FINANCIAL ACCOUNTING AND REPORTING

Investment in Associates (Equity Method)

Significant Influence 2. Loss of power to participate in the

It is the power to participate in the financial financial and operating policy decisions of
and operating policy decisions of the investee but the investee.
not control or joint control over those policies. 3. Associate becoming subject to control of a
government, court, administrator, or
Control regulator.
It is the power over the investee or the 4. As a result of contractual agreement.
power to govern the financial and operating
policies of an investee so as to obtain benefits. Equity Method
1. It is applicable when the investor has a
Associate significant influence over the investee.
It is defined as an entity over which the 2. The investor and the investee are viewed
investor has significant influence. as a single economic unit.
3. It is only applied if the investment is in
Subsidiary ordinary shares (voting shares) (FVPL or
It is defined as an entity that is controlled FVOCI classification is applied to
by another entity. investments in preference shares).
4. The investment is initially recognized at
Degree of Influence of Investor cost.
1. Ownership of less than 20% of outstanding 5. The carrying amount is increased
shares – no significant influence or (decreased) by the investor’s share of the
control; simple investment in equity profit (loss) of the investee.
securities 6. Distributions or dividends received from
2. Ownership of 20% to 50% - significant an investee reduce the carrying amount of
influence; investee is considered an the investment.
associate of investor. 7. The investment is recorded under the
3. Ownership of more than 50% - control; Investment in Associate account.
investee is considered a subsidiary of
investor (parent). Journal Entries Under Equity Method
1. Acquisition of shares – Dr. Investment in
Exceptions to the 20% Threshold of Ownership associate (at cost); Cr. Cash
Rule 2. Share in net income of associate – Dr.
An investor may still have significant Investment in associate (associate’s net
influence over an investee even if the 20% income * percentage ownership by
threshold of ownership is not met if there is investor over associate); Cr. Investment
evidence of any of the following factors: income
1. Representation in the board of directors 3. Share in net loss of associate – Dr. Loss
2. Participation in policy making process on investment; Cr. Investment in associate
3. Material transactions between the (associate’s net loss * percentage
investor and investee ownership)
4. Interchange of managerial personnel 4. Receipt of stock dividend – memorandum
5. Provision of essential technical entry
information 5. Receipt of cash or property dividend – Dr.
6. Ownership of potential voting rights that Cash or noncash asset; Cr. Investment in
are currently exercisable (e.g., share associate
warrants, debt or equity instruments that
are convertible into ordinary shares, etc.) Excess of Cost Over Carrying Amount
It occurs when the investor pays more
Causes of Loss of Significant Influence than the carrying amount of the net assets (of
1. Transfer of ownership of shares by the investee) acquired. Such excess is attributed to
investor leaving no or less than 20% the following in order of priority:
ownership over the investee. 1. Undervaluation of the investee’s assets
(e.g., building, land, inventory, etc.); and/or
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 FINANCIAL ACCOUNTING AND REPORTING
Investment in Associates (Equity Method)

2. Goodwill. Impairment of Investment in Associate

An impairment loss shall be recognized
Formula: whenever the carrying amount of the investment
a. Acquisition cost – Carrying amount of in associate exceeds its recoverable amount.
net assets acquired = Excess of cost
over carrying amount Investee with Cumulative Preference Shares
b. Excess of cost over carrying amount – When an associate has outstanding
Undervaluation of assets of investee = cumulative preference shares, the investor shall
Excess attributable to goodwill compute its share of earnings or losses after
deducting the preference dividends, whether or
Treatments for Excess of Cost over Carrying not such dividends are declared.
Amount
Journal entry for amortization or Investee with Noncumulative Preference Shares
recognition as expense of excess of cost over When an associate has outstanding
carrying amount – Dr. Investment income; Cr. noncumulative preference shares, the investor
Investment in associate shall compute its share of earnings after
1. Attributable to depreciable asset – deducting the preference dividends only when
amortized over the remaining life of the declared.
depreciable asset
2. Attributable to land – not amortized Other Changes in the Associate’s Equity
3. Attributable to inventory – expensed when Adjustments to the carrying amount of the
the inventory is sold investment in associate may be necessary for
4. Attributable to goodwill – not amortized changes in the investor’s proportionate interest in
(but the entire investment in associate the investee arising from changes in the
including the goodwill is tested for investee’s equity that have not been recognized in
impairment at the end of each reporting the investee’s profit or loss (e.g., revaluation of
period) property, plant and equipment, foreign exchange
translation differences, etc.).
Treatment for Excess of Net Fair Value Over Cost
Any excess of the investor’s share of the Reporting Date of the Investee
net fair value of the associate’s identifiable assets a. The most recent available financial
(does not include goodwill) and liabilities over the statements of the associate are to be used by the
cost of the investment is included as income in investor in applying the equity method.
the determination of the investor’s share of the b. When the reporting dates of the investor
associate’s profit or loss. and the investee are different, the associate shall
1. Attributable to depreciable asset – prepare for the use of the investor financial
amortized over the remaining life of the statements as of the same date as the financial
depreciable asset statements of the investor unless it is
2. Attributable to land – not amortized impracticable to do so.
3. Attributable to inventory – expensed when c. In any case, the difference between the
the inventory is sold reporting date of the associate and that of the
investor shall be no more than three (3) months.
Investee with Heavy Losses
If an investor’s share of losses of an Accounting Policies of the Investee
associate equals or exceeds the carrying amount If an associate uses accounting policies
of an investment, the investor discontinues other than those of the investor, adjustments shall
recognizing its share of further losses. The be made to conform the associate’s accounting
investment is reported at nil or zero. policies to those of the investor.
If the associate subsequently reports
income, the investor resumes including its share Upstream Transactions
of such income after its share of the income These are sales of assets (e.g., inventory)
equals the share of losses not recognized. from an associate to the investor. The unrealized
profit from these transactions must be eliminated
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 FINANCIAL ACCOUNTING AND REPORTING
Investment in Associates (Equity Method)

in determining the investor’s share in profit or loss other owners do not object to the
of associate. investor not applying the equity
method;
Unrealized and Realized Profit from Upstream • The investor’s debt and equity
Transactions instruments are not traded in a public
Upstream sale price – Cost of asset sold = market or “over the counter: market;
Profit from upstream sale • The investor did not file or it is not in
the process of filing financial
1. Unrealized profit – profit attributed to statements with the SEC for the
asset sold by an associate to the investor purpose of issuing any class of
when such asset is still held by the instruments in a public market; and
investor at the end of the reporting period. • The ultimate or any intermediate
2. Realized profit – profit attributed to asset parent of the investor produces
sold by an associate to the investor when consolidated financial statements
such asset is subsequently sold by the available for public use the comply
investor (except when depreciable asset with PFRSs.
was sold).
Associate Held for Sale
Downstream Transactions The investment in associate classified as
These are sales of assets (e.g., inventory) “held for sale” shall be measured at lower of
from the investor to an associate. The unrealized carrying amount and fair value less cost of
profit from these transactions must be eliminated disposal.
either:
1. By deducting the same from the profit of Cost Method
the associate as in upstream transactions; It is the accounting method applied with
or respect to investment in unquoted equity
2. By adjusting the accounts of the investor. instrument or nonmarketable equity investment.

Upstream or Downstream Sale of Depreciable Journal Entries Related to Cost Method

Asset 1. Acquisition – Dr. Investment in equity
The profit on the upstream or downstream securities; Cr. Cash
sale of depreciable asset is realized as the asset 2. Investee reported net income – No entry
is used or over the remaining life of the asset. required
3. Investee reported net loss – No entry
Discontinuance of Equity Method required
An investor shall discontinue the use of the 4. Receipt of stock dividend – Memorandum
equity method from the date that it ceases to have entry
significant influence over an associate. 5. Receipt of cash dividend – Dr. Cash; Cr.
Consequently, the investor shall account for the Dividend income
investment as follows: 6. Changes in fair value – No entry required
1. Financial asset at FVPL 7. Sale of shares (selling price > cost) – Dr.
2. Financial asset at FVOCI Cash (selling price); Cr. Investment in
3. Nonmarketable investment at cost or equity securities (cost), Gain on sale of
investment in unquoted equity instrument investment (balancing figure)

Instances When Equity Method Is Not Applicable Reclassification from Equity Method to Fair Value
1. If the investor is a parent exempt from Method (i.e., FVPL or FVOCI) or Cost Method
preparing consolidated financial 1. Occurs when significant influence is lost
statements; or for some reason.
2. If all of the following apply: 2. Any retained investment is measured at
• The investor is a wholly-owned fair value.
subsidiary, or a partially-owned 3. The difference between the net proceeds
subsidiary of another entity and the from disposal of part of the investment
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 FINANCIAL ACCOUNTING AND REPORTING
Investment in Associates (Equity Method)

and the carrying amount of the investment

sold is included in profit or loss.

Reclassification from Fair Value Method or Cost

Method to Equity Method
1. Occurs when investment in associate is
achieved in stages.
2. The existing interest in associate is
remeasured at fair value with any change
in fair value included in profit or loss.
3. If the existing interest is accounted for as
FVOCI, any unrealized gain or loss at the
date the investee becomes an associate is
reclassified to retained earnings.
4. The fair value of the existing interest plus
the cost of the additional interest acquired
constitutes the total cost of the
investment for the initial application of the
equity method.
5. The total cost of the investment for the
initial application of the equity method
minus the carrying amount of the net
assets acquired at the date significant
influence is obtained equals excess of cost
over carrying amount or excess net fair
value.

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