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Investment in Associates (PAS 28) : Conceptual Framework and Accounting Standards

The document discusses the accounting for investments in associates under PAS 28. It defines an associate as an entity over which the investor has significant influence, usually through owning 20% or more of voting shares. The equity method of accounting is used to measure investments in associates, where the investor's share of profits/losses adjusts the carrying amount. Details are provided on the procedures and journal entries for equity method accounting.

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130 views6 pages

Investment in Associates (PAS 28) : Conceptual Framework and Accounting Standards

The document discusses the accounting for investments in associates under PAS 28. It defines an associate as an entity over which the investor has significant influence, usually through owning 20% or more of voting shares. The equity method of accounting is used to measure investments in associates, where the investor's share of profits/losses adjusts the carrying amount. Details are provided on the procedures and journal entries for equity method accounting.

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Meg shark
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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NATIONAL UNIVERSITY

JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Investment in Associates (PAS 28)


Conceptual Framework and Accounting Standards
PREPARED BY: Obiña, Regienald G.
REVIEWED BY:

Disclaimer: The National University Junior Philippine Institute of Accountants together with the
BS Accountancy students of National University made every effort to ensure and help every
student during this time of the pandemic. Acknowledgment for the owner/s of the
copyrighted material used in preparing these materials is properly given and cited in every
handout. Thus, the production of these constitutes a fair use of copyrighted material as
provided in Sec. 185 of Republic Act 8293 or the “Intellectual Property Code of The
Philippines”, which states, “The fair use of a copyrighted work for criticism, comment,
news reporting, teaching including multiple copies for classroom use, scholarship, research,
and similar purposes is not an infringement of copyright [...]The purpose and character of
the use, including whether such use is of a commercial nature or is for non-profit educational
purposes.” Hence, no part of this handout may be subsequently distributed, uploaded,
published, displayed, reproduced, modified, and sold for profit in any form without
permission from the preparers. Furthermore, the violation of these acts is punishable by law.
In no event will the National University Junior Philippine Institute of Accountantstogether
with the preparers and faculty members be liable to any violation committed by the users of these
handouts.
EXCLUSIVE FOR ACCOUNTANCY STUDENTS OF NATIONAL UNIVERSITY ONLY

BASICS!
Investor - Nag invest ng pera sa isang business.
Investee – business or company na pinag investan ni investor.
So ang story is yung investor ay may SIGNIFICANT INFLUENCE over the entity. Para
maging associate niya si investee
To have a SIGNIFICANT INFLUENCE over an entity. Dapat may 20% OR MORE voting
power yung investor over the investee.
NOTE: if hindi 20% or more ang voting power, walang significant influence at hindi natin siya
iaaccount as investment in associate.
NOTE: kahit hindi 20% or more ang voting power, magkakaron parin ng significant influence
under the ff circumstances: (icheck ng Mabuti ang probs dahil usually kapag Nakita ng student
na walang 20% voting power, hindi na agad sya investment in associate)
 Representation in the BOD
 Participation in policy making process
 Material transactions between the investor and the investee
 Interchange in managerial personnel
 Provision of essential technical information

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NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

MEASUREMENT OF INVESTMENT OF ASSOCIATE


 Measured using the EQUITY METHOD of accounting
 Definition of equity method is based on the economic relationship between the investor
and the investee. Investor and the investee are viewed as single economic unit.
 Equity method is applicable when the investor has a significant influence over the
investee.

ACCOUNTING PROCEDURES OF EQUITY METHOD


 It is recognized at COST
 The profit or loss of investor is added or deducted (+/-) in the carrying amount. If
profit add, if loss ideduct sa CA
 Dividends received, matik deducted to sa CA (carrying amount) (CASH
DIVIDEND). If share dividend memo entry lang and no effect sa CA and income
 Cash dividend is not included in income but rather reduction in CA
 Note equity method is must be in ordinary share only. Bawal gamitin ang equity method
sa preference share because wala naman silang voting share para icheck ung percentage
ng investment nila.
 If may significant influence, matik si investee is said to be an associate
 Investment in associate is treated in the FS as NCA (Non-current asset)

PRO FORMA EQUITY METHOD

EXCESS OF COST OVER Carrying amount


- sobra yung binayad ni investor sa carrying amount ng net assets acquired.
o It can be classified into the FF:
 Undervaluation of assets
 Goodwill

Undevaluation of assets
 NOTE: if the excess is attributable to depreciable assets, it must be amortized
over the remaining useful life

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NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

 NOTE: if the excess is attributable to land, no need to amortized because land


does not depreciate
 NOTE: if the excess is attributable to inventory, expensed when the inventory is
sold. (Prorata if may portion lang na binenta)
Goodwill
 If FAIRLY VALUED ang nakalagay sa problem yung excess is matik para sa
GOODWILL.
 Goodwill is NOT included in the CA and it is not amortized.

NOTE: Excess Fair value is included in investment of income of the investor on the date of
acquisition.

IMPAIRMENT LOSS (PAS 36)


 if there is an indication that an investment in associate may be impaired, an impairment
loss shall be recognized whenever the Carrying amount of the investment exceeds
the recoverable amount. (CA > RECOVERABLE AMOUNT)
 Recoverable amount - is the higher between fair value less cost of disposal and value
in use
INVESTEE WITH CUMULATIVE PREFERENCE SHARES
 Investor shall compute its earnings or losses AFTER deducting the preference
dividends, whether or not such dividends are declared
INVESTEE WITH NONCUMULATIVE PREFERENCE SHARES
 Investor shall compute its share of earnings AFTER deducting the preference
dividends ONLY WHEN DECLARED
DISCONTINUANCE OF EQUITY METHOD
 If mas mababa na sa 20% ang voting power ni investor, it will ceases to have a significant
influence over the investee
 Significant influence must be lost before the equity method will ceases.
 Ang effect is accounted na siya sa PFRS 9:
o Financial Asset @ Fair value through profit or loss
o Financial Asset @ Fair value through other comprehensive income (OCI)
o Nonmarketable investment at cost or investment is unquoted equity investment
MEASUREMENT AFTER LOSS OF SIGNIFICANT INFLUENCE
 The standards said that the investor shall measure the retained investment in associate
@ FAIR VALUE
 The FV ng dating investment in associate at the it ceases will be the initial fair value of
the investment accounted in PFRS 9 as financial asset.
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NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

 Difference between the Carrying amount of the retained investment at the date the
significant influence is lost and the FV of the retained investment shall be included in
profit or loss

OTHER CASES WHEN EQUITY METHOD IS NOT APPLICABLE (Note PFRS 9 will
apply if equity method is not applicable)
 Investor is wholly-owned subsidiary, or a 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 it is not in the process of filing financial statement cs with the
SEC for the purpose of issuing any class of instruments in a public market.
 The ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with PFRS

SOURCES:
Conrado T. Valix, Jose F.Peralta, Christian Aris M. Valix. (2018). Conceptual Framework and
Accounting Standards

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NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

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NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

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