Investment in Associates

Learning Outcomes:
 Understand the principles of investments in
associates
 Understand and apply the equity method of
accounting for investments in associates
 Understand the accounting principles in
eliminating intragroup transactions with the
associates

1
 Cont.
MFRS 128 Investment in Associates

‘An entity over which the investor has a significant

influence and that is neither a subsidiary nor an
interest in a joint venture’

Significant Influence

It is presumed to exist if the investor holds, directly or

indirectly, 20% or more of the voting rights of the
investee unless it can be clearly demonstrated that
this is not the case.

2
 Cont.
Significant influence is the power to participate in the
financial and operating policy decisions of the investee
but not control of those policy

An investor losses significant influence when it losses

the power to participate in the financial and operating
policy decisions of that investee.

This loss of significant influence may be loss with or

without a change of ownership

3
 Cont.
Potential voting shares

Significant influence – the existence and effect of potential voting

shares of the investor that are currently exercisable or convertible
should be considered.

Example:
AB holds 150,000 OS of 1,150,000 issued shares in ACE Bhd.
AB also has share options that it can exercise to acquire another
150,000 shares in ACE.

Explanation:
Although AB does not yet hold 20% or more of the voting shares
of ACE Bhd (150,000/1,150,000 = 13%), it has to treat ACE as its
associate as if were to exercise its rights to acquire another
150,000 shares (300,000/1,150,000 = 26%).

4
 Cont.
If the investor holds less than 20% of the voting power
of the investee, it is presumed that the investee does
not have a significant influence, unless such can be
clearly demonstrated.

It may exist in several ways such as:

 Representation on the board of directors
 Participation in policy making processes including
decisions on dividends or other distributions
 Material intragroup transactions
 Interchange of managerial personnel
 Provisions of technical information

5
 Accounting Treatments
MFRS 128 requires the investor to account for the
associate which is not held for sale, at cost or in
accordance with MFRS 9

In the CFS the associate is accounted for using the

equity method except the following situations:

(a) The investment is classified as held for sale in

accordance with FRS 5 Non Current Assets Held
for Sale and Discontinued Operations

6
 Cont.
(b) The parent is exempted from presenting CFS, or

(c) When all the following apply:

(i) The parent itself is a wholly owned subsidiary

or is a partially owned subsidiary and the other
owner were informed and do not object to the
parent not presenting financial statements,

7
 Cont.
(ii) The parent’s debt or equity instruments are not
traded in a public market (not a listed entity)

(iii) The parent is not in the process of issuing in a

public market its debt or equity instruments by
filling its financial statements with the
regulatory authorities like securities
commission, and

(iv) any other intermediate parent of the investor

produced CFS

8
 Equity Method: Basic Principles

MFRS 128 requires an investment in an associate to be

accounted for in the CFS using the equity method.

Equity Method

An accounting method used to determine income derived

from a company‘s investment in another company over
which it exerts significant influence. Under the equity
method, investment income equals a share of net income
proportional to the size of the equity investment.

9
 Cont.
Under the equity method, the investment is initially recorded
at cost but is subsequently adjusted for the investor’s
proportionate share of the increase or decrease in the net
assets of the associate (e.g. post acquisition profits/losses,
revaluations).

At any balance sheet date, the carrying amount of the

investment account will approximate the investor’s
proportionate share of the associate’s net assets at that
date.

10
 Cont.
In the CSFP, the investor’s proportionate share of the
associate’s net assets is presented as a single line item:
“Investment in associate”

Dividends and other distributions from the investee reduce

the investment account

The FS of the associate are NOT added, line by line, to the

FS of other entities in the group.

In the CSCI, the investor’s share of the associate’s profit or

loss is presented as a single line item: “Share of profit (loss)
of associate”

11
 Cont.
The investor must include in the CSCI its share of the
associate’s post-acquisition profits or losses, irrespective of
whether dividends are distributed. By doing so, the effect of
the associate’s performance (either good or bad) is reflected
in performance of the group since the investor has influence
over the financial and operating policies of the associate

12
 Accounting Technique
Journal entries:

(i) To record initial investment (at cost)

Investment in associate RMXXX

Cash/Other assets RMXXX
(To record investment in associate company)

13
 Cont.
Journal entries: Subsequent to acquisition date

(ii) To record investor share in the post acquisition profits (or

losses) would increase (or decrease) the carrying amount
of investment in associates

Investment in associate RMXXX

Share of profit before tax of associate RMXXX
(To account for share of profit in associate)

14
 Cont.
(iii) To record dividend income received from the associate

Dividend income (gross) RMXXX

Taxation expense RMXXX
Investment in associate RMXXX
(To eliminate dividend income from the associate)

15
 Cont.
(iv) To adjust the carrying amount for changes in the investor’s
proportionate interest in the investee arising from changes
in the investee’s equity that have not been recognised in the
investee’s profit or loss (e.g. revaluation of property, plant and
equipment and foreign exchange translation differences).

Investment in associate RMXXX

Share of post-acq. Revaluation reserve RMXXX
Share of post-acq. exchange reserve RMXXX
(To account for share of post-acq. revaluation reserve,
exchange reserve, etc)

16
 Cont.
Under the equity method, the net assets of the investee entity is
not consolidated with that of the investor, thus the investment in
associate is not eliminated on consolidation but is disclosed as
a separate item in the statement of financial position to reflect
the investor’s share of the net assets as at the reporting date
which comprise the following:

Cost of investment (at cost) RMXXX

Add: Share of post-acq. Results:
Post-acq. Retained profits RMXXX
Other post-acq. Reserves RMXXX RMXXX
Carrying amount in CSFP RMXXX

17
 Goodwill
Goodwill is computed as for subsidiaries

The cost of investment is compared with the fair value of

identifiable net assets of the associate on the date the investor
gained significant influence in the associate

Goodwill is not amortised but tested for impairment

18
 Cont.
Impairment Losses on Investment in Associate

Because goodwill included in the carrying amount of an

investment in an associate is not separately recognised, it is not
tested for impairment separately by applying the requirements
for impairment testing goodwill in MFRS 136 Impairment of
Assets.

19
 Example

See Example 5.7 from TLT, CFS, 7th edition, p.297

20
 Group Statement of Financial
Position
(1) The investment account is shown as a separate item at its
carrying value. It is increased by the investor’s share of the
post-acquisition increase in the net assets of the investee.
However, if the investor’s share of losses exceeds the carrying
amount of the investment account, then the investment is
shown as nil (para 30 of MFRS 128);

(2) Assets and liabilities of the investee are not included;

(3) In determining the investor’s share of the profits or losses after

acquisition adjustments are to be made (if any) of the following:

21
 Cont.
 Depreciation of the depreciable assets based on their fair
values;
 Impairment of associate;
 Cumulative preference dividends, whether or not declared;
 Unrealised profits or losses arising on transactions between
the investor and associate must be eliminated

22
 Example 1
See Example 1, JL & TLL, C&G, 6th Edition, p. 519

23
 Solution
Explanation:

H Holds 25% of issued ordinary share capital of A.

Calculation of goodwill:
RM
Cost of investment 200,000
Net assets of A – 1.1.x7 (RM520,000 x 25%) 130,000
Goodwill 70,000

24
 Cont.
Consolidated Statement of Financial Position
As at 31.12.X7
RM

Non-current assets 1,130

Investment in A (Note A) 222

Current assets 300

1,652

Ordinary shares of RM1 each 1,000

Retained profit 1.1.X7 200

Profit for the year (310 + (100 x 25%) - 3) 332

Liabilities 120

1,652

25
 Cont.
Note A: Investment in A

Cost of investment RM200,000

Add: Post acq. Reserves (100,000 x 25%) 25,000
225,000
Less: Goodwill impaired (3,000)
Carrying amount of investment RM222,000

26
 Cont.
This can be verified as follows:

Net assets of A as at 31.12.x7 (620,000 x 25%) RM155,000

Add: Goodwill remaining (70,000 – 3,000) 67,000
Carrying amount of investment RM222,000

27
 Group Statement of Profit or Loss
and Other Comprehensive Income
(1) Group turnover/sales will comprise of the parent and
subsidiaries but not that of the associates;

(2) Group profit before tax will be that of the parent and
subsidiaries that are consolidated;

(3) The group’s share of the associate’s current year profit before
tax is shown separately.

28
 Cont.
(4) Taxation will consist of the group (holding and subsidiaries that
are consolidated).

(5) The prior year’s retained profit will comprise the group and the
group’s share of the post acquisition retained profits of the
associate brought forward.

29
 Cont.
Share of post-acquisition of OCI

Any post changes in OCI of assoc – (e.g. reserve arising from

revaluation of PPE and intangible assets; foreign exchange
translation differences; changes arising on FV of AFS investments)
– the investor share of those changes recognised in OCI of
investor and presented separately as one-line item: “Share of OCI
in an associate” either under:
 Items that may be reclassified to profit or loss; or

 Items never be reclassified to profit or loss

(Refer to Example 5.8 from TLT, CFS, 7th edition, p305, CSPLOCI)

30
 Example 2
See Example 2, JL&TLL, C&G, 6th Edition, p521

31
 Solution
Consolidated SPLOCI
For the year ended 31.12.X4
Group

Sales 1,200,000

Cost of sales (400,000)

Gross profit 800,000

Expenses (150,000)

Share of profit of A (Note 1) 17,500

667.500

Taxation (150,000)

Profit after taxation 517,500

32
 Cont.
Note 1: Share of profit of A

Profit for the year (25% x 80,000) RM20,000

Less: Goodwill impaired 2,500
17,500

33
 Comprehensive Example

See Example 5.3 from TLT, CFS, 6th edition, p.271

34
 Transactions with an Associate
 In equity accounting, the profit or loss on an investor-associate
transaction is realised in proportion to the third parties’
ownership interests in the associate.

 Rationale – elimination of investor interest is because it is

considered to be transacting with itself.

35
 Cont.
Intragroup sales of inventories:

 Upstream or downstream sales – if all inventories have been sold

to third parties within the relevant accounting period – all
profits/losses are realised. Thus, no adjustment necessary.

 If only partly sold to third parties – unrealised profits (losses) need

to be adjusted. The investor’s share of the unrealised profits or
losses is required to be eliminated.

 However, the adjustments differ for upstream/downstream sales

(See Example 5.11 from TLT, CFS, 7th edition, p.317)

36
 Cont.
Transfer or sale of PPE:

 Eliminate the investor’s proportionate share of the unrealised profit

or loss
 Downstream transfer of PPE – adjustment to be made to the

“Investment in Associate” account.

 Upstream transfer of PPE – adjustment to be made to the “Share
of profits in Associate” account.

See Example 5.12 from TLT, CFS, 7th edition, p.318

37
 Cont.
Other intragroup account balances:

 These include:
 Loan to or from the associate
 Amounts due to or due from the associate
 Dividends receivable from the associate

 These balances must not be eliminated on consolidation because

items in SFP of associate are not consolidated.

 They should be separately disclosed in the CFS under their

respective classifications (e.g. Current assets or Current Liabilities)

38
 Cont.
 Loan – the interest income or expense from loan to or from
associate – no adjustment necessary because it has been realised
(earned or incurred).

 Dividend income from associate is eliminated in on consolidation.

 Dividend receivable in SFP of investor should not be eliminated on

consolidation. It should be shown under current assets.

39
 Self Study
 Investment in Associates (Chapter 5)

See Example 5.8 from TLT, CFS, 7th edition, p301

 Model Questions & Answers (Chapter 5)

See Practice Question from TLT, CFS, 7th edition, p349

See Question 2 from TLT, CFS, 7th edition, p360

40
Investment in Joint Arrangement (JA)

Learning Outcomes:
 Understand the principles of investments in
Joint Arrangements (JA)
 Understand and apply the equity method &
percentage share method of accounting in
JA
 Understand the accounting principles in
eliminating intragroup transactions with the
JV

41
 Cont.
MFRS 11 Investment in JA

Definition of JA: “A contractual arrangement of which two or

more parties have joint control.”

Joint Control

“the contractually agreed sharing of control over an

economic activity, and exists only when the strategic
financial and operating decisions relating to the activity
require the unanimous consent of the parties sharing control
(the venturers).”

42
 Cont.
Two common characteristics:
 two or more venturers are bound by a contractual
arrangement; and
 the contractual arrangement establishes joint
control.

No one party controls the venture unilaterally nor

dominates the financial and operating decisions

43
 Overview
 Earlier – MFRS 31 Interests in Joint ventures

 Weakness in MFRS131 – accounting for JV primarily driven

by the structure of an arrangement (not the substance)

 JV structured through legal entity can be accounted using

equity method or proportionate method.

 In practice – entity use equity method and proportionate

method – compromise to enhance comparability
characteristic of FSs.

 Thus, MFRS 11 Joint Arrangements - was introduced in May

2011.

44
 Cont.
Three forms of JV (MFRS 131)

(a) Jointly controlled operations

 No establishment of a separate business enterprise
 Two or more venturers share their operations, resources
and expertise in order to produce, market and distribute
jointly a particular product such as ship or aircraft.
 Each venturer uses its own assets and incurs its own
expenses
 At the end, they share the revenue form the sale of a joint
venture product and any expenses incurred in common

45
 Cont.
(b) Jointly controlled assets
 No establishment of a separate business enterprise
 The venturers have joint control of one or more assets
contributed for the JV such as holiday villa & gas
pipeline.
 Each venturer may take a share of the output from the
assets and each bears an agreed share of the expenses
incurred.

46
 Cont.
(c) Jointly controlled entities
 Establishment of a separate business enterprise which
could be a company, partnership or other form of entity
 The JV will have its own set of accounts and prepare its
own set of financial statements
 For the venturer its contribution to the JV will be
disclosed as an investment and for the JV the
contributions made by the venturers are capital
distribution

47
 Differences MFRS 131 and MFRS 11
MFRS 131 MFRS 11
 Jointly controlled assets, jointly  Joint operations and joint
controlled operations and joint venture
venture

 JCA & JCO –use proportionate  JO – use of separate line item

method as line-by-line constant in FSs based on operator’s
per cent addition of the line rights over assets or
items in FSs or separate line obligations on liability item
item in FSs based on
operator’s rights over assets or
obligations on liability item

48
 Cont.
MFRS 131 MFRS 11
 JV – can use either equity or  JV – use equity method
proportionate method

 Separate vehicle – recognised  Joint arrangement through

as JV separate vehicle – can be joint
operation or JV
 Joint arrangement not
structured through separate
vehicle – joint operation

49
 MFRS 11
Salient features:

 Focus on substance of an arrangement

 Use “rights and obligations” approach – i.e. parties to an

arrangement recognise their rights and obligations arising
from the arrangement.

 It is principle-based standard – provide consistency and

enhance comparability

 Criteria of joint control is largely similar with the former IAS

31 – only added clarification that the sharing of control is
based on decision about the relevant activities

50
 JV or JO

JOINT ARRANGEMENT

JOINT OPERATION
JOINT VENTURE
Joint operators have rights to
Venturers have rights to net assets and obligations for
assets liabilities
Establishment of a corporation/ (e.g. when 2 or more joint
partnership operators combine their
operations, resources and
Not necessarily an equal equity expertise in order to produce,
stake market and distribute jointly a
particular product)

51
Cont.

52
Cont.

53
Cont.

54
Cont.

55
Cont.

56
 Accounting Treatment of JA
Joint Operation

In both its separate and CFS, the joint operator should

recognise its assets, liabilities, revenue and expense
(and its share of joint asset/liabilities/revenue/ expense)
in accordance with relevant MFRS (line-by-line
accounting)

See Example 5.5 & Example 5.6 from TLT, CFS, 7th edition,
p290 & p293

57
 Cont.
Joint Venture

 In its separate financial statements, the investment

be accounted for at cost or in accordance with
MFRS 139

 In its CFS, equity method (see MFRS 128) should

be applied

See Example 1 & Example 2 Topic 7 – Investment in JV

58
 Self Study
 Investment in Joint Venture (Chapter 5)

See Example 5.14 from TLT, CFS, 6th edition, p311

See Example 5.16 from TLT, CFS, 6th edition, p317

See Question 1 from TLT, CFS, 7th edition, p357

59