 Cash surrender value accumulates only on whole life insurance, not on a term

INTERMEDIATE ACCOUNTING 1 life insurance or non-life insurance policies.

 No special accounting is required on life insurance if the beneficiary is the key
Chapter 12: Other Long-Term Investments employee. Special accounting arises if the beneficiary is the entity as asset
needs to be recognized for the cash surrender value that accumulates on the
Other Long-Term Investments whole life insurance policy.
 Investments in funds set aside for specific and long-term purpose, and cash Accounting for Cash Surrender Value
surrender value. Initial Recognition Subsequent Recognition
 It is presented in the statement of financial position as “other long-term  Allocated over the required holding  Increases in cash surrender value
investments”. period necessary for it to accumulate. are treated as deduction from
 The composition and nature of the investment is disclosed in the notes.  The amount allocated to the current year the insurance expense
 The following are examples of other long-term investments: is recognized as a deduction from recognized during the period.
 Sinking Fund insurance expense.  Cash dividend received from the
 Preference Share Redemption Fund  The amount allocated to prior years is insurance is treated as deduction
 Asset Replacement Fund credited to retained earnings. from the insurance expense
 Expansion Fund  Classified as noncurrent investment. recognized during the period.
 Contingency Fund
 Insurance Fund When the insured key employee dies during the year, the increase in cash
 Cash Surrender Value surrender value is recognized up to the date of death.
The difference between the insurance proceeds received or receivable and the
Sinking Fund sum of cash surrender value and any unexpired portion of prepaid insurance is
 Fund set aside for the repayment of a long-term obligation. recognized as gain on settlement of life insurance.
 Establishment of sinking fund may be:
 Mandatory – when it results from a contractual requirement for the Chapter 14: Investment in Associates
protection of creditors.
Nature of
 Voluntary – when it results from a discretionary action of management. Type of Reporting
Relationship with Ownership Interest
Investment Period
Administration of Sinking Fund Investee
Investment
Administered by
Administered by a trustee measured at fair Regular investor Less than 20% PFRS 9
the entity
value
 The entity makes  Trustee makes all the investment decisions and
Investment in Significant 20% to 50%
all the decisions periodically reports to the entity through the Statement PAS 28
associate influence
over the fund. of Fund Balance.
 Entity records  Entity records any investment income when it receives Investment in PFRS 3 &
Control 51% to 100%
any investment the report from the trustee. subsidiary PFRS 10
income on the  Sinking fund is measured as a single asset, based on the Investment in Contractually agreed PFRS 11 &
Joint Control
fund as the statement of fund balance. joint venture sharing of control PAS 28
income is  The component of the fund is disclosed in the notes Significant Influence
earned. whenever disclosure is relevant to financial statement  The power to participate in the financial and operating policy decisions of the
users. investee but is not in control of those policies.
 Presumed to exist if the investor holds directly or indirectly (through
Cash Surrender Value subsidiaries), 20% or more of the voting power of the investee.
 Represents the amount of cash to be received from the insurance company in case  Significant influence can exist even if ownership is less than 20% under the
the life insurance is cancelled before the insured key employee dies. following:
o Representation on the BOD
 o Participation in policy-making process (including participation about - entity elects to measure the investment in FVPL
decisions on dividends)  Application of equity method is discontinued from the date it losses significant
o Material transaction between the investor and its investee influence:
o Interchange of managerial personnel o When it losses the power to participate in the financial and operating policy
o Provision of essential technical information decisions of the investee.
o Loss of significant influence can occur with or without a change in the
Voting Rights percentage of ownership:
 Only given to ordinary shares - when an associate becomes subject to the control of a govt, court,
 Preference shares do not have voting rights regardless of the percentage of administrator or regulator.
ownership - as a result of a contractual agreement.
Equity Method Loss of significant influence due to Accounting treatment
 Investments in associates are accounted using the equity method Decrease of ownership interest below 20% Financial assets at fair value
 Investment is initially measured at cost and subsequently adjusted for the (PFRS 9)
investor’s share in the investee’s changes in equity Increase of ownership above 50% Investment in subsidiary (PFRS 3;
PFRS 10)
Effect on investment in Effect on investment
Share in associate’s
associate income Reclassification of Cumulative Other Comprehensive Income, Profit or Loss,
Increase for share in and Amortized Cost
Increase for share in profit;
Profit or loss profit; decrease for share  When equity method is discontinued:
decrease for share in loss
in loss
1. Amounts previously recognized in Other Comprehensive Income
Dividends Decrease No effect
 Reclassified to profit or loss as reclassification adjustment (e.g. foreign
No effect; the share in
Other Comprehensive Increase for share in gain; exchange differences from translating foreign operations)
OCI is included in the
Income (OCI) decrease for share in loss  Transferred directly to retained earnings (e.g. revaluation surplus)
investor’s OCI
2. If ownership is reduced but significant influence is maintained
 Application of equity method starts from the date significant influence is obtained  Only proportionate amount of the other comprehensive income relating to
over an investee the reduction of interest is reclassified to profit or loss.
 On the acquisition: Acquisition cost less the investor’s share in the investee’s net  When the significant influence is achieved from additional purchase of shares
identifiable assets is accounted for as follows: resulting to an increase in ownership interest, equity method should be applied.
 If acquisition cost < fair value of the interest acquired = included as income 1. Change from FVPL to equity method
(negative goodwill) in determining the investor’s share in the investee’s 2. Change from FVOCI to equity method
profit or loss in the period of acquisition. 3. Change from amortized cost to equity method
 If acquisition cost > fair value of the interest acquired = goodwill
 Equity method is not applicable in: Potential Voting Rights
o Investment is classified as held for sale  In assessing significant influence:
o Investor is a parent and exempted from presenting consolidated FS o Currently exercisable voting rights or convertible share are assumed to have
o Investor is a subsidiary whose parent allows it not to apply the equity method been exercised or converted even if investor does not intend to actually
o Investor’s securities are not traded in a public market nor the investor is in the exercise or convert them.
process of enlisting its securities in the stock market o If after considering the voting rights, interest increases to 20% or more, equity
o Investor’s parent produces consolidated financial statements method shall be applied.
o Investment is held by entity that is a;  In computing the investor’s share in the investee’s profit or loss, the present % of
- venture capital organization ownership (i.e, excluding potential voting rights) is used.
- a mutual fund (incl, insurance funds)
 Potential voting rights or convertible shares are considered only when assessing
significant influence.
 Potential voting rights include:
o Share warrants
o Share call options
o Debt or equity instruments that are convertible into ordinary shares
 Potential voting right that are not currently exercisable are ignored in assessing
existence of significant influence.

Cumulative Preference Shares

Preference share is Preference share is non- Preference share is
cumulative cumulative redeemable
Deduct one year Deduct dividends only Do not deduct dividend
dividend, whether when declared before when computing for the
declared or not, before computing the share in share in the investee’s
computing the share in the investee’s P/L P/L
the investee’s P/L

Relationship Between the Investment in Associate and the Associate’s Equity

 The carrying amount of the investment in associate will approximate the
investor’s interest in the associate’s residual equity in the long run.

Intercompany Transactions
1. Downstream transactions – from investors to associate (investee)
 Gain is eliminated up to the extent of the investor's interest
 If carrying amount is reduced to below zero after gain is eliminated, excess
gain is recognized as deferred gain
2. Upstream transactions – from associate (investee) to investor

Share in Losses of an Associate

 The investor shares in the associate's losses only up to the amount of its interest
in the associate.
 Interest in the associate includes the following:

Impairment Losses

 Investment in associate is tested for impairment (PAS 36).

 Carrying amount vs investment's recoverable amount
Impairment loss XXX
Investment in associate XXX