INVESTMENTS IN ASSOCIATES (PAS 28)

(I) Key Definitions

 Associate- Is an entity, including an unincorporated entity such as a partnership, over which the investor has
significant influence and that is neither a subsidiary nor an interest in a joint venture.

 Significant influence - Is the power to participate in the financial and operating policy decisions of the investee
but is not control or joint control over those policies.

 Equity method - Is a method of accounting whereby the investment is initially recognized 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.

(II) Identification of Associates

 An investment of 20% or more of the voting power (directly or through subsidiaries) will indicate significant
influence unless it can be clearly demonstrated otherwise.

 If the holding is less than 20%, the investor will be presumed not to have significant influence unless such
influence can be clearly demonstrated.

 The existence of significant influence by an investor is usually evidenced in one or more of the following ways:

a) Representation on the board of directors or equivalent governing body of the investee;

b) Participation in the policymaking process.
c) Material transactions between the investor and the investee.
d) Interchange of managerial personnel.
e) Provision of essential technical information.

(III) Accounting for Associates

 In its consolidated financial statements, an investor should use the equity method of accounting for investments
in associates, unless:

a. An investment in an associate that is acquired and held exclusively with a view to its disposal within 12
months from acquisition should be accounted for as held for trading under PFRS 9 (FVPL).

b. A parent that is exempted from preparing consolidated financial statements by PAS 27 may prepare
separate financial statements as its primary financial statements. Use cost method or PFRS 9.

c. An investor need not use the equity method if all of the following four conditions are met:

1. The investor is itself a wholly owned subsidiary, or is a partially owned subsidiary of another
entity and its other owners, including those not otherwise entitled to vote, have been informed about,
and do not object to, the investor not applying the equity method;

2. The investor's debt or equity instruments are not traded in a public market.

3. The investor did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of issuing any class of
instruments in a public market; and

4. The ultimate or any intermediate parent of the investor produces consolidated financial statements
available for public use that comply with PFRS.

(IV) Applying the Equity Method

1. Basic principle – The equity investment is initially recorded at cost and is subsequently adjusted to reflect
the investor's share of the net profit or loss of the associate.

2. Distributions and other adjustments to carrying amount - Dividends received from the investee reduce the
carrying amount of the investment.

Adjustments to the carrying amount may also be required arising from other changes in the investee's equity
(revaluation surplus and translation gains and losses).

3. An associate with outstanding preference shares

 a. The investor computes its share of profits or losses after adjusting for the dividends on such shares,
whether or not the dividends have been declared on cumulative preference shares.

b. However, if the preference shares is non-cumulative, adjustments for dividends are made only if there
is a declaration.

4. Implicit goodwill and fair value adjustments - On acquisition of the investment any difference between the
cost of the investment and the investor’s share of the net fair value of the associate’s identifiable assets, liabilities
and contingent liabilities is accounted for in accordance with PFRS 3 Business Combinations.

(a) Positive goodwill relating to an associate is included in the carrying amount of the investment. However,
amortization of that goodwill is not permitted and is excluded in the determination of the investor’s
share of the associate’s profits or losses.

(b) Any negative goodwill is:

 Is excluded from the carrying amount of the investment

 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.

5. Appropriate adjustments to the investor's share of the profits or losses after acquisition are made to account
for additional depreciation of the associate's depreciable assets based on the excess of their fair values
over their carrying amounts at the time the investment was acquired. Undervalued or Overvalued inventories at
the date of acquisition shall also have an effect on the investment income since they are part of the cost of sales
of the Associate when sold.

6. Discontinuing the equity method - Use of the equity method should cease from the date that significant
influence ceases.

a) The difference between the selling price and carrying amount of the investment sold shall be recognized
in profit or loss.

b) The “retained investment” or remaining investment after the sale shall be accounted for under PFRS
9. The carrying amount is remeasured to fair value on the date significant influence ceases and recognized
in profit or loss.

7. Application of the equity method “achieved in stages”

a) The previously held interest that was accounted for under the cost or fair value method shall be
remeasured to fair value on the date the investor gains significant influence.

b) The difference between the fair value and the carrying amount of the previously held investment shall
be recognized in profit or loss.

c) The total of the fair value of the previously held investment and the new acquisition cost shall be regarded
as the total cost of the investment classified as “associate”.

d) If the FVOCI category was used to account for the previously held investment, any cumulative
unrealized gain or loss as OCI shall be reclassified to retained earnings.

8. Transactions with associates

a) Unrealized profits and losses resulting from upstream (associate to investor) and downstream (investor
to associate) transactions should be eliminated to the extent of the investor's interest in the associate if the
asset sold between the associate and investor has not yet been sold to an unrelated party.

b) However, realized profits and losses shall be recognized once the asset is sold to an unrelated party or
if the asset is being consumed through depreciation.

9. Losses in excess of investment

a) The investor’s share in the associate’s losses cannot exceed the “interest in the associate” and shall
discontinue the application of the equity method is this is the case.

b) After the investor's interest is reduced to zero, additional losses are recognized by a provision (liability)
only to the extent that the investor has incurred legal or constructive obligations or made payments on behalf
of the associate.
 c) If the associate subsequently reports profits, the investor resumes recognizing its share of those profits
only after its share of the profits equals the share of losses not recognized.

10. Date of associate's financial statements

a) The investor should use the financial statements of the associate as of the same date as the financial
statements of the investor unless it is impracticable to do so.

b) If it impracticable, the most recent available financial statements of the associate should be used, with
adjustments made for the effects of any significant transactions or events occurring between the accounting
period ends.

However, the difference between the reporting date of the associate and that of the investor cannot be longer
than three months.

MULTIPLE CHOICE PROBLEMS

I. On January 1, 2023, Larry Company purchased 40% of the ordinary shares of Paula Company for
P3,500,000 when the net assets of Paula amounted to P7,000,000. At acquisition date, the carrying
amounts of the identifiable assets and liabilities of Paula were equal to their fair value, except for equipment
for which the fair value was P2,000,000 greater than the carrying amount and inventory whose fair value
was P800,000 greater than its cost. The equipment has a remaining life of 4 years, and the inventory at the
date of acquisition was sold during 2023. Paula Company reported net income of P4,000,000 for 2023 and
paid no dividends during 2023. What is Larry’s 2023 investment income in Paula?
a. 1,500,000 Share in NI unadjusted = 4,000,000 x 40% x12/12 = 1,600,000 Cost 3,500,000
b. 1,650,000 FVNAA (3,920,000)
amor of excess Negative Goodwill 420,000
c. 1,350,000 equipment = 2,000,000/4 x 12/12 =500,000 x 40% = 200,000
inventory = 800,000 x 100% = 800,000 x 40% = 320,000
d. 1,720,000
Share in NI adjusted = 1,600,000 + 420,000 -320,000 - 200,000 = 1,500,000

II. Hennessy Company owns 100% of another entity’s preference share capital and 30% of its ordinary share
capital. The investee’s share capital outstanding on December 31, 2023 includes P5,000,000 of 12%
cumulative preference share capital and P10,000,000 of ordinary share capital. The investee reported net
income of P4,000,000 for 2023. No dividend was declared for both preference and ordinary share in 2023.
What amount should be reported as investment income for 2023?
a. 1,020,000 5,000,000 x 12% = 600,000 dividend income
b. 1,200,000 30% x (4,000,000 - 600,000)
c. 1,380,000 600,000 x 100% = 600,000 dividend income but its not declared so 0
Investment income = 1,020,000 + 0
d. 1,000,000 if with preference and ordinary share, the investment income should include the dividend income. portion nung
owned pref share only.

III. Albino Company acquired 25% of Claire Company’s voting stock for P5,000,000 on January 1, 2022.
Albino’s 25% interest in Claire gave Albino the ability to exercise significant influence over Claire’s operating
and financial policies. During 2022, Claire earned P2,000,000 and paid dividends of P500,000. Claire
reported earnings of P1,300,000 for the six months ended June 30, 2023, and P1,800,000 for the remainder
of the year.

On July 1, 2023, Albino sold half of its investment in Claire for P3,000,000, cash. The fair value of the
remaining investment was P3,100,000 on July 1, 2023, and P3,500,000 on December 31, 2023. The
remaining investment is to be held as a nontrading investment and measured at fair value through other
comprehensive income. Claire paid dividends of P600,000 on October 1, 2023. In its 2023 income
statement,

1. What amount should Albino report as gain from sale of half of its investment in Claire?
a. 125,000 Investment in Assoc
5,700,000/2 = 2,850,000 CV 7/1/23
b. 150,000 [ Selling Price 3,000,000
5,000,000
c. 80,000 2,000,000 x 25% 500,000 [ 125,000 = 500,000 x 25% CV (2,850,000)
d. 190,000 1,300,000 x 25% 325,000 [ Gain on Sale 150,000
CV 6/31/23 5,700,000

2. What amount of gain from remeasurement of the remaining investment should be reported for
2023?
a. 250,000 FV 7/1/23 3,100,000
CV 7/1/23 (2,850,000)
b. 215,000 Remeasurement 250,000
c. 225,000
d. 300,000
IV. Myra Company purchased 10% of Evita Company’s 500,000 outstanding shares of ordinary shares on
January 1, 2023, for P1,000,000 and appropriately classified this investment at FVOCI. The market value
of this investment on December 31, 2023 is P1,200,000.
 On January 1, 2024, Myra purchased an additional 100,000 shares of Evita for P3,000,000. The book value
of the net assets of Evita on that date was P12,000,000. The fair value of the net assets of the investee is
equal to the carrying amount except for land and equipment whose fair value exceeded the carrying amount
by P300,000 and P400,000, respectively. The remaining life of the equipment is 4 years. Evita reported
earnings of P3,000,000 for 2024 and paid dividends of P1,000,000. What is the goodwill from the acquisition
on January 1, 2024?
total shares: 500,000 x 10% = 50,000 + 100,000 = 150,000 shares
a. 390,000 150,000/500,000 = 30% Cost 4,200,000
b. 150,000 FVNAA =12,000,000+300,000+400,000 =12,700,000 x 30% =3,810,000
FVNAA 3,810,000
c. 190,000 total cost = 1,200,000+3,000,000=4,200,000 Goodwill 390,000
d. 0

V. On January 1, 2023, Alyssa Company acquired 40% of the ordinary shares of an associate. On such date,
assets and liabilities of the investee were recorded at fair value and the acquisition showed that goodwill of
P1,000,000 was acquired. The investee reported net income of P8,000,000 for 2023.

In December 2023, the investee sold inventory costing P3,000,000 to Alyssa Company for P5,000,000. The
inventory remained unsold by Alyssa Company on December 31, 2023.

On January 1, 2023, the investee sold an equipment to Alyssa Company with carrying amount of
P2,500,000 for P4,000,000. The remaining life of the equipment is 5 years.

What amount of investment income should be reported by Alyssa Company for 2023?
a. 1,920,000 c. 3,200,000
b. 1,800,000 d. 2,400,000
SNI = 8M X 40% = 3,200,000
-Excess in Inventory = 2M x 40% = 800,000 itong excess in inventory and equipment is
minus sa SNI kasi sa problem is binenta nya
-Excess in equipment = 1.5M x 40% = 600,000 sa associate nya mismo, hindi sa outside
+Depreciation = 1.5M/5 x 40% = 120,000 customer and its called "intercom" pero yung
depreciation is added.
Investment income = 1,920,000