IAS 28- Investment in Associate

Investment in Associate using the equity method requires an investor to account its investments
in associates. Associate is an entity which holds significant influence over the investment. Significant
influence is the power to participate in the financial and operating policy decisions of the investee
without overpowering the policies itself. The significance can be known if it ranges from 20% to 50%
share holdings and it must be clearly stated in the investment. There are several factors needed to
provide that such influence exists, requisites are:
 Participation in Policy making

 Material transactions

 Representation in the Board of Directors

Equity Method
On initial recognition, the investment in an associate is recognized at cost. The changes in
carrying amount are recognized in the investor’s share subsequently in profit or loss. Distribution
received from an investee reduces the carrying amount of the investment. Changes in the interest must
be adjusted through comprehensive income.
Accounting procedure for Investment in Associate
a) During the initial recognition, the investment is recognized at Cost.

Investment in Associate xxx

Cash xxx
b) After acquiring the investment, investor’s share is recognized in profit and loss.

Investment in Associate xxx

Investment income xxx
c) Dividends received from equity investments.

Cash xxx
Investment in Associate xxx
Investment must be in ordinary shares because equity method is not applicable in preference
shares. Equity method is discontinued if the significant influence ceases to exist.

Illustration (Bong Co.)

This study source was downloaded by 100000860691238 from CourseHero.com on 01-30-2023 06:04:23 GMT -06:00

https://www.coursehero.com/file/72176769/IAS-28-INVESTMENT-IN-ASSOCIATEdocx/
 Acquisition date: March 7, 2020, BONG Co. acquired the 27% shares of Php 500,000 worth of shares of
Sabogs enterprise.
Investment in Associates 135,000
Cash 135,000
2020: Sabogs Enterprise recorded net income of Php 400,000.
Investment in Associate 108,000
Investment Income 108,000
Sabogs Enterprise distributed 30% cash dividends from the original shares.
Cash 150,000
Investment in Associate 150,000
2021: Sabogs Enterprise suffered a loss and recorded a net loss of 200,000.
Loss on investment 200,000
Investment in Associate 200,000
Impairment loss
Impairment loss shall be recognized when the carrying amount of the investment exceeds the
recoverable amount. Recoverable amount is measured as which is higher between fair value less cost to
sell and face value (present value).

This study source was downloaded by 100000860691238 from CourseHero.com on 01-30-2023 06:04:23 GMT -06:00

https://www.coursehero.com/file/72176769/IAS-28-INVESTMENT-IN-ASSOCIATEdocx/
Powered by TCPDF (www.tcpdf.org)