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15 Investment in Associates
15 Investment in Associates
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 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.
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) Representation on the board of directors or equivalent governing body of the investee;
b) Participation in the policy-making process;
c) Material transactions between the investor and the investee;
d) Interchange of managerial personnel; or
e) 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
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4. The ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with PFRS.
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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 investor’s 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.
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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