MODULE 2 – Investment in Associates

Prepared by: Yumaira U. Panganiban, CPA

Applicable Standard:
PAS 28- Investment in Associates and Joint Ventures

Key definitions in accordance with PAS 28 1. Associate – an entity over which the investor
has significant influence.
2. Significant influence – the power to
participate in the financial and operating policy
decisions of the investee but is not control or
joint control of those policies.
3. Equity method – a method of accounting
whereby the investment is initially recognized at
cost and adjusted thereafter for the post-
acquisition change in the investor's share of the
investee's net assets. The investor's profit or loss
includes its share of the investee's profit or loss,
and the investor's other comprehensive income
includes its share of the investee's other
comprehensive income.

Significant Influence QUANTITAVE PRESUMPTION - It is

presumed that the investor has significant
influence if it holds directly or indirectly 20% or
more of the voting power of the associate unless
it can be clearly shown that significant influence
does not exist.

If the holding is less than 20%, the investor will

be presumed not to have significant influence
unless such influence can be shown.

QUALITATIVE INDICATORS
• Representation on the board of directors
• Participation in the policy-making process
• Material transactions occurring between the
two entities.
• The changing over of management
•The provision of essential technical information
Other Considerations Potential voting rights

• The existence of potential voting rights, for

example, through the ownership of share-
warrants, share-call options, and the like, must
1
 be considered when assessing whether an entity
has significant influence.
• Will not be taken into account when they are
not currently exercisable.

Loss of significant influence

• Happens when the investor loses the power to
participate in the financial and operating policy
decisions of the investee.
• Can occur without the loss of voting power or
without a change in the ownership levels.

EQUITY METHOD

Initial Recognition:

• At cost of the investment

• Any difference between the cost of the investment and the investor’s share of the net fair value
of the associate’s identifiable assets and liabilities is accounted for as an implicit goodwill (already
included in the carrying amount of the investment). Amortization of this goodwill is not permitted.
• Any excess of the entity's share of the net fair value of the investee's identifiable assets and
liabilities over the cost of the investment is included as income in the determination of the entity's
share of the associate's profit or loss in the period in which the investment is acquired. (Negative
goodwill or gain from bargain purchase)

Adjustments – increases:

• Share in profit of associate (recognize in PL – SCI)

• Share in OCI – credit balances (recognize in OCI – SCI and SOCE)

Adjustments – decreases:

• Share in loss of associate (recognize in PL – SCI)

• Cash dividends received (dividend income not recognized)
• Share in OCI – debit balances (recognize in OCI – SCI and SOCE)

Adjustments to investee’s profit or loss:

• Gain on bargain purchase resulting from acquisition of investment

• Additional depreciation of the associate's depreciable assets based on the excess of their fair
values over their carrying amounts at the time the investment was acquired
• Additional cost of sales for inventories which fair values exceed over their carrying amounts at
the time the investment was acquired
• Dividends on cumulative preference shares (whether declared or not) and dividends on
noncumulative preference shares (only when declared)

2
Continuing Losses

• The investor discontinues recognizing its share of further losses when the carrying amount of the
investment decreases to zero.
• 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 the losses that have not been recognized.

Intercompany Transactions

• Unrealized profits or losses resulting from upstream (associate to investor) and downstream
(investor to associate) transactions should be eliminated to the extent of the investor's interest in
the associate if the asset sold between the associate and investor has not yet been sold to an
unrelated party.
• Realized profits and losses shall be recognized once the asset is sold to an unrelated party or if
the asset is being consumed through depreciation.

Achieved in Stages

• The previously held interest that was accounted for under the cost or fair value method shall be
remeasured to fair value on the date the investor gains significant influence.
• The difference between the fair value and the carrying amount of the previously held investment
shall be recognized in profit or loss.
• The total of the fair value of the previously held investment and the new acquisition cost shall be
regarded as the total cost of the investment classified as "associate".
• If the FVOCI was used to account for the previously held investment, any cumulative unrealized
gain or loss as OCI shall be reclassified to retained earnings.

Cessation

• Use of the equity method should cease from the date that significant influence ceases.
– The difference between the selling price and carrying amount of the investment sold shall
be recognized in profit or loss.
– The “retained investment” shall be accounted for under PFRS 9 and shall be remeasured
to fair value on the date significant influence ceases and recognized in profit or loss.

Exceptions from the equity method

• Where the investment is classified as held-for-sale in accordance with PFRS 5

• Where aparent does not have to present consolidated financial statements because of the
exemption in PAS 27
• The investor need not use the equity method if all of these criteria apply:
– The investor is a wholly owned subsidiary or is a partially owned subsidiary of another
entity and its owners have been informed about and do not object to the investor not
applying the equity method. The owners in this case are all of those entitled to vote.
– The investor’s debt or equity instruments are not traded in apublic market.
– The investor did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory body for the purpose of issuing any class of
financial instrument in a public market.
3
 – The ultimate or any intermediate parent of the investor produces consolidated financial
statements that are available for public use and that comply with PFRS.

PRACTICE PROBLEMS

Practice #1

X owns 60% of the voting rights of Y, Z owns 19% of the voting rights of Y, and the remainder
are dispersed among the public. Z also is the sole supplier of raw materials to Y and has a contract
to supply certain expertise regarding the maintenance of Y’s equipment.

Required: What is the relationship between Z and Y?

Practice #2

Oakley Company acquired 30% of Omer Company’s outstanding shares for P3,500,000 on July 1,
2023, and incurred P8,000 broker fee. The purchase gave the former to exercise a significant
influence over the latter. The purchase price and the fair value of interest acquired is equal at the
date of acquisition (i.e., the book value and the fair value of the acquiree’s net assets are equal).
Pertinent data regarding Omer Company for the year 2023 is shown below:

Year 2023 2024

Sales P7,500,000 P8,000,000
Expenses 4,000,000 4,200,000
Dividends paid 1,500,000 2,500,000

The fair values of the investments on December 31, 2023, and 2024 were P3,200,000 and
P4,650,000, respectively. All dividends and net income were evenly incurred and paid during the
period.

a. What is the initial cost of the investment in associate on the acquisition date?
b. What is the carrying amount of the investment on December 31, 2023?
c. What is the carrying amount of the investment to be recorded on December 31, 2024?

Practice #3
On January 1, 2022, Toselli bought 25% interest of Mah Company for 2,000,000. Mah Company,
the associate, reported the following profits and losses over the first five years of operations:

2022 P(2,500,000)
2023 (3,500,000)
2024 (4,500,000)
2025 2,000,000
2026 1,500,000

Assuming there were no dividends throughout those years, determine the carrying amount of the
investment in each year.

4
Practice #4
Amari Company owns 50% and 20% of Stace Corporation’s ordinary and preference shares,
respectively. Stace’s share outstanding on December 31, 2023 are as follows:

Ordinary share P4,000,000

10% cumulative preference share 900,000

Stace reported net income of P600,000 for the year ended December 31, 2023 and declared the
current year dividend on the preference shares. What total amount of revenue should Amari
Company disclose in the statement of comprehensive income related to its investment in Stace
Corporation for the year ended December 31, 2023.

Practice #5
On July 1, 2024, Jake Company bought 320,000 of Holt Company’s 800,000 outstanding ordinary
shares for P6,000,000 plus transaction cost of P50,000. The book value and fair market value of
Precision’s net assets are not equal due to a depreciable asset which is undervalued by P450,000
with a remaining life of five years. The following data pertain to Holt Company for the year 2024:

Net income P250,000

Cash dividends declared 125,000

Assuming all net income and dividends were evenly paid and incurred during the year.
a. What is the amount of goodwill/gain on bargain purchase from the acquisition?
b. What is the carrying amount of the investment as of the year ended December 31, 2024?

Practice #6

On January 2, 2023, Marco Company purchased 25,000 shares (30%) of Polo Company’s
ordinary shares for P220 per share. Marco also paid transaction cost of P100,000. The book value
of Polo Company’s net assets was at P15M. On the same date, a depreciable asset with a
remaining useful life of 10 years was understated by 1.5M and an intangible without definite
useful life was understated by P300,000. During 2023, Polo reported the following in its
Statement of Comprehensive Income: a P4,500,000 net income and a P500,000 revaluation
surplus at the end of the year. Marco Company received cash dividends of P1,250,000 on
December 31, 2023.

a. What is the carrying value of the investment on December 31, 2023?

b. How much is the investment income to be reported in the profit or loss for 2023?
c. Assuming that Marco Company purchased the 25,000 shares at P190 per share, what is the
carrying value of the investment on December 31, 2023 and the investment income to be reported
in profit or loss for 2023?

Practice #7
Bloom Corporation acquired 30% of Gloom Company’s 100,000 voting stock on January 2,
2023 for P2,000,000 when the net assets of Gloom Company was P6,000,000. Gloom earned
P1,000,000 and P1,500,000 in 2023 and 2024, respectively. Gloom Company paid dividends of
5
P300,000 in 2023 and P500,000 in 2024. Market value of Gloom’s ordinary shares is P80 on
December 31, 2023, and P90 on December 31, 2024. On January 2, 2024, Bloom Company sold
12,000 shares of its Gloom investment at the prevailing market value of P80.

a. How much is the gain or loss on sale taken to Profit or Loss on January 2, 2024?
b. If after the sale Bloom Company reclassified its remaining investment to FVPL, how much is
the total net amount of income that should be reported in P/L for the year 2024?
c. If after the sale Bloom Company reclassified its remaining investment to FVOCI, how much
is the total net amount of income that should be reported in P/L for the year 2024?