 PAS 28

Investment in Associates and Joint Ventures

Introduction

PAS 28 prescribes the accounting for investments in associates and the application of the equity method
to investments in associates and joint ventures.

Investors apply PAS 28 when they have significant influence or joint control over an investee.

Investment in Associate

An associate is “an entity over which the investor has significant influence”. (PAS 28.3)

The existence of significant influence distinguishes an investment in associate from all other types of
investments.

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”. (PAS 28.3)

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. Conversely, significant influence is
presumed not to exist if the voting power is less than 20%.

However, these are only presumptions, meaning they are generally held to be true in the absence of
evidence to the contrary. Thus, an investor may have significant influence even if it has less than 20%
voting power, and conversely, may not have significant influence even if it has more than 20% voting
power, if these can be clearly demostrated.

Any of the following may provide evidence of the existence of significant influence:

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

c. Material transactions between the entity and its investee;

d. Interchange of managerial personnel; or

e. Provision of essential technical information. (PAS 28.6)

Accounting for Investment in Associates

Investment in associates are accounted for using the equity method.

Illustration:

On January 1, 20x1, Entity A acquires 20% interest in Entity B for ₱400,000. Entity B reports profit of
₱100,000 and declares dividends of ₱50,000 in 20x1.

 The carrying amount of the investment in associate on December 31, 20x1 is computed as
follows:

Investment in associate

1/1/x1 400,000

Share in profit (100K x 20%) 20,000 10,000 dividends (50K x 20%)

410,000 12/31/x1

Notes:

 The investment is initially measured at cost (i.e., ₱400,000) and subsequently adjusted for the
investor’s share in the associate’s profit and dividends.

 Investment in associate is an asset; it has a normal debit balance. Thus, the beginning balance is
placed on the debit side of the T-account. The ending balance is placed on the opposite side to
facilitate analysis of the equality of debits and credits.

 The share in profit is placed on the debit side because it increases in the carrying amount of the
investment.

 Dividends from investments accounted for using the equity method are not income but rather
reductions from the carrying amount of the investment.

 The investment income in 20x1 is ₱20,000 – the share in the profit.

 Investments in associates are presented as noncurrent assets.

Application of the Equity Method

An investor starts using the equity method as from the date when it obtains significant influence or joint
control over an investee.

On acquisition, the difference between the cost of the investment and the entity’s share in the net fair
value of the investee’s identifiable assets and liabilities is accounted for as follows:

 If cost is greater than the fair value of the interest acquired, the excess is goodwill.
  If cost is less than the fair value of the interest acquired, the deficiency is included as income in
determining the entity’s share in the investee’s profit or loss in the period of acquisition.

Any resulting goodwill is included in the carrying amount of the investment and is not accounted for
separately. Meaning, the goodwill is neither amortized nor tested for impairment separately.

Adjustments are subsequently made on the entity’s share in the investee’s profit or loss to account for
the depreciation or amortization of any undervaluation or overvaluation in the investee’s identifiable
assets and liabilities.

Investee’s Financial Statements and Accounting Policies

When applying the equity method, the investor uses the investee’s most recent financial statements.
When the reporting periods of the investee and the investor do not coincide, the investee shall prepare
financial statements that coincide with the investor’s reporting period for purposes of applying the
equity method. If this is impracticable, adjustments shall be made for significant transactions and events
that occur between the end of the investee’s reporting period and that of the investor’s. The difference
between the investor’s and investee’s end of reporting periods shall not exceed three months.

Uniform accounting policies shall be used. If the investee uses different accounting policies, its financial
statements need to be adjusted before the investor uses them for purposes of applying equity method.

Cumulative preference shares

If the investee has outstanding cumulative preference shares that are held by parties other than the
investor and classified as equity, the investor computes its share of profits or losses after deducting one-
year dividends on those shares, whether declared or not.

Share in Losses

The investor shares in the investee’s losses only up to the amount of its interest in the associate or joint
venture.

 Interest in the associate or joint venture includes the following:

a. Carrying amount of the investment in associate/joint venture

b. Investment in preference shares of the associate/joint venture

c. Unsecured, long-term receivables or loans

Interest in the associate or joint venture does not include trade receivables and payables and secured
long-term receivables or loans.

Shares in losses are applied first to the carrying amount of the investment in associate/joint venture.
After this is zeroed-out, shares in losses are applied to the other components of the interest in the
associate or joint venture in the reverse order of their seniority (i.e., reverse order of priority in
liquidation).

After the total balance of the interest in the associate or joint venture is zeroed-out, the investor stops
sharing in further losses, except to the extent that the investor

a. Has incurred legal or constructive obligations; or

b. Made payments on behalf of the associate.

If the investee subsequently reports profits, the investor resumes recognizing its share in those profits
only after its share in the profits equals the share in losses not recognized.

Exemptions from applying the Equity Method

An investor is exempt from applying the equity method if it is exempted from preparing consolidated
financial statements, e.g., the investor is a parent but is a subsidiary of another parent and its securities
are not being traded.

Investment in associates and joint ventures held by an entity that is a venture capital organization,
mutual fund, unit trust, investment-linked insurance fund and similar entities may be measured at fair
value through profit or loss in accordance with PFRS 9 Financial Instruments.

Classification as Held for Sale

Investments in associates or joint ventures that are classified as held for sale in accordance with PFRS 5
Non-current Assets Held for Sale and Discontinued Operation are accounted for using that standard. If
only a portion of the investment is classified as held for sale, the remaining portion is accounted for
using the equity method until the portion classified as held for sale is actually sold. After the sale, the
retained portion is accounted for under PFRS 9, unless significant influence or joint control remains, in
which case the equity method continues to be applied.

If the investment previously classified as held for sale ceases to be so classified, it is accounted for using
the equity method retrospectively from the date of its reclassification as held for sale. The prior year
financial statements are restated accordingly.

Discontinuance of Equity Method

An entity stops using the equity method as from the date when it loses significant influence or joint
control over the investee.

 If the investment becomes a subsidiary, it is accounted for using PFRS 3 Business Combinations
and PFRS 10 Consolidated Financial Statements.

 If the investment becomes a regular investment, it is accounted for using PFRS 9. The fair value
of the retained interest is regarded as its fair value on initial recognition under PFRS 9. The
difference between the following is recognized in profit or loss:
 a. The fair value of the retained interest and any proceeds from disposing part of the
investment; and

b. The carrying amount of the investment at the date the equity method was discontinued.

When the equity method is discontinued, all amounts previously recognized in other comprehensive
income in relation to the investment are either reclassified to profit or loss as a reclassification
adjustment or transferred directly to retained earnings using the provisions of other PFRSs. For example,
revaluation surplus is transferred directly to retained earnings while exchange differences from
translating foreign operations are reclassified to profit or loss.

If ownership interest is reduced but significant influence or joint control is not lost, only a proportionate
amount of the OCI relating to the reduction of interest is reclassified to profit or loss or transferred
directly to retained earnings, as appropriate.

Investment in Joint Venture

The investor uses PFRS 11 Joint Arrangements to determine whether its interest in a joint arrangement
is an investment in joint venture. If this is so, the investor accounts for the investment in joint venture in
accordance with PAS 28 i.e., using the equity method similar to an investment in associate.