Investment in Associate

By: Dr. Angeles A. De Guzman

Dean, College of Business Education
 Intercorporate share Investment
• The purchase of the equity securities of one entity by
another entity
• Acquired simply as a means of accruing regular income
in the form of dividend and investment appreciation
• These investment do not give the investor entity an
ability to influence or control the operations of the
investee entity or in certain circumstances, an entity
may purchase enough shares of another entity in order
to exert significant influence or control over the
financial and operating policies of the investee entity
 Definitions
• Significance influence is the power to participate in the
financial and operating policy decisions of the investee
but not control or joint control over those policies
• Control is the power to govern the financial and
operating policies of an entity so as to obtain benefits
from its activities
• Associate is simply defined as an entity over which the
investor has significant influence
• Subsidiary is simply defined as an entity that is
controlled by another entity
 Significant Influence
• Assessment of significant influence is a matter of judgment
• If the investor holds, directly or indirectly through
subsidiaries, 20% or more of the voting power of the
investee, it is presumed that the investor has significant
influence, unless it can be clearly demonstrated that this is
not the case
• If the investor holds, directly or indirectly through
subsidiaries less than 20% of the voting power of the
investee, it is presumed that the investor does not have
significant influence, unless such influence can be clearly
demonstrated
 Evidential Factors Beyond the mere 20%
threshold of ownership
• Representation in the board of directors
• Participation in policy making process
• Material transactions between the investor
and the investee
• Interchange of managerial personnel
• Provision of essential technical information
 Potential voting rights
• An entity may own share warrants, debt or
equity instruments that are convertible into
ordinary shares that have the potential if
exercised or converted, to give the entity
additional voting power.
• PAS 28, paragraph 7, provides that the
existence of such potential voting rights is
considered in assessing whether an entity has
significant influence
 Loss of significant Influence
• An entity loses significant influence over an
investee when it loses the power to participate
in the financial and operating policy decision of
the investee.
• The loss of significant influence can occur with
or without change in the absolute or relative
ownership interest
• The loss of significant influence could also occur
as a result of a contractual agreement
 Equity Method
• The equity method is based on the economic
relationship between the investor and the investee
• The equity method is applicable when the investor
has significance influence over the investee
• The investment (only in ordinary shares)is initially
recorded at cost but it is subsequently increased by
the net income of the investee and decreased by the
net loss and dividend payments of the investee
 Equity Method
• If the investor has significant influence but not
control over the investee, the investee is said to
be an associate
• The investment in associate accounted for using
the equity method shall be classified as
noncurrent asset
• If the investor has control over the investee, the
investor is known as the parent and the
investee is known as the subsidiary
 Excess of cost over carrying amount

• If the investor pays more than the carrying

amount of the net assets acquired, the
difference is commonly known as “excess of
cost over carrying amount” and may be
attributed to the following
– Undervaluation of the investee’s assets, such as
building, land, inventory
– Goodwill
 Excess of cost over carrying amount
• If the assets of the investee are fairly valued, the excess of cost
over carrying amount of the underlying net assets to goodwill
• If the excess is attributable to undervaluation of depreciable asset,
it is amortized over the remaining life of the depreciable asset
• If the excess is attributable to undervaluation of land, it is not
amortized because the land is nondepreciable
• If the excess is attributable to inventory, the amount is expensed
when the inventory is already sol
• If the excess is attributable to goodwill, it is not amortized but the
entire investment in associate is tested for impairment at the end
of each reporting period.
 Investee with Heavy Losses
• PAS 28, paragraph 38; provides that if an investor’s
share of losses of an associate equals or exceeds
the carrying amount of an investment, the investor
discontinues recognizing its share of further losses
• The investment is reported at nil or zero value
• If the associate subsequently reports income, the
investor resumes including its share of such income
after its share of the income equals the share of
losses not recognized
 Impairment Loss
• Impairment loss shall be recognized whenever the carrying amount
of the investment in associate exceeds its recoverable amount
• The recoverable amount is measured as the higher between fair
value less cost to sell and value in use
• Fair value less cost to sell is the amount obtainable from the sale of
the asset in an arm’s length transaction between knowledgeable
willing parties less disposal cost
• Value in use is the present value of the estimated future cash flows
expected to arise from the continuing use of an asset and from its
ultimate disposal
• Any resulting impairment loss for the investment is allocated first
to any remaining goodwill
Investee with Cumulative Preference Shares

• When an associate has outstanding cumulative

preference shares, the investor shall compute its
share of earnings or losses after deducting the
preference dividends, whether or not such
dividends are declared
• When an associate has outstanding noncumulative
preference shares, the investor shall compute its
share of earnings after deducting the preference
dividends only when declared
 Other Changes in Equity
• Adjustments to the carrying amount of the investment
in associate may be necessary for changes in the
investor’s proportionate interest in the investee arising
from changes in the investee’s equity that have not
been recognized in the investee’s profit or loss
• Such changes include those arising from revaluation of
PPE and from foreign exchange translation difference
• The investor’s share of those changes is recognized
directly in equity of the investor
 Adjustment of investee’s operations
• The most recent available financial statements of the
associate are used by the investor in applying the equity
method
• If an associate use accounting policies other than those of
the investor, adjustments shall be made to conform the
associate’s accounting policies to those of the investor
• Profits and losses resulting from upstream and downstream
transaction between an investor and an associate are
recognized in the investor’s financial statements only to the
extent of the unrelated invetors’ interests in the associate
 Upstream Transactions
• Upstream transactions are sales of assets from
an associate to the investor
• The unrealized profit from these transactions
must be eliminated in determining the
investor’s share in the profit or loss of the
associate
 Downstream Transactions
• Downstream transactions are sales of assets
from the investors to an associate
• The unrealized profit must be eliminated in
determining the investor’s share in the profit or
loss of the associate
• The investor’s share in the profit of the
associate is adjusted even if the profit is made
by the investor and the profit of the associate is
unaffected by the transaction
 Discontinuance of Equity Method –Change
from Equity
• Investor shall discontinue the use of the equity
method from the date that is ceases to have
significant influence over an associate
• Consequently, the investor shall account for
the investment as financial asset at fair value
through profit or loss, or financial asset at fair
value through other comprehensive income or
nonmarketable investment
 Measurement after loss of significant
influence
• PAS 28, provides than on the date the significant
influence is lost, the investor shall measure any
retained investment in associate at fair value
• The difference between the carrying amount of
the investment at the date the significant
influence is lost, and the fair value of the
retained investment plus any proceeds received
from disposal of any part interest in the
associate, shall be included in profit or loss
Other comprehensive Income of Associate
• PAS 28, provides that if an investor loses significant
influence, the investor shall account for all amounts
recognized in other comprehensive income by the
associate on the same basis as would be required if the
associate had directly disposed of the related assets
• If gain or loss previously recognized in other
comprehensive income by the associate would be
reclassified to profit or loss upon disposal of the related
assets, the investor shall reclassify such gain or loss to
profit or loss when the investor loses significant influence
over the associate
 Equity Method not Applicable
• Investment in associate shall not be accounted for using the equity
method if the investor is a parent that is exempt from preparing
consolidated financial statements or if all of the following apply:
– The investor is a wholly-owned subsidiary, or a partially owned subsidiary of
another entity and its other owners do not object to the investor not
applying the equity method
– The investor’s debt and equity instruments are not traded in a public market,
meaning stock exchange or over the counter market
– The investor did not file or it is not in the process of filing its financial
statements with the SEC for the purpose of issuing any class of instruments
in a public market
– The ultimate or any intermediate parent of the investor produces
consolidated financial statements available for public use that comply with
PFRS
 Investment of less than 20%
• The investment is accounted for as financial asset measured
at fair value through profit or loss or financial asset at fair
value through other comprehensive income or
nonmarketable investment
• The cost method is a method of accounting for an investment
whereby the investment is literally measured at cost
• The cost method is usually applied with respect to investment
in unqouted equity instrument or nonmarketable equity
security
• Dividends received by the investor from the investee are
accounted for as dividend income
 Dividend from preacquisition retained
earnings
• There is no distinction between preacquisition
dividends and post acquisition dividends
• Dividends received from an investee are
recognized as dividend income, regardless of
whether the dividends originated from
preacquistion retained earnings or
postacquisition retained earnings.
 Change from cost or fair value to equity
method
• An investor may acquire an ownership interest
in an investee on a certain date but the
investee may not be classified as an associate
until a later date
• If subsequent acquisitions increase the
ownership interest to 20% or more, a change
must be made to the equity method
Investment in Associate achieved in Stages
• The investment in associate achieved in stages is not covered by PAS
28. The principles for business combinations achieved in stages
should be applied
• PFRS 3, business combination achieved in stages, the acquirer shall
remeasure the previously held equity interest at fair value and
recognize the resulting gain or loss in profit or loss.
• The investor shall remeasure the previously held interest in an
investee using the equity method.
• The remeasured equity amount is considered the fair value of the
investment in associate
• The difference between the remeasured equity amount and the
carrying amount of the investment shall be recognized in profit or loss