INVESTMENT

IN ASSOCIATE
By: Adarose G. Romares
LEARNING OBJECTIVES:
▪ After studying this chapter, you should be able to:
1. Describe investment in associate and significant influence.
2. Identify the situations which give rise to the recognition of investment in associate.
3. Apply equity method in accounting for investment in associate.
4. Apply the cost method of accounting for investment in associate.
5. Compare and contrast the equity method and the cost method of accounting for
investment in associate.
6. Describe the initial recognition, initial measurement, subsequent measurement,
derecognition and financial statement presentation of investment in associate.
7. Differentiate investment in associate under full PFRS and PFRS for SMEs.
8. Calculate the correct amount of investment in associate and its related accounts.
 INVESTMENT IN ASSOCIATE
An associate is an entity over which
the investor has significant influence.

Significant influence is the power to

participate in the financial and
operating policy decisions of the
investee but is not control or joint
control of those policies.
 IDENTIFICATION OF ASSOCIATES
If an investor holds, directly or
indirectly (e.g. through subsidiaries),
20 per cent or more of the voting power
of the investee, it is presumed that
the investor has significant influence,
unless it can be clearly demonstrated
that this is not the case.
The existence of significant influence by an
investor is usually evidenced in one or more of
the following ways:

Representation on the Participation in the

board of directors or policy-making processes, Material transactions
equivalent governing including participation in between the investor and
body of the investee decisions about dividends the investee
or other distributions

Interchange of Provision of essential

managerial personnel technical information
 EQUITY METHOD
The investment in an associate or
joint venture is initially
recognized at cost and the carrying
amount is increased or decreased to
recognize the investor’s share of
the profit or loss of the investee
after the date of acquisition.
 TRANSACTIONS EQUITY METHOD COST METHOD
Investment in Associate xx Investment xx
1. Acquisition Cash (or other account) xx Cash (or other account) xx

2. Amortization Investment Income xx

of Investment in associate xx NO JOURNAL ENTRY
undervaluation
of asset (other
than goodwill)
3. Share in the Investment in associate xx
net income of NO JOURNAL ENTRY
Investment Income xx
associate
Cash xx Cash xx
4. Dividends Investment in associate xx Dividend Income xx
received
 TRANSACTIONS EQUITY METHOD COST METHOD
5. Share in Investment in associate xx
increase in OCI OCI (e.g revaluation x
component of surplus) x NO JOURNAL ENTRY
associate
6. Impairment Investment Income xx
of investment Investment in associate x NO JOURNAL ENTRY
in associate x
7. Share
dividends Memo Entry Memo Entry
received
 T-ACCOUNTS ARISING FROM
JOURNAL ENTRIES
INVESTMENT IN ASSOCIATE

Beginning Balance or acquisition cost xx xx Dividends Received

xx Amortization of Excess (excluding

Share in Net Income of Associate xx goodwill)

xx Impairment of Goodwill
Share in Increase in OCI xx

xx Share in decrease in OCI

xx Balance End
TOTAL
 NET INVESTMENT INCOME
Amortization of excess excluding
goodwill xx xx Share in the net income of
associate
Impairment of goodwill xx

Balance end xx

Total
ADJUSTMENTS FOR AMORTIZATION
ASSETS RECOGNITION OF
AMORTIZATION
Inventory and Land Upon disposal or sale (as
cost of sales)
Machine and Equipment Every year through
(depreciable asset) depreciation
Goodwill When there is impairment
 On January 1, 2017, Blade Company purchased 25,000 shares
of the 100,000 outstanding shares of Razor Company for a
total of Php2,000,000. At the time of purchase, the book
value of Razor Company's equity was Php6,000,000. Razor
Company assets having a market value greater than book value
at the we of the acquisition were as follows:
BOOK VALUE MARKET VALUE REMAINING LIFE
Inventory 800,000 1,000,000 Less than 1 year
Equipment 4,000,000 4,500,000 5 years
Land 200,000 700,000 Indefinite
Goodwill 0 800,000 Indefinite

Razor Company's net incomes in 2017 and 2018 were 1,400,000

and 11,500,000 respectively. Dividends per share paid by Razor
Company amounted to 4 in 2017 and 5 in 2018. The inventory was
sold in 2017 while the land was sold at the end of 2018 at a
gain on sale of 50,000.
1. What amount should Blade record as
investment income for the year ended
December 31,2017?
2. What amount should Blade record
as investment in associate for the
year ended December 31,2017?
 3. What amount should Blade
record as investment income for
the year ended December 31,2018?
4. What amount should Blade record
as investment in associate for the
year ended December 31, 2018?
ASSOCIATE HAVING OUTSTANDING
PREFERENCE SHARES

If held by parties other

than investor and classified
as equity, the investor
computes its share of
profits and losses after
adjusting for the dividends
on such shares
 The Total Preference Dividend Is Deducted From The Net Income If:

Deduct the fixed preference dividends

CUMULATIVE PREFERENCE SHARE whether or not such dividend are
declared

NON-CUMULATIVE PREFERENCE Deduct the preference dividends only

SHARE when declared
 REDEEMABLE PREFERENCE
SHARES
• These are treated as financial
liability.
• Therefore, the total preference
dividend shall no longer be deducted
from the net income of the associate
when computing for the share in the
net income of the associate
 POSSIBLE SCENARIOS OF CHANGES
OF OWNERSHIP INTEREST
1.From Cost to Equity Method
- 10% plus acquisition of 20%= 30% interest.
This should be accounted under PAS 28.
2. Discontinuance of Equity Method
- 30% minus 20% sold= 10% retained interest.
This should be accounted under PFRS 9.
- 30% plus acquisition of 30%= 60% interest.
This should be accounted under PFRS 3 and
PFRS 10.
 CHANGE FROM COST TO
EQUITY METHOD
In a business combination achieved in
stages, the acquirer shall re-measure
its previously held equity interest
in the acquiree at its acquisition-
date fair value and recognize the
resulting gain or loss, if any, in
profit or loss.
 ILLUSTRATION:
On January 1, 2015, David Company bought 10% of
the outstanding ordinary shares of Jean
Construction Company for 3 million. Their book
value was 8 million and the difference was
attributable to the fair value of Jean's
buildings exceeding book value. Jean's net
income for the year ended December 31, 2015, was
10 million. During 2015, Jean declared and paid
cash dividends of 2 million. The buildings have
a remaining life of 10 years. The investment in
Jean is to be held as Fair Value through Other
Comprehensive Income.
 Also, Jean’s net income for the year ended December
31,2016 was 12 million and Jean declared and paid
cash dividends of 2.5 million.
The fair value of David’s investment in Jean
securities is as follows: Dec.31,2015, 3.2 million;
Dec.31,2016, 3.1 million; and Dec.31,2017, 13
million.
On January 2, 2017, David purchased and additional
20% of Jean’s stock for 5.6 million. The excess was
attributable to building having a remaining life of
8 years.
Jean’s net income for the year ended Dec.31,2017 was
15 million and Jean declared and paid cash dividends
of 3 million.
 1. The unrealized gain or loss
to be presented in the OCI as of
December 31,2015.
 2. The income from
investment in 2016

3. The adjustment to retained earnings as of

January 2,2017 as a result of the acquisition
of the additional 20% interest in Jean Company
is: ZERO
4. The income from investment in
Jean Company to be recognized in
profit or loss is:
 5. The carrying amount of the
investment of Jean Company as of
December 31,2017 is:
DISCONTINUANCE OF EQUITY METHOD:
CHANGE FROM EQUITY
According to PAS 28 par. 22, ''an entity
shall discontinue the use of the equity
method from the date when its investment
ceases to be an associate or a joint
venture as follows:
(a)If the investment becomes a subsidiary,
the entity shall account for its
investment in accordance with PFRS 3
Business Combinations and PFRS 10
Consolidated Financial Statements.
 (b)If the retained interest in the
former associate or joint venture is
a financial asset, the entity shall
measure the retained interest at fair
value. The fair value of the retained
interest shall be regarded as its
fair value on initial recognition as
a financial asset in accordance with
PFRS 9.
The entity shall recognize in profit or
loss any difference between:
(i)the fair value of any retained
interest and any proceeds from
disposing of a part interest in the
associate or joint venture; and

(ii) the carrying amount of the

investment at the date the equity method
was discontinued."
FORMULA FOR TOTAL
GAIN OR LOSS
ASSOCIATE HAVING HEAVY LOSSES
If an investor's share of losses of an
associate equals or exceeds its interest in
the associate, the investor discontinues
recognizing its share of further losses. The
interest in an associate is the carrying
amount of the investment in the associate
under the equity method together with any
long-term interests that, in substance, form
part of the investor's net investment in the
associate.
 TOTAL INTEREST
includes the following:
1.Carrying amount of investment in associate
2.Investment in preference shares and
3.Unsecured long-term receivables or loans
does not include the following:
1.Trade receivables,
2.Trade payables or
3.Any long-term receivables for which
adequate collateral exists, such as
secured loans.
The order of priority for liquidation is
as follows:
1.External Creditors
2.Internal Creditors
3.Owners

So the reverse order of seniority would

be as follows:
4.Owners
5.Internal Creditors
6.External creditors
Therefore, the share in the loss of
the associate shall be recorded as
follows:
1.First, charge to balance of
Investment in Associate
2.Next, charge to the balance of
Investment in preference shares
(owners) and
3.Lastly, charge to unsecured long-
term receivables and loans.
SOLUTIONS:
 NOTE:
 The first
 If the associate amount to be
subsequently report recovered
profits, the investor shall be the
resumes recognizing its last amount
share of those profits that was
only after its share of deducted when
the profits equals the there was a
share of losses not share in the
recognized. net loss.
 ADJUSTMENT OF INVESTEE‘S
OPERATION

UPSTREAM TRANSACTIONS
Are, for example, sales of assets from an
associate to the investor.

DOWNSTREAM TRANSACTIONS
Are, for example, sales of assets from the
investor to an associate.
The share in the profit or loss of an
associate is recognized only to the
extent of unrelated investors
interest in the associate. If the
transaction is:
• Downstream sale- eliminate the
entire unrealized profit. (i.e. 100%)
• Upstream sale - eliminate the
investor's share in unrealized
profit. (percentage of ownership)
 ILLUSTRATION:
On January 1, 2017, Greg Company bought 25% outstanding
ordinary shares of Ming Company for 1 million. The book value
of the net asset acquired was 3 million. The difference
attributable to the fair value of Ming’s machinery exceeding
book value. The machinery has a remaining life of 10 years.
On December 20, 2017, Greg Company sold inventory costing
50,000 to Ming Company for 70,000 which was still unsold on
December 31, 2017. The companies had no other transactions
during 2017. In 2017, Ming Company reported net income of
1,000,000. cash dividends of 100,000 were declared and paid by
Ming Company on December 31,2017.
 1. What is the investor’s share in
the profit of the associate in 2017?
2. What is the carrying amount of
the investment in associate on
December 31,2017?
 B. Assuming instead that the inventory was sold
by Ming Company to Greg Company,
1. What is the investor’s share in the profit of
the associate for 2017?
2. What is the carrying amount of
the investment in associate on
December 31,2017?
 INTERCOMPANY ADJUSTMENTS:

RECOGNITION OF RECOGNITION OF REALIZED

ASSETS UNREALIZED GAIN OR LOSS GAIN OR LOSS
During the inter-company Upon disposal or sale (as cost
Inventory and Land sale and when the goods are of sales) to outside entity
still unsold at the end of the
year
Machine & Equipment During the intercompany Every year through
(depreciable asset) sale depreciation
Net realized Gain on sale of PPE (year of sale) is equal to=
Total Gain x Remaining life/ useful life (assuming
straight-line method)
 FINANCIAL STATEMENT
PRESENTATION
▪ An investment in associate or a
joint venture is generally
classified as NON-CURRENT ASSET,
unless it is classified as held
for sale in accordance with PFRS5
Non-current Assets Held for Sale
and Discontinued Operation.
ADDITIONAL NOTES ON PFRS FOR SMEs

▪ Investment in Associate
and Joint Venture of a SME
is accounted either at
cost model, equity model
and fair-value model.
 COST MODEL
Initially: transaction price plus
transaction cost
Subsequently: cost less any accumulated
impairment losses
Dividends received from the associate:
income
Net income and changes in OCI component
DOES NOT affect the investment balance
NOT APPLICABLE: if has a purchase price
quotation
 EQUITY MODEL
 initially: transaction price plus
transaction cost
Dividends received: reduction in the
carrying amount of the investment
Adjustments are made to reflect the
investor’s share in the associate’s net
income or loss and change in the OCI
component
Subject to impairment testing
 FAIR VALUE MODEL
Initially: transaction price
ONLY
Subsequently: Fair value
Changes in Fair value:
profit or loss
Not subject to impairment
testing
 COST EQUITY FAIR VALUE
1.Transaction Cost Yes Yes No
2. Dividends Income Deduction Income
3. Share in net N/A Increase N/A
income (Income)
4. Share in N/A Increase or N/A
changes in OCI decrease
component
5. Change in fair N/A N/A P&L
value of
investment
6. Subject to Yes Yes No
impairment review