Analysis of investments in associates of an SME

You were engaged by Spurs Corporation, a small and medium-sized entity, to audit its financial
statements for the year 2015. During the course of your audit , you noted the following regarding
its recent acquisitions of investments in equity securities:

a. On January 1, 2015, the entity acquired 25 percent of the equity of each of entities B, C
and D for P10 million, P15 million and P28 million respectively. Transaction costs of 1
percent of the purchase price of the shares were incurred by the entity.

b. On January 2, 2015, entity B declared and paid dividends of P1 million for the year ended
2014.

c. On December 31, 2015, entity C declared a dividend of P8 million for the year ended
2015. The dividend declared by entity C was paid in 2016.

d. For the year ended December 31, 2015, entities B and C recognized profit of respectively
P5 million and P18 million. However, entity D recognized a loss of P20 million for the
year.

e. Published price quotations do not exist for the shares of entities B, C and D. Using
appropriate valuation techniques the entity determined the fair value of its investments in
entities B, C and D at December 31, 2015 as P13 million, P29 million and P15 million
respectively. Costs to sell are estimated at 5 percent of the fair value investments.

f. The entity has no subsidiaries and therefore does not produce consolidated financial
statements.

In accordance with section 14.4 of the PFRS for SMEs, an investor shall account for all of its
investments in associates using one of the following: (a) the cost model in paragraph 14.5, (b) the
equity method in paragraph 14.8, or (c) the fair value model in paragraph 14.9. The entity is
seeking your advice on the effect of each method on the carrying amount of the investment and
its effect on profit or loss.

REQUIRED:

Determine the net amount to be recognized in 2015 profit or loss and the total carrying amount
of the investments as of December 31, 2015 using:

1. Cost Model
2. Fair Value Model
3. Equity Method

SOLUTION:
 1. P/L:P(11.78) million; CA:P39.50 million
SFP amount (Cost Model) B C D Total
Purchase price 10,000,000 15,000,000 28,000,000 53,000,000
Transaction costs 100,000 150,000 280,000 530,000
Total cost 10,100,000 15,150,000 28,280,000 53,530,000
Impairment loss* - - (14,030,000) (14,030,000)
CA, 12/31/12 10,100,000 15,150,000 14,250,000 39,500,000
*Impairment loss computation:
Total cost 10,100,000 15,150,000 28,280,000
FV less cost to sell (RA) 12,350,000 27,550,000 14,250,000
- - 14,030,000

P/L amount (Cost Model) B C D Total

Dividend income 250,000 2,000,000 - 2,250,000
Impairment loss - - (14,030,000) (14,030,000)
250,000 2,000,000 (14,030,000) (11,780,000)

2. P/L:P5.72 million; CA:P57 million

FP amount (Fair Value Model) B C D Total

Fair value 13,000,000 29,000,000 15,000,000 57,000,000

P/L amount (Fair Value Model) B C D Total

Transaction costs (100,000) (150,000) (280,000) (530,000)
Dividend income 250,000 2,000,000 - 2,250,000
FV adjustment gain (loss)* 3,000,000 14,000,000 (13,000,000) 4,000,000
3,150,000 15,850,000 (13,280,000) 5,720,000

*FV adjustment gain (loss)

Fair value 13,000,000 29,000,000 15,000,000
CA before FV adjustment 10,000,000 15,000,000 28,000,000
3,000,000 14,000,000 (13,000,000)

3. P/L:P(8.28) million ; CA:P43.00 million

SFP amount (Equity Method) B C D Total
Purchase price 10,000,000 15,000,000 28,000,000 53,000,000
Transaction costs 100,000 150,000 280,000 530,000
SOPA (SOLA) 1,250,000 4,500,000 (5,000,000) 750,000

Dividends (250,000) (2,000,000) - (2,250,000)

CA, 12/31/12 - before impairment 11,100,000 17,650,000 23,280,000 52,030,000
Impairment loss* - - (9,030,000) (9,030,000)
CA, 12/31/12 11,100,000 17,650,000 14,250,000 43,000,000

*Impairment loss computation:

CA, 12/31/12 - before impairment 11,100,000 17,650,000 23,280,000
FV less cost to sell (RA) 12,350,000 27,550,000 14,250,000
- - 9,030,000

P/L amount (Equity Method) B C D Total

SOPA (SOLA) 1,250,000 4,500,000 (5,000,000) 750,000
Impairment loss - - (9,030,000) (9,030,000)
1,250,000 4,500,000 (14,030,000) (8,280,000)