thus if this happens, it shall account for

the investment at FMV (& IFRS9), and NOT

use Equity Method

INVESTMENTS IN ASSOCIATES & JOINT VENTURE

If the investor holds, directly or indirectly through
subsidiaries, 20% or more of the voting power of
the investee, it is presumed that the investor has
significant influence, unless it can be clearly
demonstrated that this is not the case.

Associate- defined as an entity over which the

investor has significant influence

Joint venture- arrangement whereby the

parties, that have joint control of the
arrangement, have rights to the net assets of
the arrangement

Significance influence- power to participate in

the financial and operating policy decisions of
the investee but not control or joint control
over these policies

Control- power to govern the financial and

operating policies of an entity so as to obtain
benefits from its activities

Subsidiary- defined as an entity that is

controlled by another entity
*associates= investee; not limited to an
incorporated entity (unincorporated are
partnerships and joint ventures)
Significant influence by an investor is usually
evidenced by these factors:
Representation in the board of directors
Participation in policy making process
Material transactions between the investor and
the investee
Interchange of managerial personnel
Provision of essential technical info
Investments in associate and joint venture shall be
accounted for using the equity method (as long as it
is not held for disposal in within 12 months from
acquisition date)
Unless all of the ff conditions exist:
Investor is a subsidiary of another entity
The investors debt or equity instruments
are not traded for in a public capital market
The entity did not file/is filing its financial
statements w/ a securities commission for
the purpose of issuing any class of
instruments in a public market
the intermediate parent of the entity
produces consolidated financial statements
for public use

EQUITY METHOD investor and investee are

viewed as a single economic unit
-for ordinary shares only (preference shares is a
nonvoting equity)
in the balance sheet, investment in associate
comprise of fair value (price paid) + net income
impairment in the investment dividend payments
impairment loss of goodwill
in the statement of comprehensive income,
Investment income comprise of net income + excess
FMV impairment loss of goodwill - excess of
undervaluation
* Goodwill is not separately calculated since it is
already included in the fair value
1. INITIAL RECOGNITION- initially recorded at
purchase price or the FMV + transaction costs
e.g.

investment in associate
cash

xx
xx

2.PROFIT RECEIVED FROM ASSOCIATE COMP.

- The carrying amount of the investment is
increased (or decreased) to recognize the profit
(or loss)
- This is recognized at the investors profit or loss
(in the statement of comprehensive income) or
the income statement
*profit= income from the regular course of
business or operations of the company
e.g.

investment in associate
investment income

xx
xx

3.ADJUSTMENT OF CARRYING AMOUNT OF INVST.- fmv

of a certain asset is greater than its carrying amount;
thus, depreciation is understated
Step 1. Get the excess of cost over carrying amount
= Investors acquisition cost carrying amount of the net
assets acquired (e.g. 20% x 20M)
Step 2. The excess is allotted for the Undervaluation of
depreciable asset (e.g. 20% x total amount of
undervaluation), then the remainder as Goodwill.

Step 3. Annual entry to amortize depreciation of

undervalued asset[share of undervaluation/ years of
life]; or if the asset is sold during the year, just record
the total amt. of undervaluation
e.g.

investment income
xx
investment in associate

xx

4.IMPAIRMENT LOSS OF GOODWILL- if the goodwill is

assessed as impaired, entry is as follows. [excess of
cost- share in undervaluation]
e.g.
investment income
xx
investment in associate xx
5. EXCESS OF NET FAIR VALUE OVER COST i.e.
investors cost- share in FMV of net asset is NEGATIVE
e.g.

investment in associate
investment income

xx

-loss is only up to the extent of the carrying

amount of investment
-entry is done only at the year when there is
income
Disposal of investment in associates record gain/loss
on sale of investment [cash-investment in associate]
Reclassification of equity securities when investor
losses significant control, thus he can no longer use the
equity method and reclassify the investment at fair
value (irrevocable choice of OCI or P&L)
Reclassification to less than 20%:
e.g. equity investments (at FMV)
investment in associate
gain from investment

xx
xx
xx

xx

6.DIVIDENDS RECEIVED FROM ASSOCIATE COMP.

distributions received from investee; similar to the
concept of the previous dividends but w diff. credit acct.
e.g.
cash or rcvbl
xx
investment in associate
xx
7.INVESTMENT INCOME RECOGNIZED IN OCI changes
in the investees equity that have not been recognized
in the profit or loss adjustments to OCIex.
Revaluation of PPE, change in FMV, etc through OCI
e.g.
investment in associate
xx
OCI (share in revaluation incr. of assoc) xx
Other issues affecting the investment in associate
Difference in reporting dates- ex. The associate and
investor is using fiscal and calendar year, then
the associate would make an fs same as
investor (but not obliged)
Difference in accounting policies- investor adjusts
Associate has preference shares dividends would
be declared as such
o Investor has cumulative preference shares
Step1. Get the profit attributable to ordinary
shareholders
Associates total profit- [PS% x total par value]
Step2. Multiply to investors percent in equity
o Investor has non cumulative preference shares
Step1. Get the profit attributable to ordinary
shareholders
Associates total profit- DECLARED preference
shares
Step2. Multiply to t=investors percent in equity
Associate continuously reports losses- dr. loss on
investment cr. Investment In associates

Reclassification to more than 20% or more:

e.g. investment in associate
xx
equity investments at FV (OCI or PL)

xx