PAS 28

INVESTMENTS IN
A S S O C I AT E S & J O I N T
VENTURES
 IAS 28 – OVERVIEW
• Objective and scope
• Application of the equity method
• Disclosure

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OBJECTIVE & SCOPE

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ASSOCIATE
– an entity over which an investor has significant influence, but
which is not a subsidiary or an interest in a joint venture

– may be an unincorporated organization such as a

partnership

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 Types of Nature of Application
Investment Relationship reporting
with investee standards
At fair value Regular investor PFRS 9
In Associate Significant PAS 28
Influence
In Subsidiary Control PFRS 3 and
PFRS 10
In Joint Venture Joint Control PFRS 11 and
PAS 28

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• Significant Influence
– Standard IAS 28 defines significant influence as the power to
participate in the financial and operating policy decisions of the
investee, but is NOT a control or joint control of those policies.
– usually when holding, directly or indirectly, 20% to 50% of the voting power of
another entity
– equity method of accounting required for investments in associates

• Control
– a higher level of power
– exists when an investor can govern the financial and operating policies of an
investee and through this obtain benefits from its activities.

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Percentage of Type of investment
ownership

Less than 20% Financial assets at fair

value

20% to 50% Investment in

associate

51% to 100% Investment in subsidiary

Contractually agreed Investment in joint
sharing of control venture

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The other ways of evidencing significant influence are as
follows:
• Investor has a representation on the board of directors (or other equivalent
governing body) of the investee.
• Investor participates in policy-making processes (including dividend
decisions).
• There are material transactions between the investor and its investee.
• There’s interchange of managerial personnel.
• Provision of essential technical information.

Changes in significant influence

– lost when an entity no longer has the power to participate in the financial
and operating decisions of the investee
– may be lost or obtained by factors other than a change in share ownership

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Equity Method
- Investment is initially recognized at cost
- Subsequently adjusted for the investor share in the in the investee’s changes in equity (e.g.,
profit or loss dividends and other comprehensive income).

Benefits of the equity method

• better information in the statement of comprehensive income about the investor’s (and
associate’s) performance than recognizing the dividend received
• if investor exercises influence that is beneficial to the investee, it recognizes the positive
effect on the investee’s profit in its own profit and loss

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EXAMPLE

• On January 1, 2001, Entity A acquires

20% interest in Entity B for P400,000.
Entity B reports profit of P100,00 and
declares dividend of P50,000 in 2001.

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THE CARRYING AMOUNT OF INVESTMENT IN ASSOCIATE
ON DECEMBER 31, 20X1 IS COMPUTED AS FOLLOWS:

Investment in associate

1/1/x1 400,000
Sh. In profit (100K x 20%) 20,000 10,000 Dividends (50K x 20%)
410,000 12/31/x1

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 IAS 28 – APPLICATION OF THE
EQUITY METHOD

Exceptions to applying the equity method for investments in associates

1. the investment is classified as held for sale

2. the investor’s parent company is exempt from preparing consolidated financial
statements
3. the investor itself meets all the same criteria in 2 above that exempt a parent
from preparing consolidated statements

• The equity method is often called one-line consolidation

– procedures are similar to those used to account for acquisition of a subsidiary and for
subsequent consolidation procedures in PAS 27
– both methods are concerned with accounting for the investments as part of the
reporting entity rather than as passive holdings

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IAS 28 – APPLICATION OF THE EQUITY METHOD

At Acquisition
• investor prepares an analysis of the purchase cost
• investor identifies any difference between the investor’s cost and its share of the fair value of
the associate’s identifiable net assets at acquisition as:

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 IAS 28 – APPLICATION OF THE EQUITY METHOD

After Acquisition
• As associate earns a profit -- its net assets increase
– the investor recognizes its share of the profit and increases the carrying amount of the
investment for its share of the increase in the associate’s net assets

• Fair value differences

– not recognized in the associate’s records
– not amortized in the profit or loss that the associate reports
– are amortized by the investor as they are included in the investment account balance
– usually has the effect of reducing the investment income reported

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 IAS 28 – APPLICATION OF THE EQUITY METHOD

• Dividends
– as associate declares/pays dividends, its net assets decrease
– investor recognizes its share of the reduction as the dividend is received
• This entry reflects the conversion of the investment into cash by the investor

Adjustments needed each period

• elimination of profits and losses on intercompany transactions between the investor and
the associate
• for upstream (associate to investor) and downstream (investor to associate) transactions
– the investor’s share of any unrealized profits and losses are eliminated with
adjustments to the investment and the investment income accounts

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 IAS 28 – APPLICATION OF THE EQUITY METHOD

Other Adjustments
• investor adjusts investment account and its OCI or other equity account for its share
of associate’s OCI and changes in other equity accounts
• investor’s share of associate’s losses is more than the carrying amount of the
investment
– continue to recognize losses and resulting liability to extent investor has legal or
constructive obligations to make payments on behalf of associate

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Share in Effect on Effect on
Associate’s Investment in investment
associate income
a. Profit or Loss Increase for share Increase for share
in profit/decrease in profit: decrease
for share in loss for share in loss
b. Dividends decrease No effect
c. OCI Increase for share No effect, the
in gain/decrease share in OCI is
for share in loss included in the
investor’s OCI

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INVESTEE ACCOUNTING POLICY AND
FINANCIAL STATEMENTS

• The procedures in equity method are very similar to consolidation

procedures under the standard PFRS 10 Consolidated Financial
Statements:
• Both investor and investee shall apply uniform accounting
policies for the similar transactions.
• The same reporting date shall be used, unless it’s impracticable.
• The difference between investee’s and investor’s end of reporting
period shall not exceed three months

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CUMULATIVE PREFERENCE
SHARES
• If the investee has outstanding cumulative preference
shares that are held by parties other than the investor and
classified as equity, the investor computes its share of
profits or losses after deducting one-year dividends on
those shares, whether declared or not.

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SHARE IN LOSSES

• The investor shares in the investee’s losses only up to the amount of

its interest in the associate or joint venture.
Interest in the associate or joint venture:
• A. Carrying amount of the investment in associate/joint venture
• B. Investment in preference shares of the associate/joint venture
• C. Unsecured, long tong-term receivables or loans

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• Zero-out (Shares in losses are applied first to the carrying amount of the
investment in associate/joint venture).
• Shares in losses are applied to other components of the interest in the
associate or joint venture in the reverse order of their seniority
• After the total balance of the interest in the associate or joint venture is
zeroed-out, the investor stops sharing in further losses, except to the
extent that the investor.
A. Has incurred legal or constructive obligations
B. Made payment on behalf of the associate.

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IAS 28 – APPLICATION OF THE EQUITY METHOD
Impairment Losses

• investment account reduced by investor’s share of losses

reported by associate
• investor applies PAS 39 to determine whether an impairment
loss
• carrying amount of investment as a whole is compared with its
recoverable amount
– the higher of value in use and fair value less selling costs
• impairment loss is not allocated to specific assets underlying the
investment
• investment tested for impairment as a single asset
• impairment loss may be reversed in the future
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 IAS 28 – APPLICATION OF THE EQUITY METHOD

Loss of Significant Influence

• When investor ceases to have significant influence over an associate

• Unless associate becomes a subsidiary or joint venture, the investment is accounted

for under IAS 39
– investment that remains is remeasured at its fair value
– proceeds on disposal are recognized
– difference between total of these two amounts and carrying value of investment
when significant influence is lost is recognized in profit or loss

• Amounts remaining in entity’s OCI attributable to the associate

– account for as if associate had disposed of the related assets/liabilities

• Amounts are reclassified to profit or loss if that is what associate would have done
on disposal
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IAS 28 – DISCLOSURE

• Investments in associates under equity method reported as non-current assets

• Disclose
(a) carrying amount of investments
(b) investor’s share of profit or loss for the period
(c) investor’s share of any discontinued operations of associates, report
separately in discontinued operations
(d) investor’s share of changes recognized in OCI by associate, report in OCI
(e) information about any related contingent liabilities

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IAS 28 – DISCLOSURE
• Other information required
– info that provides reader with a better understanding of circumstances
and financial position of associates

• Examples
• summarized financial information about associates

• reasons supporting use of equity method with holdings of < 20%

• reasons why any associates not accounted for using equity method

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LOOKING AHEAD
• Early 2008
– minor amendments made to IAS 28 to reduce choice and exemptions – no
change to major concepts and how equity method is applied

• Topic not listed on current IASB project agenda

– no significant changes expected in foreseeable future
– work on IAS 27 may have implications for IAS 28

• New term being considered = significant involvement

– Not yet determined how this term is related to “significant influence”

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