1

Investments in Associates
Definitions 2
Definitions 3
Significant influence 4

Determining if significant (SI) influence

exists requires judgement
– SI presumed if investor holds, directly or
indirectly, ≥20% of voting power of
associate, unless clearly demonstrate this
is not the case
– conversely, if the investor holds <20%...
– a majority ownership by another investor
does not preclude an investor from
having SI
Significant influence continued 5

• Determining if SI exists requires

judgement. This means considering all
factors, eg
– potential voting rights (currently exercisable or
convertible
– representation on the board of directors or
equivalent governing body
– participation in policy-making processes,
including participation in decisions about
dividends or other distributions
– material transactions between the investor
and the investee
– providing essential technical information
– interchange of managerial personnel
Loss of Significant influence 6

• Factors
– Loses the power to participate in
the financial and operating policy
decisions of the associate
– Can occur with or without change
in the absolute or relative
ownership interest
– As a result of a contractual
agreement
Equity method 7

• Based on the economic relationship between the

investor and the investee
• Investor and investee are one and the same
• SI exists
• Investment must be in ordinary shares
• Investment in associate shall be classified as
noncurrent asset
• Parent – investor has control over the investee
(Subsidiary)
 Equity method (Illustration on Page
753) 8

In the books of investor:

• Initial recognition : At cost
• Subsequent recognition :
– Increase / decrease carrying amount with profit /loss of the associate
– Recognize profit / loss of subsidiary in P& L account of investor
– Reduce the carrying amount with dividends received from associates
• Adjust the carrying amount for the following:
– changes in the investee’s other comprehensive income due to :
– Changes arising from the revaluation of property, plant and
equipment
– foreign exchange translation differences.
• Adjust investor’s other comprehensive income:
– With the investor’s share of those changes arising from revaluation
exchange difference etc.
 Excess of Cost over CA 9

• Investor pays more for an investment than the carrying amount of the asset
– Undervaluation of the investee’s assets (bldg, land, inventory)
– Goodwill
• If the assets of the investee are fairly valued
– attribute the excess of cost over CA of the net assets to goodwill
• If the excess is attributable to undervaluation of depreciable asset
– It is amortized over the remaining life of the depreciable asset
• If the excess is attributable to undervaluation of land
– It is not amortized because land is nondepreciable
• If the excess is attributable to inventory
– It is expensed when the inventory is already sold
• If the excess is attributable to goodwill
– It is included in the CA of the investment and not amortized
• The entire investment is tested for impairment at the end of each period.
 Excess of Net Fair Value over Cost 10

• 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

Investment in Associate xxx

Investment Income xxx
 Investee with Heavy Losses 11

• Share of losses equals or exceeds the CA of

investment
– Investor discontinues recognizing its share of further
losses
– The investment is reported at nil or zero value
• Subsequently reports income
- Investor resumes recognizing income if its share of
income equals the share of losses not recognized
 Impairment Loss 12

• Impairment loss shall be recognized

– When the CA of investment in associate exceeds its
recoverable amount
• Recoverable amount = higher between (FV – cost of
disposal) and (value in use)
• FV = proceeds of sale at measurement date
• Value in use = PV of the estimated future cash flows
expected to arise from the continuing use of an asset and
from its ultimate disposal
• Allocated first to remaining goodwill
 Investee with Preference Share 13

• Cumulative
– Investor’s share of profit or loss is computed
after deducting the preference dividends,
declared or not
• Non Cumulative
– Investor’s share of profit or loss is computed
after deducting the preference dividends only
when declared
 Other Changes in Equity 14

• Changes arising from Revaluation of PPE

and from Foreign translation differences
– Changes are recognized directly in equity of the
investor
 Adjustment of Investee’s Operations 15

• The most recent available FS of the associate are used by

the investor in applying the equity method (difference shall
be not > 3 mos)
• Adjustments shall be made to conform the associate’s
accounting policies to those of the investor
• Investor’s share in the associate’s P/L resulting from
upstream/ downstream transactions is eliminated
– Upstream transactions are sales of assets from an associate to the investor
– Downstream transactions are sales of assets from the investor to an
associate
 When Equity Method Not Applicable 16

• If the investor is a parent that is exempt from preparing

consolidated FS
• The investor is a wholly-owned or partially-owned
subsidiary of another entity and the other owners do not
object to the investor not applying the equity method
• The investor’s debt and equity instruments are not traded
in a public market or over the counter market
• The investor did not file or in the process of filing FS with
SEC for the purpose of issuing any class of instruments in
a public market
• The parent of the investor produces consolidated FS
available for public use that comply with PFRS
Discontinuance of equity method 17

• Stop using equity method when SI

ceases, account for the investment as:
– Financial asset at FV through profit
or loss
– Financial asset at FV through other
comprehensive income
– Nonmarketable investment at cost or
investment in unquoted equity
instrument
Measurement after loss of SI 18

• Any retained investment shall be

measured at FV included in P&L
• If disposal, derecognise Associate &
recognise in profit or loss the difference
between (i) proceeds + fair value of
retained interest & (ii) CA when SI lost.
• without disposal regard FV at that
date as a new cost
 Associate Held for Sale 19

• Accounted for in accordance with PFRS 5

• Shall be measured at the lower of CA and FV
less cost of disposal
 Investment of less than 20% 20

• The investor does not share in the P/L of the investee

• Dividends received by the investor is regarded as dividend
income
• Fair Value Method:
– Financial assets are measured at FV through P/L
– Financial assets are measured at FV through OCI
– Used when associate is acquired in stages
• Cost Method:
– Applied to investment in unquoted equity instrument or
nonmarketable equity investment
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