PAS 28 Investment in Associates
quity method of accounting for share
E
Associate
investment
● A
n entity over which the investor has significant
● T he investment in associate is measured using
influence.
theequity method of accountingwhich is based
on the economic relationship between. the
Significant influence
investor and the investee. The investor and the
● T
he power to participate in thefinancialand
investee are viewed as asingle economic unit
operating policy decisionsof the associatebut
where they are one and the same.
not controlor joint control over those policies
● The equity method is applicable when the
investor has a significant influence over the
ractical guidance in determining significant
P
investee.
influence ● Accounting procedures - equity method
● If you hold20% or moreof the voting power 1. The investment is initially recognizedat
(directly or indirectly through subsidiaries), it's cost(the amount paid for.)
generally assumed that youhavesignificant 2. The carrying amount isincreased by the
influence unless proven otherwise. investor's share of the profitof the
If you holdless than 20%, it's generally assumed investee anddecreased by the
youdon't havesignificant influence unless you investor's share of the lossof the
can prove that you do. investee.
● Even if another investor owns most of the The investor's share of the profit or loss
company, that doesn't automatically mean you of the investee is recognized as
can't have significant influence. investment income.
● When an investor exercises significant influence 3. Dividends received from an equity
over the investee, one or more of the following investeereducethe carrying amount of
indicators is usually present: the investment.
1. Representation in the board of directors 4. Note that the investment must be in
2. Participation in policy-making processes ordinary shares.
3. Material transactions between the If you’ve invested in preference shares
investor and the investee (which don’t give you voting rights), the
4. Interchange of managerial personnel equity method doesn't apply.
5. Provision of essential technical 5. Technically, if the investor has significant
information influence over the investee, theinvestee
is said to be anassociate.
Accordingly, under the equity method,
the investment in ordinary shares should
be appropriately described as
investment in associate.
6. The investment in associate accounted
for using the equity method shall be
reported as anoncurrent asset.
Excess of cost over carrying amount” with
“ Discontinuance of the equity method
respect to acquisition of share investment ● A n investor should discontinue the use of the
● If the investor pays more than the carrying equity method from the date that itceases to
amount of the net assets acquired, the have significant influenceover an associate
difference is commonly known as "excess of ● After losing significant influence, you account for
cost over carrying amount" the investment as one of the following:
● If the assets of the investee arefairly valued, the 1. Financial Asset at Fair Value Through
excess of cost over carrying amount of the Profit or Loss
underlying net assets is attributable togoodwill. 2. Financial Asset at Fair Value Through
● If the excess is attributable toundervaluation of Other Comprehensive Income
a depreciable asset, it isamortizedover the 3. Nonmarketable Investment at Cost or
remaining life of the depreciable asset. Unquoted Equity Instrument
● If the extra cost is becauseland is undervalued, easurement of the investment in associate
M
youdon't amortizeit since land doesn’t lose when significant influence is lost
value over time. You only recognize the amount ● O n the date you lose significant influence, you
as an expense when the land is sold. measure any remaining investment atfair value.
● If the extra cost is becauseinventory is This fair value will then be treated as the fair
undervalued, you recognize the extra cost as an value on initial recognition as a financial asset.
expensewhen the inventory is sold. ● The difference between the carrying amount of
● If the excess is attributable togoodwill, it is the retained investment and the fair value is
included in thecarrying amount of the recorded as again or lossin profit or loss.
investmentand not amortized. Additionally, if you sell part of the investment, the
However, the entire investment in associate difference between the sale proceeds and the
including the goodwill is tested for impairment at carrying amount is also recognized as a gain or
the end of each reporting period. loss.
ircumstances when the equity method is not
C
Excess of fair value over cost applicable
● If the value of what you’ve invested in is higher ● A n investment in associate shall not be
than what you paid for it, that extra value is accounted for using the equity method if the
treated asincome investor is a parent that is exempt from
preparing consolidated financial statementsor if
Impairment loss with respect to an investment all of the following apply.
in associate 1. The investor is a wholly-owned or
● If there is an indication that an investment in partially-owned subsidiary, and other
associate may be impaired, an impairment loss owners agreenot to use the equity
shall be recognized whenever the carrying method.
amount of the investment in associate exceeds 2. The investor's debt and equity
recoverable amount instrumentsaren’t tradedon public or
● The recoverable amount is measured as the over-the-counter markets.
higherbetweenfair value less cost of disposal 3. The investor isn’t filing financial
andvalue in use. statements with the SEC ordoesn’t plan
● If there's an impairment, it affects the whole to issue instruments in a public market.
investment, including any goodwill. 4. The investor’s ultimate or any
● The recoverable amount of an investment in intermediateparent preparesand
associate is assessed foreach individual publicly sharesconsolidated financial
associate. statements that follow Philippine
Financial Reporting Standards.
ccounting procedure if an associate has
A ● If these conditions apply, the investment should
cumulative and noncumulative preference be accounted for as one of the following:
shares 1. Financial Asset at Fair Value Through
● C umulative Preference Shares:Subtract Profit or Loss.
preference dividends from your share of 2. Financial Asset at Fair Value Through
earnings,whether or notthe dividends are Other Comprehensive Income.
declared. 3. Nonmarketable Investment at Cost or
● Noncumulative Preference Shares: Subtract Investment in Unquoted Equity
preference dividends only if they aredeclared. Instrument.
