CABRIA CPA REVIEW CENTER
INVESTMENT IN ASSOCIATES AND JOINT VENTURES
LECTURE
ASSOCIATE – is an entity over which the investor has
significant influence.
JOINT VENTURE – is an arrangement whereby the parties,
that have joint control of the arrangement, have rights to
the net assets of the arrangement.
The existence of significant influence by an investor is
usually evidences in one or more of the following ways:
a. Representation on the board of directors or
equivalent governing body of the investee
b. Participation in policy-making processes, including
participation in decisions about dividends or other
distributions
c. Material transactions between the investor and the
investee
d. Interchange of managerial personnel
e. Provision of essential technical information
Holding 20 per cent or more of voting power
As a general rule, significant influence is presumed to exist
when an investor holds, directly or indirectly through
subsidiaries, 20 per cent or more of the voting power of the
investee.
This presumption relates to voting rights, which can arise
not just in relation to an ordinary share holding. For
example, when 50 per cent of the voting rights in an entity
are held by the ordinary shareholders, and the other 50 per
cent of the voting rights are attached to voting preferred
shares, an investment in four per cent of the ordinary shares
and thirty-six per cent of the voting preferred shares will
result in a presumption that the four per cent ordinary share
ownership will be accounted for under the equity method,
provided that the voting preferred share investment is, with
respect to voting rights, substantively the same as an
investment in ordinary shares.
Holding less than 20 per cent of voting power
If the investor holds, directly or indirectly through
subsidiaries, less than 20 per cent of the voting power of
the investee, it is presumed that the investor does not have
significant influence, unless such influence can be clearly
demonstrated. The presence of one or more of the
indicators set out in the earlier paragraph may indicate that
an investor exercises significant influence over a less than
20 per cent-owned corporate investee.
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Tel. Nos. (043) 980-6659
ERNIE M. LAT II
Decisions regarding the appropriateness of applying the
equity method for a less than 20 per cent-owned corporate
investee require careful evaluation of voting rights and their
impact on the investor's ability to exercise significant
influence.
In addition to the indicators set out above, the following
indicators could provide evidence of significant influence:
 The investor's extent of ownership is significant
relative to other shareholdings (i.e. a lack of
concentration of other shareholders)
 The investor's significant shareholders, its
parent, fellow subsidiaries, or officers of the
investor, hold additional investment in the
investee
 The investor is a member of significant investee
committees, such as the executive committee or
the finance committee.
Potential voting rights
Potential voting rights can arise through share warrants,
share call options, debt or equity instruments that are
convertible into ordinary shares, or similar instruments that
have the potential, if exercised or converted, to give the
holder additional voting power or reduce another party's
voting power over the financial and operating policies of
another entity. When an investor owns such instruments,
the existence and effect of potential voting rights that are
currently exercisable or currently convertible are considered
when assessing whether the investor has significant
influence over that other entity. Potential voting rights are
not currently exercisable or convertible when, for example,
they cannot be exercised or converted until a future date or
until the occurrence of a future event.
Investment in preferred shares that is substantively
the same as in ordinary shares
When an investment in preferred shares is determined to be
substantively the same as an investment in ordinary shares,
the investment may give the investor significant influence,
in which case the investment should be accounted for using
the equity method. Factors that either individually or
collectively may indicate that a preferred share investment
is substantively the same as an ordinary share investment
include:
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 The investee has little or no significant ordinary
shares or other equity, on a fair value basis that is
subordinate to the preferred shares
 The investor, regardless of ownership percentage,
has demonstrated the power to exercise significant
influence over the investee's operating and financial
decisions. The power to participate actively is an
important factor in determining whether an equity
interest exists by virtue of preferred share holdings
 The investee's preferred shares have essentially the
same rights and characteristics as the investee's
ordinary shares as regards voting rights, board
representation, and participation in, or rate of
return approximating, the ordinary share dividend
 The preferred shares have a conversion feature
(with significant value in relation to the total value
of the shares) to convert the preferred shares to
ordinary shares
Long-term interests that in substance form part of
the investor's net investment in an associate
An investor may have a variety of interests in an associate
both long term and short-term, including ordinary or
preferred shares, loans, advances, debt securities, options
to acquire ordinary shares, and trade receivables. For the
purposes of IAS 28(2011):38 which considers the extent to
which losses of an associate should be recognized, the
investor's interest in the associate is the carrying amount of
the investment in the associate under the equity method
together with any long-term interests that, in substance,
form part of the investor's net investment in the associate.
Accounting for investment in associates
IAS 28 defines the equity method as 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 net assets of the investee.
The equity method
An entity with significant influence over, or joint control of,
an investee should account for its investment in an associate
or a joint venture using the equity method except when the
investment qualifies for exemption.
IAS 28 defines the equity method as 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 net assets of the investee. The profit or
loss of the investor includes the investor's share of the profit
or loss of the investee, and the investor's other
comprehensive income includes its share of the investee's
other comprehensive income.
IAS 28 justifies the use of the equity method by noting that
the recognition of income on the basis of distributions
received may not be an adequate measure of the income
earned by an investor on an investment in an associate or
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a joint venture because the distributions received may bear
little relation to the performance of the associate or joint
venture. Because the investor has joint control of, or
significant influence over, the investee, the investor has an
interest in the associate's or joint venture's performance
and, as a result, the return on its investment. It is therefore
appropriate for the investor to account for this interest by
extending the scope of its financial statements to include its
share of the profit or loss of such an investee. As a result,
application of the equity method provides more informative
reporting of the investor's net assets and profit or loss.
The equity method is used whether or not the investor,
because it also has subsidiaries, prepares consolidated
financial statements. However, the investor does not apply
the equity method when presenting separate financial
statements.
Application of the equity method
Under the equity method, an investment is initially
recognised at cost, and the carrying amount is adjusted
thereafter for:
 The investor's share of the post-acquisition profits
or losses of the investee, which are recognised in
the investor's profit or loss; and
 Distributions received from the investee, which
reduce the carrying amount of the investment.
Adjustments to the carrying amount may also be necessary
for changes in the investor's proportionate interest in the
investee arising from changes in the investee's other
comprehensive income (such as the impact of property
revaluations and some exchange differences). The
investor's share of those changes is recognised in other
comprehensive income of the investor.
The investor's share of the investee's profits or losses after
acquisition is also adjusted to take account of items such as
additional depreciation of depreciable assets based on their
fair values at the acquisition date.
Similarly, appropriate adjustments to the investor's share of
the associate's or joint venture's profit or loss after
acquisition are made for impairment losses such as for
goodwill or property, plant and equipment.
IAS 28(2011):10 specifies that the investment in an
associate or joint venture accounted for using the equity
method is initially recognised at cost. Generally, cost
includes the purchase price and other costs directly
attributable to the acquisition or issuance of the asset such
as professional fees for legal services, transfer taxes and
other transaction costs. Therefore, the cost of an
investment in an associate or joint venture at initial
recognition comprises the investment's purchase price and
any directly attributable expenditure necessary to acquire it.
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REVIEW QUESTIONS
1. Under the cost model of accounting for an
investment, changes to the carrying amount of the
investment occur if:
a. the investee earns post-acquisition profits or
losses;
b. goodwill included in the investment is
amortized;
c. the investment is impaired;
d. dividends are received from the investee.
2. The method of accounting that applies to an
investor and associate relationship is the:
a. cost method;
b. fair value method;
c. consolidation method;
d. equity method.
3. For the purposes of equity accounting an associate
is a business entity including:
a. an unincorporated entity;
b. a joint venture;
c. a subsidiary;
d. venture capital organizations.
4. For the purposes of equity accounting, significant
influence is regarded as the power of an investor
to:
a. control the financial and operating policies of an
associate;
b. participate in the financial and operating policy
decisions of an investee;
c. participate in the day-to-day management of a
joint venture interest;
d. dominate the financing decisions of an entity.
5. The application of the equity accounting method of
accounting is based on the investor owning:
a. more than 50% of the voting power in an
associate;
b. more than 20% of the voting power in an
associate;
c. less than 20% of the voting power in an
associate;
d. part of the share capital of an associate
whether or not there are voting rights attached.
6. The equity method of accounting need not be
applied where the investment:
a. represents more than 20% of the voting shares
of an associate;
b. does not provide the investor with significant
influence;
c. is held exclusively with a view to its disposal
within 12 months;
d. is made by an investor who has no subsidiaries.
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7. Where all of the following conditions apply an
investor need not apply the equity method of
accounting:
I. The investor is a wholly owned subsidiary
or a partly owned subsidiary and its owners
do not object to the method not being
used.
II. The investor's debt or equity securities are
not traded in a public market.
III. The investor has not filed financial
statements with a regulatory organisation
for the purpose of issuing any class of
securities in a public market.
IV. The ultimate parent of the investor
publishes consolidated financial statements
that comply with IFRS.
a. I and IV only;
b. II and III only;
c. I, II and III only;
d. I, II, III and IV.
8. In respect to the equity method of accounting,
where an investor has no subsidiaries the investor
must apply the:
a. cost method of accounting for investments in
associates;
b. consolidated financial reporting
c. equity method in its own accounting records;
d. net present value method to measuring the
expected cash flows from an associate.
9. The 'one-line' equity accounting method is used
when accounting for an investment in:
a. a subsidiary;
b. a unit trust;
c. a joint venture;
d. an associate.
10. The equity method of accounting for an investment
in an associate includes the following steps:
Recognize the initial investment at cost
Recognize the initial investment at fair value
Reduce the carrying amount by any distributions
Adjust the carrying amount by the investor's share
associate's profit or loss
a. I
b. II
c. III
d. IV
11. Mandy Limited acquired a 30% share in Sandy
Limited for P27 000. Mandy Limited has no other
investments. At the date on which it became an
associate, Sandy Limited had the following equity
items: Share capital P50 000, Retained earnings
P40 000. At the end of the financial year following
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acquisition, Sandy Limited generated a profit of P6 dividend of P5 000. The balance in the investment
000. The carrying amount of the investment in account after equity accounting has been applied is:
Sandy Limited at the end of the financial year is: a. 26,200
a. 25,200 b. 27,700
b. 27,000 c. 28,000
c. 28,800 d. 29,200
d. 33,000
Initial investment (P25 000) + share of
27,000 + (6,000 * 30% = 1,800) = 28,800 revaluation (30% x P4 000) + share of profit
(30% x P10 000) – share of dividend (30% x
12. Codger Limited acquired a 40% investment in P1 500).
Lodger Limited for P50 000. Lodger declared and
paid a dividend of P10 000. Codger Limited does not 16. Where goodwill is acquired on an investment in an
prepare consolidated financial statements. The associate the goodwill is:
appropriate entry for the investor to record this a. amortised across the useful life of the goodwill;
dividend is: b. written off immediately against the carrying
a. DR Cash P4 000 amount of the investment;
CR Investment in associate P4 c. carried as a separate asset in the accounting
000; records of the investor;
b. DR Dividends payable P4 000 d. not subject to amortisation.
CR Cash P4 000;
c. DR Cash P4 000 17. When an associate declares and pays a dividend out
CR Dividend revenue P4 000; of pre-acquisition profits the application of the
d. DR Investment in associate P4 000 equity method results in the investor making the
CR Dividend revenue P4 000. following adjustment:
a. DR Investment in associate;
b. Cr Cash;
13. Investor Limited acquired a 25% interest in c. CR Dividend revenue;
Investee Limited for P15 000. Investor holds other d. No adjustment.
equity investments but does not prepare
consolidated financial statements. Investee Limited If the dividend is made out of pre-acquisition
revalued its buildings class of assets by P50 000 profits, no equity adjustment is required.
during the current financial period. The balance of
the investment in associate account at the end of 18. If an associate incurs losses the investor is required
the current financial period is: to:
a. 12,500 a. ignore the losses for the purposes of equity
b. 15,000 accounting adjustments;
c. 16,250 b. recognize losses only to the point where the
d. 27,500 carrying amount is equal to the initial
investment;
15,000 + (50,000 * 25% = 12,500) = 27,500 c. recognize losses to the point where the carrying
amount of the investment is zero;
14. Tea Limited acquired a 35% investment in Cup d. reclassify the investment as a current asset.
Limited for P20 000. Tea Limited also owns two
subsidiaries and prepares consolidated financial 19. Where an investor has discontinued the use of the
statements. Cup Limited declared and paid a equity method because the associate has incurred
dividend of P5 000 during the current financial year. losses it must disclose the:
The appropriate consolidation adjustment to record a. unrecognized share of current period and
this transaction will include the following entry: cumulative losses of the associate;
a. DR Investment in associate; b. reason why it has discontinued the method;
b. DR Cash; c. accounting policy it has adopted in place of the
c. DR Dividend revenue; equity method;
d. DR Share of profit of associate. d. effect on the statement of changes in equity if
it had continued to use the method.
15. Company A acquired a 30% interest in an associate,
Company B, for P25 000. Company A is part of a 20. Which of the following types of share investment
consolidated group. In the financial period does NOT qualify as a strategic investment?
immediately following the date on which it became a. Controlled investments
an associate, Company B revalued assets by P4 b. Investments without significant influence.
000, generated profits of P10 000 and declared a c. Joint Control investments.

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d. Significant influence investments.
21. A significant influence investment is one that:
a. allows the investor to exercise significant
influence over the strategic and operating
policies of
the Associate.
b. allows the investor to exercise significant
influence over the strategic operating and
financing
policies of the Associate.
c. allows the investor to exercise significant
influence over only the operating policies of the
Associate.
d. allows the investor to exercise significant
influence over only the financing policies of the
Associate.
22. What is the dominant factor used to distinguish
portfolio investments from significant influence
investments?
a. The percentage of equity held by the investor.
b. Use of the Equity Method to account for and
report the investment.
c. The investor's intention to establish or maintain
a long-term operating relationship with the
investee.
d. Use of the Cost Method to account for and
report the investment
23. What percentage of ownership is used as a
guideline to determine that significant influence
exists
under IAS 28 Investments in Associates and Joint
Ventures?
a. 20% or more
b. 25% or more
c. Between 20% and 50%
d. Less than 20%
24. Which of the following methods uses procedures
closest to those used in preparing consolidated
financial statements?
a. Fair value through profit or loss (FVTPL).
b. The equity method
c. FVTOCI
d. The cost method
25. Which of the following is NOT a possible indicator
of significant influence?
a. The Associate's new CEO was previously CEO
of the investor company.
b. The investor has the ability to elect members to
the Board of Directors.
c. The investor has engaged in numerous
intercompany transactions with the Associate.
d. The investor has the right to participate in the
policy-making process.
26. Which of the following statements is CORRECT?
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a. An ownership interest between 0 and 10% can
never imply significant influence.
b. An ownership interest between 20% and 50%
always implies significant influence.
c. Significant influence is still possible if the
Investor owns less than 20% of the voting
shares of
the Associate.
d. Control is only possible if the Investor owns
more than 50% of the voting shares of the
Associate.
27. When are gains on intercompany transfers of assets
between an investor and a significant influence
investment recognized as part of the investment
income accounted for by the parent under the
equity
method?
a. They are never recognized.
b. In the period(s) when the assets are sold to
third parties or consumed.
c. In the period when the intercompany transfer
takes place.
d. They are recognized only when the investment
is sold.
28. On January 1, 2016, X Inc. purchased 25% of the
voting shares of Y Inc. for $100,000. The
investment is
reported using the equity method, as X has
significant influence over Y. Y's net income and
declared dividends for
the following three years are as follows:
Net Income Dividends
2016 50,000 20,000
2017 70,000 80,000
2018 30,000 60,000
Which of the following journal entries would have
to be made to record X's purchase of Y's shares?
a. Dr: Investment in Y – 112,000
Cr: Goodwill – 112,000
b. Dr: Investment in Y – 12,000
Cr: Cash –12,000
c. Dr: Investment in Y – 112,000
Cr: Cash – 112,000
d. No entry required
29. Which of the following journal entries would have
to be made to record X's share of Y's net income
for 2016?
a. Dr: Investment in Y – 12,500
Cr: Equity method income – 12,500
b. Dr: Investment in Y – 12,000
Cr: Equity method income – 12,000
c. Dr: Investment in Y – 7,500
Cr: Equity method income – 7,500
d. No entry
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30. Which of the following journal entries would have
to be made to record X's share of Y's dividends
paid for 2016?
a. Cash 5,000
Dividend income 5,000
b. Investment in Y 5,000
Dividend income 5,000
c. Cash 5,000
Investment in Y 5,000
d. No entry

31. When an investment is accounted for using the

Equity Method, how are the investor's share of the
investee's income from non-operating sources
(such as gains or losses from discontinued
operations)
to be accounted for by the investor?
a. Any such gains or losses are shown separately,
net of tax below income from operations on the
investor's Income statement. The investor's pro
rata share of these after-tax gains and losses
are added to or deducted from the Investment
account.
b. No specific accounting treatment is required.
These items simply have to be disclosed in a
note
to the financial statements.
c. Any such gains or losses are to be charged
directly to Retained Earnings net of tax.
d. Any such gains or losses are combined with
revenue and expenses from operations. The
investor's pro rata share of these after-tax gains
and losses are added to or deducted from the
Investment account.

END

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