(Intermediate Accounting 1B)

LECTURE AID

2018

ZEUS VERNON B. MILLAN

Chapter 13 Investments in Associates

Related standard:
PAS 28 Investments in Associates and Joint Ventures

Learning Objectives

• Define an investment in associate.

• Describe the accounting requirement for
investments in associates.
• Account for the investor’s share in the losses of
an associate.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Definition of terms

• Associate – an entity, including an unincorporated

entity such as a partnership, over which the investor has
significant influence.
• Significant influence – the power to participate in
the financial and operating policy decisions of the
investee but is not control or joint control over those
policies.
(PAS 28)

INTERMEDIATE ACCTG 1B (by:

MILLAN)
 Significant influence
• Significant influence is presumed to exist if the investor holds,
directly or indirectly (e.g. through subsidiaries), 20% or more
of the voting power of the investee, unless it can be clearly
demonstrated that this is not the case.

• For significant influence to exist, the investment should provide

the investor voting rights. Thus, investment in preference
shares, regardless of the percentage of ownership, is not
accounted for under PAS 28 because preference shares do not
give the investor voting rights.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Evidence of existence of significant influence by
an investor
The following may provide evidence of significant influence even if
the percentage of ownership interest is less than 20%.
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; or
e) Provision of essential technical information.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Equity method
• Investments in associates or joint ventures are accounted
for using the equity method. Under this method, the
investment is initially recognized at cost and
subsequently adjusted for the investor’s share in the
changes in the EQUITY of the investee.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
 T-accounts

Investment in associate Sh. In P/L of associate

beg. xx
Sh. in profit xx xx Sh. in loss Sh. in loss xx xx Sh. in profit
Sh. in (Cr.) OCI xx xx Sh. in (Dr.) OCI
xx Sh. in dividends
Undervaluation Undervaluation
xx of asset of asset xx
xx end. xx

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Preference shares issued by an associate
If an associate has outstanding preference shares that are held by
parties other than the investor, the investor computes its share of
profits or losses after making the following adjustments.
Preference share is Preference share is Preference share is
cumulative noncumulative redeemable
 Deduct one-year  Deduct dividends  No dividend is
dividend, only when declared deducted when
whether declared before computing computing share in
or not before share in associate’s associate’s profit or
computing share profit or loss. loss.
in associate’s
profit or loss.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Discontinuance of the use of equity method
• An investor starts to apply the equity method on the date it obtains
significant influence and ceases to apply the equity method on the
date it loses significant influence.
• On the loss of significant influence, the investor shall measure at
fair value any investment the investor retains in the former
associate. The investor shall recognize in profit or loss any
difference between:
a. The fair value of any retained investment and any proceeds
from disposing of the part interest in the associate; and
b. The carrying amount of the investment at the date when
significant influence is lost.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Classification of retained interest
Following the discontinuance of equity method, the retained interest
shall be classified as follows:

Loss of significant influence due Accounting treatment

to

 Decrease of ownership interest  Financial asset at fair value

below 20%. under PFRS 9
 Increase of ownership above  Investment in subsidiary under
50% PFRS 3 and PFRS 10

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Reclassification of cumulative OCI
• If an investor loses significant influence over an associate, all
amounts recognized in other comprehensive income in relation to
the associate shall be accounted on the same basis as would be
required if the associate had directly disposed of the related assets or
liabilities.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Change to equity method - Gain of significant
influence
• Significant influence may be achieved from additional purchase of
shares resulting to an increase in ownership interest. Although, not
specifically addressed in PAS 28, this type of acquisition may be
accounted for by reference to PFRS 3 Business Combinations
particularly on the accounting for business combination achieved in
stages.

• “In a business combination achieved in stages, the acquirer shall

remeasure its previously held equity interest in the acquiree at its
acquisition-date fair value and recognize the resulting gain or loss,
if any, in profit or loss or other comprehensive income, as
appropriate.” (PFRS 3.42 )
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Share in losses of associate
If an investor’s share of losses of an associate equals or exceeds its
interest in the associate, the investor discontinues recognizing
its share of further losses.

Interest in the associate includes the following:

1. Investment in associate measured under equity method
2. Investment in preference shares of the associate
3. Unsecured long-term receivables or loans

Interest in the associate does not include the following:

1. Trade receivables and payables
2. Secured long-term receivables or loans

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Share in losses of associate - continuation
After the investor’s interest in the associate is reduced to zero,
additional losses are provided for, and a liability is recognized, only to
the extent that the investor has incurred
a. Legal or constructive obligations or
b. Made payments on behalf of the associate.

• Any other losses are not recognized.

• If the associate subsequently reports profits, the investor resumes

recognizing its share of those profits only after its share of the
profits equals the share of losses not recognized.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 1B (by: MILLAN)

  QUESTIONS????
 REACTIONS!!!!!

INTERMEDIATE ACCTG 1B (by: MILLAN)

 END
INTERMEDIATE ACCTG 1B (by: MILLAN)