Conceptual Framework and Accounting Standards

PAS 28 - Investment In Associates

Investment in Associate - Significant Influence

- PAS 28 describes the accounting for investments in associates
and the application of the equity method to investments in
associates and joint ventures.
 An Associate is an entity over which the investor has
significant influence but neither a subsidiary nor an interest
in a joint venture.
 Significant Influence is the power to participate in the
financial and operating policy decision of the investee but is
not control or joint control of those policies.
Significant influence in presumed to exist if the investor holds
directly or indirectly, 20% or more of the voting power of the
investee. Conversely, significant influence is presumed not to
exist if the voting power is less than 20%, ]
Demonstration of Significant Influence
- representation on the board of directors or equivalent governing
body of the investee
- Participation in policy-making processes, including participation
in decisions about dividends or other distributions.
- Material transactions between the entity and its investee
- Interchange of managerial personnel
- Provision of essential technical information
Application of Equity Method
On acquisition, the difference between the cost of the investment
and the entity’s share in the net fair value of the investee’s
identifiable assets and liabilities is accounted as follows:
a. If cost is greater that the fair value of the interest acquired, the
excess is good will
b. If cost is less than the fair value of the interest acquired, the
deficiency is included as income in determining the entity’s share
in the investee’s profit or loss in the period of acquisition.
Discontinuance of Equity Method
- An entity stops using the equity method as from the date it
losses significant influence over an investee.
 If the investment becomes a subsidiary, it is accounted for
using PFRS 3.
 If the investment becomes a regular investment, it is
accounted using the PFRS 9. The fair value of the retained
interest is regarded as its fair value on initial recognition
under PFRS 9. The difference between the following is
recognized in profit or loss.
1. The fair value of the retained interest and any proceeds
from disposing part of the investment, and
2. The carrying amount of the investment at the date the
equity method was discontinued.

Accounting for Investment in Associates

- Accounting for EQUITY METHOD
- Under the equity method, the investment is initially recognized
at cost and subsequently adjusted for the investor’s share in the
investee’s changes in equity (e.g. profit or loss, dividends, and
other comprehensive incomes)

ACCOUNTING PROCEDURES:
1. Investment is initially recognized at cost
2. The carrying amount is increased by the investors share of the
profit if the investee and decreased by the investor’s share of
loss of the investee. The investor share if the profit or loss of the
investee is recognized as investment income.
3. Dividends received from an equity investee reduce the
carrying amount of the investment
4. Investment must be in ordinary shares. If the investment is
preferred shares, the equity method is not appropriate because
PS is a nonvoting equity.