FINANCIAL ACCOUNTING AND REPORTING

INVESTMENT IN ASSOCIATES

PAS 28 prescribes the accounting for investment in associates and sets out
the requirements of application of equity method when accounting for
investments in associates.

DEFINITION OF TERMS
ASSOCIATE – an entity, including an unincorporated entity such as a
partnership, over which an investor has significant influence.

SIGNIFICATNT INFLUENCE – is the power to participate in the financial and

operating policy decisions of the investee but is not control or joint control
over those policies. Below are the features of the definition:

1. It requires the investor to have the power, or the capacity, to affect the
investee but does not require the investor to actually exercise that power.
Instead, the focus is on the existence of the power or capacity.

2. The specific power is that of being able to participate in the financial and
operating decisions of the investee but has no power or capacity to
dominate the financial and operating decisions.

3. In the definitions of an associate and significant influence, there is no

requirement for the investor to hold any shares, or have a beneficial
interest, in the associate. However, the application of the equity method
of accounting is based on the investor owning shares in the associate. In
other words, if significant influence is exercised by one entity over
another by virtue of an association or contract other than from the
holding of shares, then the equity method cannot be applied in relation to
the associate.
4. The level of influence is significant when the investor holds 20% up to
50% interest in the voting power of the investee it is presumed that the
investor has significant influence over the investee. This is a rebuttable
presumption because if the investor can demonstrate that such influence
does not exist, then the investee is not classified as an associate.
Further, where the investor owns less than 20% of another entity, there
is presumption that the investee is not an associate.

CONTROL OF AN INVESTEE – an investor controls an investee when the

investor is exposed, or has rights to variable returns from its involvement
with the investee and has the ability to affect those returns through the
power over the investee.

NATURE OF
APPLICABLE
RELATIONSHIP
TYPE OF INVESTMENT REPORTING
WITH
STANDARD
INVESTEE
• Investment measured at Regular Investor PFRS 9
fair value
• Investment in associate Significant PAS 28
Influence
• Investment in subsidiary Control PFRS 3 & PFRS 10
• Investment in joint Joint Control PFRS 11 and PAS 28*
venture
*investment in joint venture is discussed in detail in AFAR.

PERCENTAGE OF OWNERSHIP INTEREST TYPE OF INVESTMENT

Less than 20% Financial asset at Fair value
(either FVTPL or FVOCI)
20% to 50% Investment in Associate
51% to 100% Investment in subsidiary
Contractually agreed sharing of control Investment in joint venture

Accounting Method Use:

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

Investor’s share in the change in

Effect on the carrying amount of
Investee’s equity (net assets or
the investment
capital)
• Profit or Loss Increase for share in profit, Decrease
for share in loss
• Dividends Decrease
• Other comprehensive income Increase for share in gain, Decrease
for share in loss
• Discontinued operations Increase for share in gain, Decrease
for share in loss

Investment in associates accounted for using equity method is classified as

non-current assets.

Purchase cost not equal to the interest acquired

If PP > FV of interest acquired, excess is goodwill.
The goodwill is included in the Carrying amount of the investment and is not
accounted for separately. Hence, GW is neither amortized nor tested for
impairment separately.

If PP < FV of interest acquired, deficit is a gain from bargain purchase.

Such negative goodwill is recognized in profit or loss in the period the
investment s acquired.

FV of interest acquired
Investor’s ownership percentage X Net FV of the associate’s identifiable
assets and liabilities.

Carrying amounts different from Fair values

If CA of associate’s asset < FV, it is undervalued.
Investor’s share in the undervaluation is recognized on a rational basis as
deduction to both investment income and investment account over the
remaining life of the asset. Treatment is opposite if the asset is overvalued.
If CA of associate’s liability > FV, it is undervalued.
Investor’s share in undervaluation is recognized on a rational basis as
addition to both investment income and investment account over the
remaining term of the liability. The opposite treatment applies if the liability
is overvalued.

EQUITY METHOD NOT APPLICABLE

The equity method is applicable when an investor has significant influence
over an investee. However, the equity method is not applicable under the
following:
a. The investment is classified as held for sale under PFRS 5 Non-current
assets held for sale and discontinued operations
b. The parent is exempted from presenting consolidated financial
statements
c. The investor is a subsidiary whose parent allows it not to apply equity
method, the investor’s securities are not traded in a public market or
in the process of enlisting its securities to be traded in the market, the
investor’s parent produces consolidated financial statements in
accordance with PFRS.

CUMULATIVE PREFERENCE SHARES

Preference Share is Preference share is Preference share is
cumulative noncumulative redeemable
✓ Deduct one year ✓ Deduct dividends ✓ No dividend is
dividend, whether only when deducted when
declared or not declared before computing share
before computing computing share in associate’s
share in in associate’s profit or loss.
associate’s profit profit or loss.
or loss.

Loss of significant influence

An entity loses significant influence over an investee when it loses the power
to participate in the financial and operating policy decisions of that investee.

The loss of significant influence can occur with or without a change in the
percentage of ownership. For example:
a. When an associate becomes subject to the control of a government,
court, administrator, or regulator.
 b. As a result of a contractual agreement

Discontinuance of the use of equity method

An investor shall discontinue the use of the equity method from the date it
ceases to have a significant influence over an associate and shall account for
the investment in accordance with PFRS 9 (fair value ) from the date,
provided the associate does not become a subsidiary of a joint venture.
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% PAS 27

On the loss of significant influence, the investor shall measure at fair value
any 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.

The discontinuance of equity method is accounted for prospectively. Previous

financial statements are not restated to adjust previously recognized share
in profits or losses, other comprehensive income, and discontinued
operations of the associate.

THEORIES
1. PAS 28 applies to which of the following?
a. Investment in associates held by an venture capital organization or
mutual fund measured at fair value through profit or loss
 b. A 20% investment in preference shares
c. An interest in a partnership which gives the investor significant
influence over the partnership
d. A 60% investment in ordinary shares of another entity

2. An entity shall apply PAS 28

a. To an investment which give the entity significant influence over the
investee
b. To account for investments in associate in the entity’s separate
financial statements
c. Even when significant influence is lost
d. Any of these

3. When an investment in equity securities represent 20% to 50% interest in

the voting rights of the investee, which of the following standards most likely
would be applied?
a. PFRS9
b. PAS 31
c. PFRS 3
d. PAS 28

4. When equity investment results to a joint control, which standard shall be

applied?
a. PFRS 9
b. PAS 31
c. PFRS 3
d. PAS 28

5. When equity investments results to control which standard shall be

applied?
a. PFRS 9
b. PAS 31
c. PFRS 3
d. PAS 28

6. In the consolidated financial statements, to which of the following

financial instruments if PFRS 9 applicable?
a. Investment in ordinary shares representing 51% interest
b. Investment in ordinary shares representing 20% interest
c. Interest in a joint venture
 d. Investment in preference shares representing 100% interest

7. Which of the following statements is correct?

a. According to PAS 28 Investment in Associates, a partnership cannot be
an associate
b. Goodwill included in the carrying amount of an investment in associate
is tested for impairment separately
c. Only investment in ordinary shares can be classified as investment in
associate
d. Only investment which gives the investor voting rights can be
classified as investment in associate

8. If GHI Corporation owns a controlling interest of 51% of the entity shares

of MNO Co., GHI Corporation is
a. Parent company to MNO Co.
b. Associate company to MNO Co.
c. Subsidiary company to MNO Co.
d. Fellow Subsidiary to MNO Co.

9. It is an entity, including an unincorporated entity such as partnership over

which the investor has significant influence and that is neither a subsidiary
nor an interest in a joint venture
a. Association
b. Subsidiary
c. Joint venture
d. Associate

10. Significant influence is presumed to exist

a. If an investor holds, directly or indirectly 25% or more of the voting
power of the investee
b. If an investor holds, directly or indirectly 51% or more of the voting
power of the investee
c. If an investor holds, directly or indirectly 100% or more of the voting
power of the investee
d. If an investor holds, directly or indirectly 20% or more of the voting
power of the investee

11. In which of the following does X have significant influence?

a. X owns 30% on the voting shares of ABC Co. the other 60% is held by
Y and all seats on the board of directors are appointed by Y
 b. X owns 30% of the preference shares of Z Co.
c. X owns 15% of the voting shares of ABC Co. all other shares are held
in very small blocks and therefore X has representatives in board of
directors
d. X owns 80% of Y, and Y owns 40% of Z. In Y’s separate financial
statements, the investment in Z is classified as held for sale in
accordance with PFRS 5

12. Which of the following does not correctly relate to the application of the
equity method?
a. The investor recognizes its proportionate share in the profit or loss,
other comprehensive income, and discontinued operations of the
associate
b. Dividends received are accounted for as reduction in the investment
balance
c. Share dividends are not accounted for
d. The investor accounts only its proportionate share in the profit or loss
of the associate but not in other comprehensive income and
discontinued operations

13. Which of the following computations may properly result to the correct
balance of an investment in associate account at year end?
a. Beginning balance of investment plus share in associates profit minus
share in dividends declared by associate, and minus amortization of
share in undervaluation of associate’s asset
b. Beginning balance of investment plus share in associates profit minus
share in dividends declared by associate, and plus amortization of
share in undervaluation of associate’s asset
c. Beginning balance of investment plus share in associates profit plus
share in dividends declared by associate, and minus amortization of
share in undervaluation of associate’s asset
d. Beginning balance of investment plus share in associates profit minus
share in dividends declared by associate, minus amortization of share
in undervaluation of associate’s asset, and minus separate impairment
loss on goodwill included in the carrying amount of the investment

14. Which of the following computations may properly result to the correct
amount of share in associate’s profit or loss for the period?
a. Share in profit of associate minus amortization of share in the
overvaluation of associate’s asset
 b. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset
c. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus share in dividends declared
by associate
d. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus separate impairment loss on
goodwill included in the carrying amount of the investment

15. Equity method shall cease to be applied only when the investor losses
significant influence over the associate. Which of the following is not true?
a. The loss of significant influence can occur with or without a change in
the percentage of ownership
b. An entity losses significant influence over an investee when it losses
the power to participate in the financial and operating policy decisions
of an investee
c. There is a presumption of loss of significant influence if the ownership
interest falls below 20%
d. There is presumption of loss of significant influence when the associate
is operating under severe long term restrictions that significantly
impair its ability to transfer funds to the investor.