INVESTMENT IN ASSOCIATE

BASIC PRONCIPLES
 INTERCORPORATE SHARE
INVESTMENT
The purchase of the equity shares of one entity by another entity.
It is a case of one entity investing in another entity through the
acquisition of share capital.
An entity may purchase enough shares of another entity in order to exert
significant influence over the financial and operating policies of the
investee entity.
 SIGNIFICANT INFLUENCE
Is the power to participate in the financial and operating policy decisions of the
investee but not control or joint control over those policies.

Investors hold 20% or Investors holds less than A substantial or majority Beyond the mere 20%
more of the voting power 20% of the voting power ownership by another threshold of ownership.
of the investee, it of the investee it investor does not a.) Representation in the board
of directors
presumed that the presumed that the necessarily preclude an b.) Participant in policy making
investors has significant investors does not have investors from having process
influence. significant influence. significant influence. c.) Material transactions
between the investor and the
investee
d.) Interchange of managerial
personnel
e.) Provision of essential
technical information
 POTENTIAL VOTING RIGHTS
The potential voting rights should be currently exercisable or convertible.
Potential voting rights are not currently exercisable or convertible when the rights
cannot be exercised or converted until a future date or until the occurrence of a
future event.

LOSS OF SIGNIFICANT INFLUENCE

An entity losses significant influence over an investee when it loses the power to
participate in the financial and operating policy decisions of the investee.
The loss of significant influence could also occur as a result of a contractual
agreement.
 EQUITY METHOD

The equity method is based on the economic relationship between the investor and
the investee.
The equity method is applicable when the investors has a significance influence
over the investee.
 ILLUSTRATION-EQUITY METHOD
1) On January 1, 2021, an investor purchased 20,000 shares of the 100,000 outstanding ordinary
shares of another entity at P200 per share.
The investment represents a 20% equity interest and the investors has a significant influence over the investee. The
acquisition cost is equal to t he carrying amount of the net assets acquired.
Investment in associate 4,000,000
Cash 4,000,000
2) The investee reported net income of P5,000,000 for 2021.
The investor recognized a share of the net income of the investee equal to 20% of P5,000,000 or P1,000,000.
Investment in associate 1,000,000
Investment income 1,000,000
 ILLUSTRATION-EQUITY METHOD
3) Received a 25% share dividend from the investee on December 31,2021.
Memo – Received 5,000 ordinary shares as 25% share dividend on 20,000 original shares. Shares now held, 25,000 shares.
Note that the 20% equity interest is not affected by the share dividend. The equity interest is the same before and after the same dividend.

4) The investee reported a net loss of P1,000,000 for 2022.

The investor recognized a share in the net loss of the investee equal to 20% of P1,000,000 or P200,000.
Loss on investment 200,000
Investment in associate 200,000

5) The investee declared and paid a cash dividend of P2,500,000 on ordinary shares on December 31,
2022.
The investor recognized a share in the cash dividend paid by the investee equal to 20% of P2,500,000 or P500,000.
Cash 500,000
Investment in associate 500,000
*Under the equity method, cash dividend is not an income but a return or reduction of investment.
 EXCESS OF COST OVER CARRYING AMOUNT
If the investor pays more than the carrying amount of the net assets acquired, the difference is commonly known as
“excess of cost over carrying amount” and may be attributed to the following:
a) Undervaluation of the investee’s assets, such as building, land and inventory.
b) Goodwill
 If the assets of the investee are fairly valued, accountants frequently attribute the excess of cost over carrying amount of
the carrying amount of the underlying net assets to goodwill.

If the excess is If the excess is If the excess is If the excess is

attributable to attributable to attributable to inventory, attributable to goodwill,
undervaluation of undervaluation of land, it the amount is expensed it is included in the
depreciable asset, it is is not amortized because when the inventory is carrying amount of the
amortized over the the land is already sold. investment and not
remaining life of the nondepreciable. amortized.
depreciable asset. *The amount is expensed
when the land is sold.
 ILLUSTRATION
At the beginning of the current year, an investor purchased 20% of the outstanding ordinary shares of an investee for P5,000,000.
The net assets of the investee on the date of acquisition are fairly valued except for a depreciation asset for which the fair value
is P2,000,000 greater than its carrying amount. Any remaining excess is attributable to goodwill.
The carrying amount of the investee’s net assets was P20,000,000. The investor therefore paid P1,000,000 in excess of the
carrying amount of net assets.
Acquisition Cost 5,000,000
Carrying amount of net assets acquired 4,000,000
(20%x20,000,000) 1,000,000

The excess of attributable to the following:

Undervaluation of depreciable asset of investee with

remaining life 5 years (20%xP2,000,000) 400,000
Goodwill-remainder 600,000
Excess of cost over carrying amount 1,000,000

Investment income 80,000

Investment in associate 80,000
(400,000/5 years)
 EXCESS OF NET FAIR VALUE OVER COST

• PAS 28,paragraph 32, provides that any excess of the investor’s share of the net fair value of
the associate’s identifiable assets and liabilities over the cost of the investment is included as
income in the determination of the investor’s share of the associate’s profit or loss in the
period in which the investment is acquired.
 ILLUSTRATION
At the beginning of the current year, an investor purchased 40% of the ordinary shares
outstanding of an investee for P15,000,000 when the net assets of the investee amounted to
P30,000,000.
At the acquisition date, the carrying amount of the identifiable assets and liabilities of the
investee were equal to their fair value, except for the following:
a) Equipment whose fair value was P7,000,000 greater than carrying amount.
b) Inventory whose fair value was P2,500,000 greater than carrying amount.
The equipment has a remaining life of 4 years and the inventory was all sold during the
current year.
The investee reported net income of P20,000,000 for the current year and paid P5,000,000
cash dividend at year-end.
 ILLUSTRATION-COMPUTATION

Acquisition cost 15,000,000

Carrying amount of net assets acquired (40% x P30,000,000) 12,000,000
Excess of cost over carrying amount 3,000,000
Less: Excess attributable to equipment (40% x P7,000,000) 2,800,000
Excess attributable to inventory (40% x P2,500,000) 1,000,000
Excess net fair value over cost -800,000
 INVESTEE WITH HEAVY LOSSES
• PAS 28, paragraph 38, provides that if an investor’s share of losses of an associate equals or
exceeds the carrying amount of an investment, the investors discontinues recognizing its
share of future losses.
• The investment is reported at nil or zero value.
• If the associate subsequently reports income the investor resumes including its share of such
income after its share of the income equals the share of losses not recognized.
 ILLUSTRATION
On January 1, 2021, an investor acquired 25% of the ordinary shares of an associate for
P5,000,000.
On this date, the identifiable assets and liabilities of the associate were measured at fair value
and there is no goodwill arising from the acquisition.
The profits and losses made by the associate over the first 5 years of operations were:

Profit (loss) Investor's share

2021 (1,000,000) (250,000)
2022 (10,000,000) (2,500,000)
2023 (12,000,000) (3,000,000)
2024 2,000,000 500,000
2025 2,500,000 625,000
 ILLUSTRATION
Journal Entries
2021Loss on investment 250,000
Investment in associate 250,000

2022Loss on investment 2,500,000

Investment in associate 2,500,000

2023Loss on investment 2,250,000

Investment in associate 2,250,000

Acquisition cost 5,000,000

Loss on investment:
2021 (250,000)
2022 (2,500,000)
Carrying amount- January 1, 2023 2,250,000

The investor's share in the loss of the associate for 2023 is P3,000,000

However, the loss to be recognized cannot exceed the carrying amount

of the investment of P2,250,000. The investment is reduced to zero.
 ILLUSTRATION-SOLUTION
2024No entry
Share in the loss 2023 3,000,000
Loss recognized in 2023 2,250,000
Unrecognized loss in 2023 750,000
Share in profit for 2024 500,000
Remaining unrecognized loss 250,000

If the associate subsequently reports profit, the investor

resumes
recognizing its share of profit only after the share of profit equals
the share of losses not previously recognized.

2025Investment in associate 375,000

Investment income 375,000

Share in profit for 2025 625,000

Remaining unrecognized loss (250,000)
Share in profit to be recognized in 2025 375,000
 IMPAIRMENT LOSS
• PAS 28,paragraph 40, requires that an impairment loss shall be recognized whenever the
carrying amount of the investment in associate exceeds recoverable amount.
• Recoverable amount is measured as the higher between fair value less cost of disposal and
value in use.

Value in use is the present value of the estimated future cash flows expected to arise from the
continuing use of an asset and from its ultimate disposal.

a) Present value of estimated future cash flows expected to be generated by the investee, including
cash flows from operations of the investee and the proceeds on the ultimate deposal of the investment.
b) Present value of the estimated future cash flows expected to arise from dividends to be received
from the investment and from its ultimate disposal.
 INVESTEE WITH PREFERENCE SHARES
• When an associate has outstanding cumulative preference shares, th3 investors shall
compute its share of earnings or losses after deducting the preference dividends, whether or
not such dividends are declared.
• When an associate has outstanding noncumulative preference shares, th3 investor shall
compute its share of earnings after deducting the preference dividends only when declared.
 ILLUSTRATION

An investee reported the following capital accounts at the beginning of current year:
Preference share capital, 12% cumulative, P100 par,
50,000 shares issued 5,000,000
Ordinary share capita, P50 par, 500,000 shares authorized
and 200,000 shares issued 10,000,000
Retained earnings 5,000,000
On the same date, an investor acquired 40,000 ordinary shares of the investee representing a 20%
interest for P3,000,000.
The net assets of the investee are fairly valued.
The investee reported net income of P2,000,000 for the current year and paid cash dividends of
P500,000 to ordinary shareholders and the preference rate.
 ILLUSTRATION-SOLUTION
Journal Entries for current year
1. To record the investment:
Investment in associate 3,000,000
Cash 3,000,000

2. To record the share in net income:

Investment in associate 280,000
Investment income 280,000

Net income 2,000,000

Prefence dividend (12% x 5,000,000) 600,000
Net income to ordinary share 1,400,000

Share in net income (20% x 1,400,000) 280,000

3. To record the share dividend:

Cash (20% x 500,000) 100,000
Investment in associate 100,000
 OTHER CHANGES IN EQUITY
• Adjustments to carrying amount of the investment in associate may be necessary for changes
in the investee arising from changes in the investee's equity that have not been recognized in
the investee’s profit or loss.
• The investor’s share of those changes is recognized directly in equity of the investor.
 ILLUSTRATION
The investment in associate is 20% as a consequence of which the investor has significant
influence over the investee.
The investee reported the following for the current year:
Net Income 6,000,000
Dividend paid 2,000,000
Revaluation surplus 3,000,000
 ILLUSTRATION-SOLUTION

Journal entries for curremt year

1. Share in net income:
Investment in associate 1,200,000
Investment income (20% x 6,000,000) 1,200,000

2. Share n dividend paid:

Cash (20% x 2,000,000) 400,000
Investment in associate 400,000

3. Share in revaluation surplus:

Investment in associate 600,000
Revaluation surplus- investee (20% x 3,000,000) 600,000
THANK YOUU!