SFRS(I)1-28:

ACCOUNTING FOR
INVESTMENT IN
ASSOCIATED
COMPANIES
LEARNING OBJECTIVES
• Identify an associate
• Explain the concepts of equity accounting
• Prepare journal entries to account for investment in associate
using equity accounting
• Prepare consolidated financial statements to incorporate the
results of associated company using the equity accounting
method
CAN A PARENT HAVE BOTH A
SUBSIDIARY AND ASSOCIATE?
WHAT IS AN ASSOCIATE?
• SFRS(I) 1-28 Para 3and 5
– 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.
– Investor holds directly or indirectly, 20% or more of
voting power of investee
EXERCISE-SIGNIFICANT INFLUENCE
80% 30%
P Ltd S Ltd T Ltd

10%

Is T Ltd an associate of P Ltd?

Working:
0.8x0.3+0.1= 0.34=34%
T Ltd is an associate of P Ltd.
ACCOUNTING FOR ASSOCIATES
Equity method

Initial Subsequent
recognition measurement

Parent’s books Consolidation

Dr: Investment in associate
Cr: Cash/ordinary shares
Dr: Investment in associate
Cr: Other income
(To account for negative
goodwill)
5 Items to adjust for
• Share of current year profit
• Dividend income
• Post-acquisition reserve
• Elimination of unrealised
profits on intercompany
transactions
• P&L effect of fair value
difference
ACCOUNTING FOR ASSOCIATES
Subsequent measurement

1. Share of current year profit

• Current year profit of an associate is recognised proportionately
as an increase in the value of investment in associate and share
of profit of associates
• Amount to recognise = Associate’s NPAT x % shareholding
• Journal entry:
• Dr: Investment in associate
Cr: Share of profit of associate
ACCOUNTING FOR ASSOCIATES
Subsequent measurement

2. Dividend income
• Dividends paid by an associate is seen as distribution of profit,
which decreases the value of parent’s investment in the associate
• Amount = Total amount of dividends paid by associate x %
shareholding
• Journal entry:
• Dr: Dividend income
Cr: Investment in associate
ACCOUNTING FOR ASSOCIATES
Subsequent measurement

3. Post – acquisition reserve

• Any post-acquisition reserve is transferred to beginning retained
profit and increases the value of investment in associate
• Amount = (RE B/f – pre-acq RE) x % shareholding
• Journal entry:
• Dr: Investment in associate
Cr: Retained earnings b/f (Beginning retained earnings)
ACCOUNTING FOR ASSOCIATES
Subsequent measurement

4. Elimination of unrealised profits (URP) on intercompany

transactions
• No adding line by line in equity accounting, therefore, no
elimination of intercompany balances or transactions
• Only unrealised profits from intercompany transactions are
adjusted for investor’s proportionate share
• Upstream and downstream are adjusted in the same manner
• Amount = URP x % shareholding
• Journal entry:
ACCOUNTING FOR ASSOCIATES
Subsequent measurement
5. P&L effect of fair value difference
• Acquisition costs includes investor’s share of book value and the
excess of fair value over book value of associate’s net assets and
goodwill at the acquisition date.
• Adjustments to the investor’s share of profit or losses after
acquisition are made for:
• Depreciation of depreciable asset
• Impairment losses
• Amount = (Impact on profit) x % shareholding
• Journal entry:
• Dr/Cr: Share of profit of associate
Dr/Cr: Investment in associate
ILLUSTRATION 1
CONSOLIDATED FINANCIAL STATEMENTS
Investor’s financial
statements
 SUMMARY
Date of Post Current year
acquisition acquisition
reserve
P/L Dividend

Dr Investment in associate
Cr Cash

Dr Investment in associate
Cr Beginning retained earnings

Dr Investment in associate
Cr Share of profit of associate (P/L)

Dr Dividend Income
Cr Investment in associate
SUBSIDIARY VS ASSOCIATES
Subsidiary
Investment Eliminated on consolidation
account
Goodwill Created on consolidation on
acquisition date and recorded on
consolidation B/S. Impairment
tested annually.
Dr: Impairment loss
Dr: BRP (prior year)
Cr: Allowance for impairment
Negative goodwill is recognised
immediately on consolidated
P/L.
Associate
One-line consolidation.
Investment in associate
account adjusted for share of
profit, prior year profits,
dividends and unrealised profit
or losses.
Included as part of the cost of
investment. No amortisation
and impairment tested annually
for goodwill.
Negative goodwill is
recognised immediately on
consolidated P/L.
SUBSIDIARY VS ASSOCIATES
Subsidiary Associate
Unrealised Unrealised profit to be Unrealised profits to be
profit on eliminated. For fixed assets, adjusted in equity
intercompany depreciation entry to be accounting. (apportion)
sale of fixed done on gradual realization. Dr: Share of profit of A
assets, stocks Upstream affects NCI (P/L) Cr: investment in A
and NCI (B/S). No distinction between
upstream and downstream
sale.

Intercompany Eliminated on Not eliminated on

balances consolidation. consolidation.
SUBSIDIARY VS ASSOCIATES
Subsidiary Associate
Dividends Dividends to be eliminated on Dividend taken as return of
consolidated P/L and B/S capital that reduces
Dr: Dividend Income (P/L) Investment in A (apportion)
Dr: NCI (B/S) Dr: Dividend income
Cr: Retained earnings Cr: investment in A
And
Dr: Dividend payable
Cr: Dividend receivable
Cr: NCI (B/S)
SUBSIDIARY VS ASSOCIATES
Subsidiary Associate
Share of prior Added across 100% as part Separate journal entry
year post profits of consolidation process, to recognise the share
NCI’s share removed later of profit
Dr: Investment in A
Cr: BRP

Share of current Added across 100% as part Separate journal entry

year profit after of consolidation process, to recognise share of
tax NCI’s share removed later current year profit
Dr: Investment in A
Cr: Share of profit of A
(To apportion)
SUMMARY
• Associate is a company where we own shares and we have
significant influence over (20% - 50% shareholdings).
• Use equity accounting; one-line consolidation.
• Investment in associate account is not eliminated.
• No recording of goodwill on consolidated balance sheet. There
is no amortisation and impairment of goodwill.
• No recognition of under / overvaluation of assets and liabilities
and unrecorded intangible assets and contingent liabilities.
– Adjustment is made for depreciation and impairment losses.
SUMMARY
Adjust investment account against share of profit
(Dr/Cr: Investment in assoc, Dr/Cr: Share of profit of associate)
1. Intercompany Unrealised profit (no upstream/downstream impact)
2. Adjustments as a result of fair value difference and unrecorded
transactions
3. Current year profit

Adjust investment account against dividend income

(Dr: Dividend income, Cr: Investment in associate)
4. Intercompany dividends

Adjust investment account against BRE

(Dr/Cr: Investment in assoc, Dr/Cr: Retained earnings b/f)
5. Prior year profits