IAS 28

INVESTMENT
IN
ASSOCIATES
Learning Competencies

 Define an investment in associate.

 Describe the accounting requirement for investments in
associates.
 Account for the investor’s share in the losses of an
associate.
Definition of terms

 Associate – an entity, including an unincorporated

entity such as a partnership, over which the investor
has significant influence.
 Significant influence – the power to participate in the
financial and operating policy decisions of the investee
but is not control or joint control over those policies.
(PAS 28)
 Significant influence
 Significant influence is presumed to exist if the investor holds,
directly or indirectly (e.g. through subsidiaries), 20% or more
of the voting power of the investee, unless it can be clearly
demonstrated that this is not the case.

 For significant influence to exist, the investment should

provide the investor voting rights. Thus, investment in
preference shares, regardless of the percentage of ownership,
is not accounted for under PAS 28 because preference shares
do not give the investor voting rights.
Evidence of existence of significant influence by
an investor
The following may provide evidence of significant influence even if
the percentage of ownership interest is less than 20%.
a) Representation on the board of directors or equivalent
governing body of the investee;
b) Participation in policy-making processes, including participation
in decisions about dividends or other distributions;
c) Material transactions between the investor and the investee;
d) Interchange of managerial personnel; or
e) Provision of essential technical information.
Equity method
 Investments in associates or joint ventures are
accounted for using the equity method. Under this
method, the investment is initially recognized at cost
and subsequently adjusted for the investor’s share in
the changes in the EQUITY of the investee.
 T-accounts
Investment in associate Sh. In P/L of associate
beg. xx
Sh. in profit xx xx Sh. in loss Sh. in loss xx xx Sh. in profit
Sh. in (Cr.) OCI xx xx Sh. in (Dr.) OCI
xx Sh. in dividends
Undervaluation Undervaluation
xx of asset of asset xx
xx end. xx
Preference shares issued by an associate
If an associate has outstanding preference shares that are held by parties other than the investor, the investor computes its share of profits or losses after making the following adjustments.

Preference share is Preference share is Preference share is

cumulative noncumulative redeemable
 Deduct one-year  Deduct dividends  No dividend is
dividend, only when declared deducted when
whether declared before computing computing share in
or not before share in associate’s associate’s profit
computing share profit or loss. or loss.
in associate’s
profit or loss.
Discontinuance of the use of equity method
 An investor starts to apply the equity method on the date it obtains
significant influence and ceases to apply the equity method on the date it
loses significant influence.
 On the loss of significant influence, the investor shall measure at fair
value any investment the investor retains in the former associate. The
investor shall recognize in profit or loss any difference between:
a. The fair value of any retained investment and any proceeds from disposing of the part
interest in the associate; and
b. The carrying amount of the investment at the date when significant influence is lost.
Classification of retained interest
Following the discontinuance of equity method, the retained interest shall be
classified as follows:

Loss of significant influence due to Accounting treatment

 Decrease of ownership interest  Financial asset at fair value

below 20%. under PFRS 9

 Increase of ownership above  Investment in subsidiary under

50% PFRS 3 and PFRS 10
Reclassification of cumulative OCI
 If an investor loses significant influence over an associate, all amounts
recognized in other comprehensive income in relation to the associate
shall be accounted on the same basis as would be required if the
associate had directly disposed of the related assets or liabilities.
Change to equity method - Gain of significant
influence
 Significant influence may be achieved from additional purchase of shares
resulting to an increase in ownership interest. Although, not specifically
addressed in PAS 28, this type of acquisition may be accounted for by
reference to PFRS 3 Business Combinations particularly on the accounting
for business combination achieved in stages.

 “In a business combination achieved in stages, the acquirer shall

remeasure 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 or other comprehensive income, as appropriate.”
(PFRS 3.42 )
Share in losses of associate
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.
 
Interest in the associate includes the following:
1. Investment in associate measured under equity method
2. Investment in preference shares of the associate
3. Unsecured long-term receivables or loans
 
Interest in the associate does not include the following:
1. Trade receivables and payables
2. Secured long-term receivables or loans
Share in losses of associate - continuation
After the investor’s interest in the associate is reduced to zero, additional
losses are provided for, and a liability is recognized, only to the extent that
the investor has incurred
a. Legal or constructive obligations or
b. Made payments on behalf of the associate.

 Any other losses are not recognized.

 
 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.