Investment in

Associates
 Type of Investments
Nature of relationship Percentage of
Type of investment with investee ownership interest

Investment measured at fair value Regular investor Less than 20%

Investment in associate Significant influence 20% to 50%

Investment in subsidiary Control 51% - 100%

Contractually agreed
Investment in joint venture Joint control sharing of control

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Investment in Associate
▸ An associate is an entity over which the investor has
significant influence.

Significant influence

▸ The power to participate in the financial and operating

policy decisions of the investee but not control or joint
control over those policies.

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Significant influence
Evidences of Significant influence Presumption

▸ Representation in the board of If the investor holds, directly or

directors indirectly through subsidiaries,
▸ Participation in policy making 20% or more of the voting power
process of the investee, it is presumed
▸ Material transactions between the that the investor has significant
investor and investee influence, unless it can be clearly
▸ Interchange of managerial demonstrated that this is not the
personnel case.
▸ Provision of essential technical
information
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Measurement Accounting entries for equity method
The investment is initially recorded at cost Purchase of shares
and subsequently adjusted for the investor’s
Investment in associates xx
share in the investee’s changes in equity.
Cash xx

Equity Method – it is based on the economic Net income

relationship between the investor and Investment in associates xx
investee. They are viewed as a single Investment income xx
economic unit – one and the same entity.
Dividends
Other changes in equity Cash xx
Investment in associates xx
▸ Revaluation surplus
▸ Net loss or investment with heavy
losses
▸ Impairment

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Illustration 1: Purchase of investment
On January 1, 2021, ABC Co. purchased 25% interest in the ordinary shares of
XYZ, Inc. for P2,000,000. XYZ’s assets and liabilities approximate their fair values
except for the following:

a. Inventories with a carrying amount of P500,000 have a fair value of P100,000.

b. A depreciable asset with a carrying amount of P3,000,000 has a fair value of

P5,000,000. The asset has a remaining useful life of 10 years.

XYZ net assets has a book value of P5,000,000.

On December 31, 2021, XYZ reported P1,200,000 profit and declared and paid
dividends of P500,000.
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Illustration 1: Purchase of investment
Journal entries
Fair value of the net assets acquired Investment in associate 2,000,000
Cash 2,000,000
Book value of net assets 5,000,000
Investment in associate
300,000
Overvaluation of inventory (500K- 100K) (400,000) Share in profit of Assoc.
To record share in associate’s
300,000
Undervaluation of depreciable asset (5M- 3M) 2,000,000 profit (1.2M *25%) on Dec. 31,
2021
Fair value of net assets 6,600,000
Multiply by: % of interest 25% Cash 125,000
Investment in associate 125,000
Fair value of net assets acquired 1,650,000
To record the cash dividends
(500K* 25%) on Dec. 31, 2021

Goodwill is computed as follows:

Investment in associate 100,000
Share in profit of Assoc. 100,000
Purchase cost 2,000,000
To record the overvaluation of
Less: Fair value of net assets acquired (1,650,000) inventory (400K* 25%)

Goodwill 350,000 50,000

Share in profit of Assoc.
Investment in associate 50,000
To record the undervaluation of
asset (2M* 25% /10 yrs) 7
Illustration 1: Purchase of investment
T-Account analyses:

Investment in Associate Share in profit (loss) of associate

1/1/21 2,000,000
Sh. In profit 300,000 125,000 Cash dividends 300,000 Sh. In profit
Overvaluation 50,000 Undervaluation Undervaluation Overvaluation of
100,000 50,000 100,000 inventory
of inventory of dep. asset of dep. asset
2,225,000 End. balance End. balance 350,000

Investment, end 2,225,000 Share in profit 350,000

Investment, beg. (2,000,000) Share in dividends (125,000)
Net change 225,000 Net change 225,000

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Discontinuance of Equity Method

An entity stops using the equity method as from the date when it losses
significant influence over the investee.

▸ If the investment becomes a subsidiary, it is accounted for using

PFRS 3 Business Combination 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.

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Illustration 2: Loss of significant influence
On January 1, 2021, ABC Co. acquired 30,000 ordinary shares of XYZ, Inc.,
representing 30% interest, for P3,000,000. On this date, XYZ’s net assets have a
carrying amount of P8,000,000 and fair value of P10,000,000. The difference is
attributable to an undervalued building with a remaining useful life of 10 years. XYZ
uses the straight line method of depreciation.

In 2021, XYZ reported profit of P1,000,000 and paid cash dividends of P600,000. XYZ
shares are selling at P100 per share on December 31, 2021.

On July 1, 2022, ABC sold 60% of its investment in XYZ shares at prevailing market
price of P120 per share. XYZ reported interim profit of P500,000 for the six months
ended June 30, 2022.

On December 31, 2022, XYZ reported total profit of P1,200,000 for the year and
declared P1,000,000 cash dividend. The shares are quoted at P135 per share at year-
end. 10
Illustration 2: Loss of significant influence
Journal entries

Jan. 1, Investment in associate 3,000,000

2021 Cash 3,000,000

Cash (600K *30%) 180,000

Investment in associate 120,000 Investment in Associate
Dec. 31, Sh. In profit of assoc. (1M *30%) 300,000
2021 To record share in profit and dividends 1/1/21 3,000,000 180,000 Cash div. 2021
Sh. In profit Undervaluation
Sh. In profit of assoc. [(10M-8M 2021 300,000 60,000 2021
*30%) /10 yrs]
60,000
Investment in associate 60,000 Sh. In profit Undervaluation
Dec. 31, 150,000 30,000
To record depreciation of undervalued 2022 2022
2021 building
3,180,000 July 1, 2022
Investment in associate(500K *30%) 150,000
July 1, Sh. In profit of assoc. 150,000
2022 To record sh. in profit on June 30, 2022

Sh. In profit of assoc. 30,000

Investment in associate 30,000
July 1, To record depreciation of undervalued
2022 building
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Illustration 2: Loss of significant influence
Journal entries

Cash (30K sh. *60% *120) After the sale, the unsold portion of the
Investment in associate (3.18M 2,160,000 investment is reclassified because it is
*60%) 1,908,000
presumed that significant influence is lost. The
July 1, Gain on sale of investment 252,000
remaining interest is only at 12% (initial
2022 To record the sale of investment
interest of 30% multiply by the unsold interest
Held for trading securities (30K sh. of 40%)
1,440,000
*40% =12K sh. *120)
Investment in associate (3.18M Net share in profit of associate
*40%)
1,272,000
Jan. –June (150k profit. - 30k
Gain on reclassification 168,000 undervaluation) 120,000
July 1, To record reclassification of remaining
2022 shares Gain on sale 252,000
Gain on reclassification 168,000
Dividend receivable (1M *12%) 120,000
Dividend income 120,000
Dec. 31, Dividend income 120,000
2022 To record dividend income in 2022 Unrealized gain on change of FV 180,000

Held for trading securities (135-120 Total income recognized in

*12K shares) 180,000 2022 840,000
Dec. 31, Unrealized gain – P/L 180,000
2022 To record dividend income in 2022 12
Share in losses

The investor’s share in the investee’s losses only up to the amount of its
interest in the associate.
▸ Carrying amount of the investment in associate
▸ Investment in preference shares
▸ Unsecured, long term receivables or loans

After the total balance of the interest in the associate is zeroed-out, the
investor stops sharing in further losses, except that the investor:
▸ Has incurred legal or constructive obligations
▸ Made payments in behalf of the associate

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Illustration 3: Share in losses of associate
ABC Co. owns 20% of the ordinary shares of XYZ Inc. The records of ABC as of December
31, 2021 show the following information before any necessary year-end adjustments.

Investment in associate 200,000

Trade accounts receivable –XYZ 300,000
Investment in preference shares –XYZ 100,000
Advances to associates –XYZ 50,000
Loans receivable, secured -XYZ 120,000

▸ XYZ reported loss of P1,400,000 in 2021.

▸ XYZ reported loss of P500,000 in 2022.
▸ XYZ reported loss of P100,000 in 2023. In addition, ABC incurred constructive
obligation in favor of XYZ in the amount of P120,000 and made P80,000 payments on
behalf of XYZ.
▸ In 2024, XYZ reported profit of P1,000,000.

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Illustration 3: Share in losses of associate
Interest in associate

Investment in associate 200,000

Investment in preference shares –XYZ 100,000
Advances to associates –XYZ 50,000
Interest in the associate, Dec. 31, 2021 350,000

Share in losses

Share in the loss of associate 280,000

Investment in associate 200,000
Dec. 31, Investment in preference shares 80,000
2021 To recognize sh. In loss in 2021

Share in the loss of associate 70,000

Investment in preference shares 20,000
Dec. 31, Advances to associate 50,000
2022 To recognize sh. In loss in 2022

Dec. 31, No entry. The balance of the “interest in associate” is already

2023 reduced to zero 15
Illustration 3: Share in losses of associate
Loss on associate 200,000
Cash 80,000
Dec. 31, Liability incurred on behalf of assoc. 120,000
2023 To recognize sh. In loss in 2021

Share in profit

Share in profit of associate (1M *20%) 200,000

Cumulative losses not recognized (30K +20K) (50,000)
Share on profit of associate, adjusted 150,000

Advances to associate 50,000

Investment in preference shares 100,000
Dec. 31, Share in profit to associate 150,000
2024 To recognize sh. In profit in 2024

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