Ray Company had a book value and fair value of 400,000. Park Company paid 72,000 for this investment. The investment is classified as held for trading securities. The fair Value of the investment on December 31, 2001 is P74,000. Scanned with CamScanner46 Chapter 14 On January 1, 2002, Park purchased an additional 10% of the outstanding stock of Ray Company, paying another 41,009, The purchase price reflects the fair value of the shares. Ra, Company's reported profits and dividends for 2001 and 2092 are given below: 2001 2002 Profits : P40,000 —P50,000 Dividends 30,000 30,000 Requirement: Prepare the journal entries in Park’s books in 2001 and 2002, including the reclassification from held for trading securities to investment in associate. (Adapted) Share in losses of associate 14. Which of the following may not be included in the interest in associate when determining the threshold for recognizing share in losses of associate? a. investment in preference shares of associate b. long-term, unsecured, advances to the associate ¢. trade receivables from the associate d. investment in associate 15. After the investor's interest in the associate is reduced to zero, | additional losses are recognized only to the extent that the investor has incurred a. legal or constructive obligations. b. made payments on behalf of the associate. c. aorb d. further losses are not recognized 16. ABC Co,’s investment in associate has a carrying amount of 80,000 on January 1, 20x1. The investment represents 20% interest in the associate. In addition, ABC Co. has made advances to the associate amounting to P20,000, the settlement of which is neither planned nor likely to occur in the Scanned with CamScannerInvestment in Associates 47 foreseeable future. In 20x1, the associate reported loss of 600,000. Requirement: How much is the share in the associate’s loss? PROBLEM 3: EXERCISES 1. On July 1, 2002, Mountain Systems acquired 8,000 shares of Precision Services’ 40,000 outstanding common shares at a cost of P240,000. The book value and fair market value of Precision's net assets on that date was P880,000. The following data pertain to Precision Services for 2002. Net income reported in 2002: January 1-June 30 P28,000 July 1 - December 31 36,000 Total P64,000 Cash dividends declared and paid: January 1 - June 30 30,000 July 1- December 31 30,000 Total 260,000 Requirements: a. Prepare all the necessary entries in Mountain's books for 2002. b. Compute the goodwill (if any) on the purchase. 2 On January 1, 2009, Boss Co. acquired 40,000 out of the 100,000 outstanding ordinary shares of Digitech Co. for P1,450,000. The acquisition resulted to goodwill of P115,000. Differences in book values and fair values of assets and liabilities of Digitech as of acquisition date are shown below. Item Carrying amt. Fair value Remaining useful life Building 1,800,000 2,000,000 10 years Equipment 800,000 425,000 5 years ‘Loans payable 1,150,000 1,900,000 3 years to maturity Scanned with CamScannerLm 48 Chapter 14 During 2009, Digitech earned profit of P100,000. The amortization of the difference in the fair value and carrying amount of the loans payable is P200,000 and 250,000 in 2009 and 2010, respectively, Requirements: 7 a. How much is the carrying amount of the net assets of Digitech “on January 1, 2009? b. How much is the total income (loss) from the investment to in 2009? ¢. If the recoverable amount of the investment on December 31, 2010 is P1,270,000, what is the entry to recognize the impairment loss? 3. On July 1, 2009, Les Co. acquired 50,000 newly issued shares of Claypool Co. at P10 per share. Before the acquisition, Claypool had 100,000 ordinary shares outstanding. In 2009, “Claypool reported profit of P5,000,000, 2,000,000 of which was earned during the first half of 2009. Claypool paid 9% annual cash dividends in 2009. Requirements: a. How much is Les Co.’s investment income in 2009? b. How much is the balance of the investment in associate account on December 31, 2009? c. Provide the journal entries in 2009. 4, On January 1, 2009, Steve Co. acquired 20,000 shares out of the 100,000 outstanding shares of Bailey Co. for a total cost of 200,000. During the year, Bailey reported profit of 1,000,000 and declared P200,000 cash dividends. If Steve Co. incorrectly accounted for the investment at cost (and recognized dividends as revenue) rather than equity method, what is the correcting entry to be made in 2010? Scanned with CamScannervestments in Associates 49 5, On January 1, 2002, Gardner Associates purchased 30 percent of the outstanding shares of stock of Gillen Corp. for P150,000 cash. The investment will be accounted for by the equity method. On that date, Gillen’s net assets (book and fair value) were P300,000. Gardner has determined that the excess of the cost of its investment in Gillen over its share of Gillen’s net assets is attributable to equipment with remaining useful life of 40 years. Gillen's net income for the year ended December 31, 2002, was 60,000. During 2002, Gardner received P5,000 cash dividends from Gillen. There were no other transactions between the two companies. ; Requirement: Compute the amount that would be reported on Gardner Associates’ books for the investment in Gillen Corp. at December 31, 2002. (Adapted) 6. ABC Co, owns 40% of XYZ, Inc.’s ordinary shares. On July 1, 20x2, ABC Co. sold three-fourths of its investment for 1,000,000. The adjusted balances of the related accounts immediately before the sale are as follows: * Investment in associate 1,200,000 * Cumulative share in associate's exchange differences on translation of a foreign operation 500,000 Cr The Temaining ownership of 10% (1/4 of 40%) still gives ABC significant influence over XYZ. : Requirement: Provide the journal entries on July 1, 20x2. Scanned with CamScanner50 Chapter 14 PROBLEM 4: CLASSROOM ACTIVITY INSTRUCTIONS: 1) Close your eyes and imagine you are an accountant. 2) Take five (5) deep breaths — breathe in and breathe out slowly, 3) Open your eyes and solve the problem below. ABC Co., your company, has an investment in Philippine Seven Corporation (7 Eleven) common stocks. Information on the investment follows: No. of common stocks _Carrying amount Jan.1,2012 °° * 69,328,593 P379,592,676 Share dividends 10,399,289 Dec. 31, 2012 79,727,882 Excerpts from Philippine Seven Corporation’s December 31, 2012 audited financial statements are as follows: ° Statement of financial position Noncurrent Liabilities r Deposits payable (Note 14) 181,901,238 Net retirement obligations (Note 24) 61,120,420 Cumulative redeemable preferred shares (Note 15) 6,000,000 Deferred revenue - net of current portion (Note 16) 2,643,179 Total Noncurrent Liabilities 251,664,837 Total Liabilities * 2,637,758,138| Equity ‘Common stock (Notes 17 and'31)~ #1 par value Authorized - 600,000,000 and 400,000,000 shares as of December 31, 2012 and 2011, respectively Issued - 399,325,661 and 347,329,216 shares as of December 31, 2012 and 2011, respectively {held by 656 and 666 equity holders in 2012 ; and 2011, respectively (Note 1)] 399,325,664 Additional paid-in capital (Note 31) t 293,525,0% Retained earnings (Notes 17 and 31) 1,233,432,9 Revaluation increment on land [net of deferred income tax liability {Notes 8 and 27)] _3,2293895 7 7,929,513,5% Cost of 686,250 shares held in treasury (Note 17) ___ 2902 Total Equity 19 TOTAL LIABILITIES AND EQUITY. P4 ‘See accompanying Notes to Consolidated Financial Statements. Scanned with CamScanneryr nvestments in Associates statement of comprehensive income —— INCOME BEFORE INCOME TAX 674,647,532 PROVISION FOR INCOME TAX (Note 27) 210,022,001 NET INCOME 464,625,531 QTHERCOMPREHENSIVEINCOME = | TOTAL COMPREHENSIVE INCOME 464,625,531 BASIC/DILUTED EARNINGS PER SHARE (Note 28; PLAT ‘Jee accompanying Notes to Consolidated Financlal Statements, Statement of changes in equity CN ARR aon) saan pas aoa oO) ‘TUE NAEIEADI0 JOSY SIONYTVE WTC 283930 JO SY STONTTVE “oman IE EN a ey Sew isa Issa isto : cease cat) sects setae aces unite sire Scanned with CamScanner52 Chapter 14 Notes [z ‘Summary of Significant Accounting Policies and Financial Reporting Practices Cumulative Redeemable Preferred Shares Cumulative redeemable preferted shares that exhibit characteristics of a liability is recognized as 4 financial liability in the consolidated balance sheet, net of transaction cost. The corresponding dividends on those shares are charged as interest expense in profit or loss. Equity Common Stock Common stock is measured at par value for all shares issued and outstanding. |dditiorial Paid-ini Capital When the shares are sold at premium, the difference between the proceeds and the par value is credited to the “Additional paid-in capital” account. When shares are issued for a consideration lother than cash, the proceeds are measured by the fair value of the consideration received. In case| the shares are issued to extinguisti or settle the liability. of the Group, the shares shall be measured| either at the fait value of the shares issued or fair value of the liability settled, whichever is more| refiably-determinable, [Retained Earnings . Retained earnings represent the cumulative balance of periodic net income or loss and'changes in accounting policy. When the retained eamings account his a debit balaiice, it's called “deficit.” A deficit is not an asset but a dechiction from equity. Treasury Stock Treasury stock.is stated at acquisition cost and is deducted from equity, ‘No gain or loss is recognized in profit or loss-6i the purchase, sale, issuance of cancellation ‘of the Group’s own} lequity instruments. Scanned with CamScanner5. Cumulative Redeemable Preferred Shares Cumulative redeemable preferred shares, which are redeemable at the option of the holder, represent the share of PSC-ERP through its trustee, BPI-AMTG, in SSHI's net assets pertaining to fered shares. PSC-ERP is entitled to an annual “Guaranteed Preferred Dividend” in the earings of SSHI starting April 5, 2002, the date when the 25% of the subscription on preferred shares have been paid, in accordance with the Corporation Code. ‘The guaranteed annual divylends shall be calculated and paid in accordance with the Sharcholder's Agreement dated November 16, 2000 which provides that the dividend shall be determined by the BOD of SSHI using the prevailing market conditions and other relevant factors. Further, the preferred shareholder shall not participate in the eamings of SSHI except to the extent of guaranteed dividends and whatever is left of the retained earnings will be declared as dividends in favor of common shareholders, Guaranteed preferred dividends included under “Interest expense” in the consolidated statements of comprehensive income amounted to P258,750, 327,000 and P364,920 in 2012, 2011 and 2010, respectively (see Note 21). Interest payable included as part of “Others” under “Other current liabilities” in the consolidated balance sheets amounted to P348,750 and P327,000 as of December 31, 2012 and 2011, respectively. 17, Equity Common Stock ; ‘The Group was listed with the Philippine Stock Exchange on February 4, 1998 with total listed shares of 71,382,000 common shares consisting of 47,000,000 shares for public offering and 24,382,000 shares for private placement. ‘The Parent Company offered the share at a price of 4.40, As of December 31, 2012 and 2011, the Company has a total of 656 and 666 sharcholders on record, Movements in the number of shares are as follows: + 2012 2011 2010 Beginning balance 347329,216 302,114,918 287,761,172 Issuance of stock dividends (Note28) 51,996,445 __ 45,214,298 14,353,746 Ending balance 399,325,661 347,329,216 _- 302,114,918 On July 24, 2012, the BOD and at least 2/3 of the Company's stockholders approved the increase of the Company's “authorized common ‘stock. from. ®400,000,000, divided into 400,000,000 common shares. vith par value of #1 per share, to 600,000,000, divided ‘into -600,000,000 ‘Common shares with a par value of P per share. The Philippine SEC approved the Company's application for the increase in its authorized capital Stock on October 19; 2012, . Scanned with CamScanner