INVESTMENT IN ASSOCIATE

Basic principles

Intercorporate share investment is the is the purchase of the equity shares of one entity by another entity.

Significance influence is the power to participate in the financial and operating policy decisions of the investee but not control
or joint control over those policies.
 If the investor holds, directly or indirectly through.subsidiaries, 20% or more of the voting power of the investee, it is
presumed that the investor has significant influence, unless it can be dearly demonstrated that this is not the case.

Potential voting rights - An entity may own share warrants. instruments that are convertible into ordinary shares till have the
potential, if exercised or converted, to give tht entity additional voting power over the financial and operating policies of
another entity.

Loss of significant influence - An entity loses significant influence over an investee when it loses the power to participate in
the financial and operating policy decisions of the investee.
 The loss of significant influence can occur with or without change in the absolute or relative Ownership interest

Equity method - is based on the economic relationship between the investor and the investee.

Excess of cost over carrying amount - arises if the investor pays more or less for an investment than the carrying amount of
underlying net assets.
 Undervaluation of the inventee’s assets, such as building, land and inventory.
 Goodwill

Excess of net fair value over cost - 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.

Investee with heavy losses - investment is reported at nil or zero value. The investor discontinues recognizing its share of
further losses.

Impairment loss - shall be recognized whenever the carrying amount of the investment in associate exceeds recoverable
amount.

 The recoverable amount is measured as the higher between fair value less cost of disposal and value in use.
 Fair value is the price that would be recovered to sell an asset in an orderly transaction between market participants at the
measurement date.
 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:

A. Present value of estimated future cash flows expected to be generated by the investee, including cash flows from
operations of the investee, including cash flows from operations of the investee and the proceeds on the ultimate
disposal of the investment.
B. Present value of the estimated future cash flows expected to arise from dividends to be received from the investment and
from its ultimate disposal.

Investee with preference share - when an associate has outstanding cumulative preference shares, the investor shall compute
its share of earnings or losses after deducting the preference dividends, whether or not such dividends are declared.

Other changes in equity - such changes include those arising from revaluation of properly, plant and equipment and from
foreign exchange translation differences.