UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 15 – PAS 28: INVESTMENT IN ASSOCIATES EDMUND E. HILARIO, CPA, MBA
FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
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A. Definition of terms
Associate – is simply defined as an entity over which
the investor has significant influence.
Significance influence – is the power to participate in
the financial and operating policy decisions of the
investee but not control over those policies. The
assessment of significant influence is a matter of
judgment.
However, PAS 28, paragraph 5, provides guidance in
the assessment of significant influence “if the investor
holds, directly or indirectly through subsidiaries, 20%
or more of the voting powers of the investee, it is
presumed that the investor has significant influence”
unless it can be clearly demonstrated that this is not
the case.
Conversely, 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. A  Inventory – if the excess is attributable to
substantial or majority ownership by another investor
does not necessarily preclude an investor from having
significant influence.
Beyond the mere 20% threshold of ownership, the
existence of significant influence by an investor is
evidenced by any one or more of the following
factors:
 Representation in the board of directors
 Participation in policy making process
 Material transactions between the investor & the
investee
 Interchange of managerial personnel
 Provision of essential technical information
 Existence of convertible debt or equity
instrument of which if exercised or converted,
will give rise to additional voting power
B. Measurement of investment in associates
The investment in associate is measured using the
equity method of accounting. The equity method is
based on the economic relationship between the
investor and the investee. The investor and the
investee are viewed as a single economic unit. The
investor and the investee are one and the same. The
equity method is applicable when the investor has a
significant influence.
C. Accounting procedures – Equity method
1) The investment is initially recognized at cost
2) The carrying amount is increased by the
investor’s share of the profit of the investee and
decreased by the investor’s share of the loss of
the investee. The investor’s share of the profit
or loss of the investee is recognized as
investment income.
3) Dividend received from an equity investee reduce
the carrying amount of the investment.
4) Note that the investment must be in ordinary
shares. If the investment is preference shares,
the equity method is not appropriate regardless
of the percentage because the preference share
is a non-voting equity.
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5) 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 shares
should be appropriately described as investment
in associate.
6) The investment in associate accounted for using
the equity method shall be reported as
noncurrent asset.
D. Excess of cost over carrying amount
If the investor pays more than the book value of the
net asset acquired, the difference is commonly
known as “excess of cost over carrying amount”.
This excess may be attributed to the following:
† Undervaluation of the investee’s assets such as:
 Building, - if the excess is attributable to
undervaluation of building, it is amortized
over the remaining life of the asset
 Land – if the excess is attributable to
undervaluation of land, it is not amortized
because the land is non-depreciable
inventory, the amount is expensed when the
inventory is already sold.
† Goodwill – 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.
E. Excess of Fair value over cost
PAS 28 paragraphs 32, provides that any excess of
the investor’s share of the net fair value of the
associate’s identifiable asset & liabilities over the cost
of the investment is included as income in the
determination of the investor’s share of the
associate’s profit or loss in the period in which
the investment is acquired.
Computation of investment income
Share in NI xx
Add/Deduct:
Amortization of excess – Equipment (xx)
Amortization of excess – Inventory (xx)
Excess net fair value xx xx
Net investment income xx
F. Impairment loss
PAS 28 in conjunction with PAS 36 requires that an
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 The value in use of an
Investment in Associate is the investor’s share in
either of the following:
 PV of estimated future cash flows expected
to be generated by the investee, including
cash flows from operations of the investee &
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 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 15 – PAS 28: INVESTMENT IN ASSOCIATES EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING
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the proceeds on the ultimate disposal of the
investment.
 PV of the estimated future cash flows
expected to arise from dividends to be
received from the investment and from its
ultimate disposal
Note: Any resulting impairment loss for the
investment is allocated first to any remaining
goodwill.
G. Investee with noncumulative preference share
 Cumulative – when an associate has outstanding
cumulative preference share, the investor shall
compute its share of earning or losses after
deducting the preference dividends, whether or
not such dividends are declared.
 Non-cumulative - when an associate has
outstanding non-cumulative preference share,
the investor shall compute its share of earning
after deducting the preference dividends, only
when such dividends are declared.
H. Discontinuance of equity method
PAS 28, paragraph 22, provides than an investor
shall discontinue to 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 follows:
1) Financial assets at fair value through profit or
loss. PAS 28 paragraph 18 as amended, also
provides that (on the date the significant
influence is lost,) the investor shall measure
any retained investments in associate at fair
value. The difference between the carrying
amount of the investment (at the date the
significant influence is loss) 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.
2) Financial assets at fair value through other
comprehensive income.
3) Nonmarketable investment at cost or investment
in unquoted equity instrument.
PAS 28 paragraph 18, provides that an investor shall
discontinue the use of the equity method only from
the date that it cease to have significant influence
over an associate and shall account for the
investment as AFS or Non-marketable equity
security.
1St SEMESTER 2019 – 2020
ceases to be an associate shall be regarded as the
fair value on initial recognition as a financial asset
The difference between the carrying amounts of the
retained investment at the date the significant
influence is lost, and the fair value of the retained
investment shall be included in profit or loss. Of
course, the difference between the net proceeds from
disposal of part of the investment and the carrying
amount of the investment sold is recognized as gain
or loss on disposal of investment.
J. Equity method not applicable
PAS 28, paragraph 17, provides that an 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 all of
the following apply:
1) The investor is a wholly-owned subsidiary or a
partially owned subsidiary of another entity and
the other owners do not object to the investor
not applying the equity method.
2) The investor’s debt and equity instruments are
not traded in a public market or “over the
counter” market
3) The investor’s did not file or is is not in the
process of filing financial statements with SEC for
the purpose of issuing any class of instruments in
a public market
4) The ultimate or any intermediate parent of the
investor produces consolidated financial
statements available for public use that comply
with PFRS.
In those circumstances, the investment is accounted
for as follows:
1) Financial assets at fair value through profit or
loss (trading security - @ Fair Value)
2) Financial assets at fair value through other
comprehensive income (Available for sale
security - @ Fair Value)
3) Non-marketable investment at cost (or
investment in unquoted equity instrument - @
Cost)

PAS 28, Basic for Conclusion 18, requires an investor

that continues to have significant influence over an
associate to apply the equity method even if the
associate is operating under severe long-term
restrictions that significantly impair the ability to
transfer funds to the investor. Significantly influence
must be lost before the equity method ceases to be
applicable.

I. Measurement of after loss of significant influence

PAS 28, paragraph 22, provides that on the date the
significant influence is lost, the investor shall
measure any retained investment in associate at fair
value. The fair value of the investment at the date it

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