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FINANCIAL ACCOUNTING AND REPORTING


INVESTMENTS IN ASSOCIATES
Key Definitions

Associate- Is an entity, including an unincorporated entity such as a partnership, over which the
investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.

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.

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 investors 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.
Identification of Associates
A holding of 20% or more of the voting power (directly or through subsidiaries) 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:
a)
b)
c)
d)
e)

Representation on the board of directors or equivalent governing body of the investee;


Participation in the policy-making process;
Material transactions between the investor and the investee;
Interchange of managerial personnel; or
Provision of essential technical information.

Accounting for Associates


In its consolidated financial statements, an investor should use the equity method of
accounting for investments in associates, unless:
a. An investment in an associate that is acquired and held exclusively with a view to its disposal
within 12 months from acquisition should be accounted for as held for trading under PFRS 9
(FVPL).
b. A parent that is exempted from preparing consolidated financial statements by PAS 27 may
prepare separate financial statements as its primary financial statements. Use cost method or
PFRS 9.
c. An investor need not use the equity method if all of the following four conditions are met:
1. The investor is itself a wholly owned subsidiary, or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise entitled to vote, have
been informed about, and do not object to, the investor not applying the equity method;
2. The investor's debt or equity instruments are not traded in a public market;
3. The investor did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of issuing any class
of instruments in a public market; and
4. The ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with PFRS.
Applying the Equity Method of Accounting

1. Basic principle The equity investment is initially recorded at cost and is subsequently
adjusted to reflect the investor's share of the net profit or loss of the associate.
2. Distributions and other adjustments to carrying amount - Distributions received from the
investee reduce the carrying amount of the investment. Adjustments to the carrying amount may
also be required arising from OTHER changes in the investee's equity (revaluation surplus and
translation gains and losses.
3. An associate with outstanding preference shares
a. The investor computes its share of profits or losses after adjusting for the dividends on such

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shares, whether or not the dividends have been declared on cumulative preference
shares.
b. However if the preference shares is non-cumulative, adjustments for dividends are made
only if there is a declaration.
4. Implicit goodwill and fair value adjustments - On acquisition of the investment any difference
between the cost of the investment and the investors share of the net fair value of the
associates identifiable assets, liabilities and contingent liabilities is accounted for in accordance
with PFRS 3 Business Combinations. Therefore:
(a) Goodwill relating to an associate is included in the carrying amount of the investment.
However, amortization of that goodwill is not permitted and is therefore not included in the
determination of the investors share of the associates profits or losses.
(b) Any excess of the investors share of the net fair value of the associates identifiable assets,
liabilities and contingent liabilities over the cost of the investment
Is excluded from the carrying amount of the investment
Included as income in the determination of the investors share of the associates
profit or loss in the period in which the investment is acquired.
This is more commonly known as negative goodwill or the gain on bargain purchase
5. Appropriate adjustments to the investor's share of the profits or losses after acquisition are
made to account for additional depreciation of the associate's depreciable assets based on the
excess of their fair values over their carrying amounts at the time the investment was acquired.
This rule also applies to inventories since this will have an effect in the associates reported net
income.
6. Transactions with associates
Unrealized profits and losses resulting from upstream (associate to investor) and downstream
(investor to associate) transactions should be eliminated to the extent of the investor's interest
in the associate if the asset sold between the associate and investor has not yet been sold to
an unrelated party.
However, realized profits and losses shall be recognized once the asset is sold to an
unrelated party or if the asset is being consumed through depreciation.
7. Discontinuing the equity method - Use of the equity method should cease from the date that
significant influence ceases.
The difference between the selling price and carrying amount of the investment sold shall be
recognized in profit or loss.
The retained investment shall be accounted for under PFRS 9 and shall be remeasured to
fair value on the date significant influence ceases and recognized in profit or loss.
8. Application of the equity method achieved in stages
The previously held interest that was accounted for under the cost or fair value method shall
be remeasured to fair value on the date the investor gains significant influence.
The difference between the fair value and the carrying amount of the previously held
investment shall be recognized in profit or loss.
The total of the fair value of the previously held investment and the new acquisition cost shall
be regarded as the total cost of the investment classified as associate.
If the FVOCI was used to account for the previously held investment, any cumulative
unrealized gain or loss as OCI shall be reclassified to retained earnings.
9. Date of associate's financial statements
The investor should use the financial statements of the associate as of the same date as the
financial statements of the investor unless it is impracticable to do so.
If it impracticable, the most recent available financial statements of the associate should be
used, with adjustments made for the effects of any significant transactions or events occurring
between the accounting period ends.
However, the difference between the reporting date of the associate and that of the investor
cannot be longer than three months.
9. Losses in excess of investment
The investors share in the associates losses cannot exceed the interest in the associate
and shall discontinue the application of the equity method is this is the case.
After the investor's interest is reduced to zero, additional losses are recognized by a provision
(liability) only to the extent that the investor has incurred legal or constructive obligations or
made payments on behalf of the associate.

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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.
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