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Lesson 10 - Investment in Associate

PAS 28 outlines the accounting for investments in associates using the equity method, which requires recognizing the investment at cost and adjusting it for the investor's share of the investee's net assets. Significant influence is defined as the ability to participate in financial and operating policy decisions, typically indicated by a 20% or more voting power. The document also details the accounting procedures for the equity method, the treatment of excess costs, and the cessation of significant influence.

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5 views

Lesson 10 - Investment in Associate

PAS 28 outlines the accounting for investments in associates using the equity method, which requires recognizing the investment at cost and adjusting it for the investor's share of the investee's net assets. Significant influence is defined as the ability to participate in financial and operating policy decisions, typically indicated by a 20% or more voting power. The document also details the accounting procedures for the equity method, the treatment of excess costs, and the cessation of significant influence.

Uploaded by

ellenpanganiban6498
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Investment in Associate

and Joint Venture


PAS 28
• PAS 28 prescribes the accounting for investment in
associates and sets out the requirements of application
of equity method when accounting for investments in
associates
Technical Knowledge
• To define an associate
• To know the meaning of significant influence
• To identify the factors that indicate significant influence
• To understand the equity method of accounting for
share investment
• To identify the circumstances when an investment in
associate is not accounted for under the equity method
Definition of Terms
ASSOCIATE – an entity, including an unincorporated entity
such as a partnership, over which an investor has significant
influence.
SIGNIFICATNT INFLUENCE – It 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. A
holding of 20% or more of the voting power (directly or
indirectly) will indicate significant influence unless it can be
clearly demonstrated otherwise. If the holding is less than
20%, the investor will be presumed not to have significant
influence unless such influence can be clearly demonstrated.
The existence of significant influence by an investor is
usually evidenced in one or more of the following ways:
1. Representation on the board of directors or equivalent
governing body of the investee
2. Participation in the policy-making process
3. Material transactions between the investor and the
investee
4. Interchange of managerial personnel
5. Provision of essential technical information
Accounting for Investment in
Associates
• In its consolidated financial statements, an investor
should use the equity method of accounting for
investments in associates,
Equity Method
• Is a method of accounting whereby the investment is
initially recognized at cost and adjusted thereafter for
the post acquisition change in the investor’s share of
net assets of the investee.
• The profit or loss of the investor includes the investor's
share of the profit or loss of the investee
Accounting Procedures for Equity
Method
• The investment is initially recognized at cost
• The carrying amount is increased by the investor’s
share of the profit of the investee and decreased by the
investor’s share of loss of the investee
• Dividends received from an equity investee reduce the
carrying amount of the investment
• Note that the investment must be in ordinary share
If the investment is in preferencece shares, the equity method
is not appropriate regardless of the percentage because the
preference share is nonvoting equity
• Technically, if the investor has significant influence over
the investee, the investee is said to be an associate

Accordingly, under the equity method, the investment in


ordinary share should be appropriately described as
investment in associate
The investment in associate account for using the equity
method shall be reported as non current asset
Excess of cost over carrying amount
• An accounting problem arises if the investor pays more or less for
an investment than the carrying amount of underlying net assets
• If the investor payment 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:
1. Undervaluation of investee’s assets such as building, land, and
inventory
2. Goodwill

If the assets of the investee are fairly valued, the excess of


cost over carrying amount of the underlying net assets is
attributable to goodwill
Excess of fair value over cost
• PAS 28, paragraph 32, provides that any excess of the
investor’s share of net fair value of the associate’s
identifiable assets and liabilities over the cost of the
investment is included as income in the determination
of the investor’s share of the associates profit or loss in
the period in which the investment is acquired.
Loss of Significant Influence
Use of the equity method should cease from the date that
significant influence ceases.
1. Loss of significant influence due to sale of investments.
• The difference between the selling price and carrying amount of the investment
sold shall be recognized in profit or loss.
• The remaining balance of investment not sold is accounted for under PFRS 9 and
recorded at fair value at the time significant influence ceases.
• The difference between fair value and carrying amount of remaining investment is
recognized in Profit or loss or other comprehensive income.
2. Loss of significant influence due to increase or additional
purchase of interest.
• If the investor interest increases to more than 50%, the investor has control over
the associate. In this case the investor shall use PFR 3 business combination.
• The difference between the fair value and the carrying amount of the previously
held investment shall be recognized in profit or loss
THANK
YOU

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