Investment In Associate Associate ~ is an entity, including an un- significant influence and that is neither a subsi orporated entity such as a partnership, over which the investor has idiary nor an interest in a joint venture. Significant influence - isthe power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies, Below are the features of the definition: 1. Ic requires the investor to have the power, or the capacity, to affect the investee but does not require the investor © actually exercise that power. Instead, the focus is on the existence of the power or capacity {The specific power is that of being able to participate in the financial and operating decisions of the investee but hhas no power or capacity to dominate the financial and operating decisions. 3. In the definitions of an associate and significant influence, there is no requirement for the investor to hold any shares, or have a beneficial interest, in the associate, However, the application of the equity method of accounting is based on the investor owning shares in the associate. In other words, if significant influence is exercised by one entity over another by virtue of an association or contract other than from the holding of ‘shares, then the equity method cannot be applied in relation to the associate. 4. The level of influence is significant when the investor holds 20% up to 50% interest in the voting power of the investee it is presumed that the investor has significant influence over the investee. This is a rebuttable Presumption because if the investor can demonstrate that such influence does not exist, then the investee is not classified as an associate. Further, where the investor owns less than 20% of another entity, there is resumption that the investee is not an associate. ‘A: Measurement (Full Application of the Standards) Equity method — a method of accounting whereby the investment is initially recorded 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 adjusted for the effect of any fair value differences recognized on acquisition of the associate. Measure at point of acquisition + measured at historical cost. The cost represents the fair market value of the shares acquired or the consideration issued and any transaction costs incurred. Measure subsequent to acquisition — the cost and carrying value of the equity securities is increased or decreased to recognize the investor's share of the profit or loss of the investee after the date of acquisition. The investor's share of the profit or loss of the investee is recognized in the investor's profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustment to the carrying amount may also 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 known as other comprehensive income. Such changes include those arising from the revaluation of property. plant and equipment and intangible asset(s), unrealized gain or loss on equity investments, unrealized gain or loss on hedges and including remeasurement gain or loss on defined benefits, The carrying value ofthe investment is also affected by the recognition ofthe excess of the acquirer's interest in the net fair value of acquiree's identifiable assets iabilties and contingent liabilities over cost ater reassessing {he identification and measurement of the acquiree'sidemtitiable assets, liabilities and contingent liabilities The amount of excess is actually the negative goodwill. However, if there is the investment is higher than its recoverable amount, the amount of imy investment in associate account should be reported in the balance sheet paired such that the carrying amount of airment loss should be recognized, the at its recoverable amount. jions: The equity method of accounting is not applied to investments in associates classified as held for sale in ‘accordance with PFRS 5 “Non-current assets held for sale and discontinued operations”. An investor measures an associate that is classified as held for sale atthe lower of its carrying amount at the date of elassfieston ao teld for sale and fair valueless costo sell. Therefore, equity method ceases once an associate i clasifed as for sale.eof oss) From Investment During the holding period or when held ~ share in the investee’s reporied net profit or loss adjusted by the amount of any understatement or overstatement of expenses on the related assets and fiabilities of the Wester, impainnent of goodwill or any amount of negative goodwill. The “Ficome from Investment or Equity in Earnings of Associate” may be used to reflect the share on the earnings OF toys and the related adjustments When an associate has outstanding cumulative preference shares that are held by parties other than the investor and classified as equity. the investor computes its share of earnings ar losses after deducting the dividends on such shares, whether or not such dividends have been declared. For preference shares that are non-cumulative, the dividends are deducted only when there is declaration ‘The above discussion relates only to dividends that are classified as equity because, for those preference shares classified as debt. the payments to the holders are treated as interest and deducted before calculating, profit or loss for the petiod, For preference shares treated as equity. the payments to holders are classified as dividends and appropriated subsequent to the ealeulation of profit oF loss, Algo, in the calculation ofthe investor's share ofthe profit of the associat, adjustments must then be made to the recorded profit of the associate where that figure has been measured based on policies that are éifferent from those applied by the investor. 'b. Upon derecognition or disposal - the difference of the net disposal proceeds over the carrying value of the investment at the time of disposal is the measure of gain or loss om disposal of investment. Any other comprehensive income recognized by the investor in relation to the investment in associate must be recycled and included in the gain or loss on disposal measurement, C: Einancial instrument becoming an associate: ‘An entity should account for the step acquisition of an associate by applying either (Once selected, the investor ‘must apply the selected policy consistently): a Acost-ased approach, oF b. An IFRS 3 approach 1, Where a cost-based approae the determination of: (a) the cost ofthe investment; (b) whether or not any catch-up adjustment is required when frst applying equity accounting: and {€)_ the goodwill implicit inthe investment (or gain on bargain purchase) applied to accounting for a step acquisition of an associate, this involves In all approaches, cost is the sum of the consideration given for each tranche together wit aitributable costs. However, any directly 8 result ofthe answers to (a) and (b) the four approaches are as follows: Cost Based Catch-up eq} jty-aecounting Approach adjustment Determination of goodwillgain on bargain purchases Approach | None Difference between sum of consideration and share of fair value of net assets at date investment becomes an associate Approach 2 Nove Difference between the cost of each tranche and the share of fair value of net assets acquired in each tranche Approach 3. For profits (les dividends), Difference between the cos ofeach tranche and the share of fair and "changes in other value of net assets acquired in each tanche income (OCT) (less dividends), Difference between the cost ofeach tranche and the share of fair changes in OCI and changes value of net assets acquired in each tranche in fair value of net assets Approach 4 Catch-up adjustment ; ‘Approaches | and 2 do not recognize a ‘catch-up" equity-aecounting adjustment relating to the first tranche of the investment held by the investor. (On the other hand, Approaches 3 and 4 do recognize a “catch-up” equity-accounting adjustment relating to the first tranche of the investment held by the investor. This adjustment is recognized against the appropriate balance within equity ~ that is, retained earnings. or other equity reserve. To the extent that they are recognized, these will be reflected in other comprehensive income in the statement of comprehensive income, i ‘Approach | determines goodwill ina single calculation based on amounts atthe date the investment becomes an associate. (On the other hand, Approaches 2, 3 and 4 determine goodwill based on separate calculations at the date of acquisition of each tranche.‘The rationale for each of the four approaches eat follows: Sppcoach | Paragraph 23 of TAS 28 states that *An inveytment in an associate is acco the date on which it becomes an associate.” ted for using the equity method from Recognising any catch-up adjustments may be interpreted as form of equity accounting fora perk prior ‘gaining significant influence, which contradicts this principle of IAS 28 JAS 28 refers to the fact that an associate, ‘Therefore, cumulative adjustmen investor applies equity accounting to the investment once i for periods prior lo this event are not recognized, ition of the investment any difference between the Paragraph 23 of {AS 28 also goes on to state that “on ‘. Nei wale of the nswciate’s identifi assets and cost of the investment and the investor's share of the net fa liabilities is accounted for a8 follows (@) goodwill relating to an associate is included in the carying amount of the investment, Amortization of that goodwill isnot permitted. (b) any excess of the investor's share of the net fair vi lover the cost of the investment is included as i associate's profit or loss in the period in which the investment is acquired.” However, paragraph 23 of IAS 28 does not specify at which dates the fair values of the wet assets are to bs determined. It may be interpreted to mean only atthe date that the investment becomes an associate. Tis is also consistent with the approach in IFRS 3 whereby the underlying far values of net assets are only determined at fone time rather than determining them several times for indivklual transactions feading to the change in the ‘economic event. ; This approach avoids some of the practical difficulties encountered when applying, the other approaches. However, the drawback of this approach is that goodwill may absorb the effects of other events, because & portion of the cost is determined at adifferemt date to the fair value of the assets. Approach 2 No catch-up adjustment is recognized, similar tothe reasons noted in Approach 1. However, paragraph 23 of TAS 28 i interpreted 0 mean that the fair values of the associate's net assets are determined at a date that comesponds 10 the date at which consideration was given. Therefore, the fair valves are determined for each tranche, This may require the far value (o be determined for previous periods when no such exercise was performed at the date of the original purchase ties is baved on fair values at ‘The drawback of this approach is that the measurement of the assets and different dates. ; Approach 3 Fercheup adjustment is recognized to reflect the application of the equity method as described in paragraph 11 OF1AS 28 with respect to the first tranche, However, the application of that paragraph restricts the adjustment only to the share of profits and other comprehensive income relating to the first teanche. That is, there is 90 Catch-up adjustment made for changes inthe fair value of the net assets not recognized by the investee (except for any adjustments necessary to give effect to uniform accounting policies). ‘Similar to Approach 2, paragraph 23 of IAS 28 is interpreted to mean that the fair values of the associate's net assets are determined at a date that corresponds to the date at which consideration was given. Therefore, the fair ‘Values are determined for each tranche. This may require the ftir values to be determined for previous periods ‘when no such exercise was performed at the date ofthe original purchase. ‘The drawbacks of this approach are the same as Approach 2. ac ‘This approach is based on the underlying philosophy of equity according, which isto Westor's share of th undrying nel ants pha poodvl inherent athe purchase price. Theretec, where te evonen wat acquired in tranches a catch-up adjustment is necessary in order to apply equity accounting from the date the invesiment becomes an associate a8 required by paragraph 23 of IAS 28. The catch-up adjustment reflects not only the post-acquisition share of profits and other comprehensive income relating to the firs tranche, but also the share of the unrecognized fair value adjustments based on the fair values at the date of becoming an associate ‘Similar to Approach 2, paragraph 23 of IAS 28 is interpreted to mean thatthe fair values of the associate's net assets are determined ata date that corresponds tothe date at which consideration was piven. Therefore, the far ‘values are determined for each tranche. This may require the fair values 10 be determined for previous periods ‘when no such exercise was performed at the date of the original purchase,By including a catch-up adjustment for the post-acquisition changes in the fair values of the underiying net assets relating to the first tranche, this method overcomes the mixed-measurement drawback of Approach 2. 2. Applying an IFRS 3 approach Using an IFRS 3 approach, at the date that significant influence is obtained the previously held imerest ‘would be revalued to fair value and the resulting gain or loss recognized in profit or loss. D: tion — upon application of IAS 27 (2s amended in 2008) and IFRS 3 An investor shall discontinue the use of the equity method from the date when it ceases to have significant influence over an associate and shall account for the investment in accordance with PERS 9 from that date, provided the associate does not become a subsidiary oF 2 jointly controtied entity as defined in JAS 31. On loss Of significant influence, the investor shall measure at fair value any investment the investor retains in the former associate. The investor shall recognize in profit o¢ loss any difference between: a) the fair value of any retained investment and any proceeds from disposing of the part interest in the associate, and ») the carrying amount of the investment at the date when significant influence is fost. ‘Therefore upon loss of significant influence there is a remeasurement to fair value of any remaining imterest that is taken to profit or loss regardless of the prospective accounting designation under IFRS 9. Deemed Disposal ‘An investor's interest in an associate may be reduced other than by an actual disposal. Such a reduction in interest, which is commonly referred to as a ‘deemed disposal’ gives rise to a “dilution” gain or toss. Deemed disposal may arise for a number of reasons, including: a) the investor does not take up its Full allocation ina rights issue by the associate b) the associate declares scrip dividends which are not taken up by the investor so that its proportional interest is diminished ©) another party exercises its options or warrants issued by the associate: or ) the associate issues shares to third parties Although IASB did not explicitly consider accounting for deemed disposals of associates in drafting 1AS 28, paragraph 20 of the standard refers to the concepts underlying the procedures used in accounting for the -quisition of a subsidiary in accounting for acquisitions of interests in associates. Therefore. rather than relying on a literal reading of the definition of the equity method. it is more appropriate to account for deemed disposals of associates in the same way as deemed disposals of subsidiaries. TAS 27 has been amended as part of phase II of the business combination project so as to require that partial disposats of subsidiaries. were control is retained. are accounted for as equity transactions. Under equity accounting an investor only accounts for its own interest. Given that the other investors’ ownership in the associate is not reflected in the accounts of fan investor there is no basis for concluding that deemed disposals can only be treated as equity transaction. e | PULL IFRS “Three measurement models are provided — cost. | Only the equity method is allowed, except for limited equity and fair value = circumstances where fair value can be uti luded in. cost | No specific requirements regarding transaction Coats der the equity meth sence inns ‘Goodwill ientified under the equity method is treated | Goodwill s included wm the carping amount of the] “separately and amortized _ | investment and i not amortized ae Under the equity method. the accounting policies oF The impracticabslion the associate are adjusted to that of the investor unless | Sateen Hoot rac ded a ply equity I the same reporting | The same requirement SPONGES dates muat be used, except fit is impractical do $0, | dates i limited to ee neath ne ge ee | should be consistent year-on-yearInvestment in Associates On December 31,2011 Jane Company. afiedium-ized emit. acquired 30% of the ordinary shares that carry voting rights of Company Jing for P1.000,000 including a P20,000 commission and brokerage costs in ‘acquiring. these shares, Jane Company uses the cost model to account for its investments in associates. In January 2, 2012 Jing Company declared and paid dividend of P200,000 out of profits earned in 2011. No further dividends were paid in 20(2, 2013 and 2014. A published quotation does ot exist for Company Jing. At December 31, 2012, 2013 and 2014. in accordance with section 27 for SMEs Impairment of Assets, management assessed the fair values of its investment in Company Jing as P1,020,000, 1,100,000 and P900,000. Cost to sell are estimated at P60,000 throughout. Question 1; Jane Company measures its investment in Company Jing on December 31, 2012, 2013 and 2014, respectively at a. 1,000,000, P1,000,000, P 1,000,000 . P_ 980.000, P1,040,000, P840,000 JAP 960.000. 1,000,000, P- 840.000 4. 1,200,000. P1. 100,000, P900,000 8 MODEL " Question 2: Assume that Company Jing shares are publicly traded, Jane Company measures is investment in ‘Company Jing on December 3 D012, 2013 and 2014 respecaseTe at a. P1,000,000, P1,000.000, P1,000,000-¢. P° 980,000, P1,040,000, P840.000 b, P_ 960,000, P1,000,000, P 840,000 A PI.020,000, PI, 100,000, P900,000 ‘On January 2, 2011, Parker Company, amedium-sized entity) acquired 25% of the equity of each of entities, A, B and C for P100,000, P150,000 and P280,000, Parket Company has significant influence over entities A, B and. C. Transaction costs of 1% of the purchase price of the shares were incurred by Parker Company. On January 15, 2011 A Company dectared and paid dividends of P10,000 for the year ended 2019. On December 31, 2011 B Company declared a dividend of P80,000 for the year ended 2011 which will be paid in 2012. For the year ended December 31, 2011 A Company and B Company recognized profits of 50,000 and P180,000 respeciively. However, C Company recognized a loss of P200,000 for the year 2011. Published price quotations do not exist for the shares of entities A. B and C. Using appropriate valuation techniques Parker Company determined the fair value of its investments in entities A, B and C at December 31, 2011 as P130,000, P290,000 and P150.000 respectively. Costs to sell are estimated at 5% of the fair value of the vestments. Parker Company has no subsidiaries and therefore does not produce consolidated financial statements, Question 1: Uf Parker Company uses the cost model in measuring its investment in associates, at what amount should the investment in A, B and C, respectively, be reported in ils December 31, 2011 statement of financial position? 2. P100,000, P150,000, 280,000 J, P101,000, P151,500, P142.500 b. PIO1.000, P151,500, P282,800 . 4, P123,500, P275.500, Pi42.500 Question 2: Assume that the shares of A. B and C are publicly traded fand’ wend, Company uses the fair value model 10 measure its investment in associates, at what amount should the investment in A. Band C. respectively. be reported in its December 31, 2011 statement of financial position? a. P100,000, P150,000, P280,000 ©, P123.500, P275,500, P142.500 b. PI01,000, 151.500, P282.800 A: P130,000, P290,000, P150,000 Questyon 3: Assume that Parker Company uses the equity method in measuring its investment in associates, at ‘what amount should the investment in A, B and C, respectively, be reported in its December 31, of financial position? 919 a. P100,000, P150,000. P280,000 _#t P111,000, P176.500, P142,500 b. P101.000, P151.500, P282,800 d. PII1,000, P176.500, P232,800 Pace tof? On January 2, 2012, Marco Company purchased 20,000 shares (20°) of Polo Company's ordinary share for 4,500,000 including the 100,000 transaction cost, During 2012, Polo reported the following in its statement of comprehensive income a P4,000,000 net income and « PSO0,000 unrealized gain from its investment at fair value to other comprehensive income, Polo Company paid cash dividends of P3,000,000 on December 31, 2012 no‘ReSA/Proctical Accounting | __ Question 1: What is the carrying value of the Tnvestm 2 PS.300.000 b. 4,600,000 wot December 11, 3012" © PA700,000 J PH.RON.0100 D Questin 2: what amount should be tenet in Is vtement of eomptensive income of 301 by Marco Compan related wo ts investment ia Pola Compan a. Fotn 000 cP b. P7000, - ue sf 00,000 CC. % Im April t. 2012, Hoty Company acquired 40%e of the 100.00 shares outwandiny eninary share of Trinity ‘Company for P3,000.000. This investment pave Holy the ability to exercise significant influetee over Trinity, The book value ofthe aequired shares was P2400,000 The excess ofthe cast ver book vile wa atric (8 ntangible asset which was undervalued on Teiuny's balance sheet and wehich had renin Wg, oF the year ended December 31,2012, trinity reported a comprehensive income of PY, 10,000 which inches {A874 300.000 revaluation reserve wi island and paid cash viens of 200,09) os ordinary share and thereaer sued 15%e share dividend, Assuming the iny Question 3: W after the sale Bloom Company reclassified its remaining igy ‘of unrealized gain or loss should be reported in its December 31, 2012 profit or loss? a. None ©. P180,000 22 b. P114,000 4. P294,000 [a 20 Question 4: If after the sale Bloom Company reclassified the remaining investment to profit or loss, what total ‘amount of should be reported in the company’s profit o¢ loss related to the investment? ‘a. None ©. P180.000 b. P166,000 <4. P460,000 Question 5: What js the carrying Value ofthe investment on December 31, 2011 assuming Bloom Company is a GB ¢ ized enterprise nd uses the equity method for its investment in associate? er . P2,210,000 4. P2,300,000 nS. dium-sized enterprise and uses the equity method to account for its investment in associate, what amount of unrealized gain or loss should Bloom Company recognized on January 2, 2012 if the retained investment was reclassified? : a. None ©. P126,000 b, P114,000 4. P180,000 Cc 9 Table owns 50% and 20% of Chair Corporation's ordinary and preference shares, respectively. Chair's shares ‘outstanding at December 31, 2014 follow: Ordinary share 14,000,000 10% cumulative preference share 900,000 ‘Chair reported net income of P600,000 for the year ended December 31, 2014 and declared the current year dividend on the preference shares. What total amount of revenue should Table Company disclose in the statement of comprehensive income related to its investment in Chair Company for the year ended December 31, 2014? a, none ©. P273,000 b. P255,000 i 4. P300,000