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Chapter 24 Investment in Associate

Intercorporate Share Investment
the purchase of equity securities of one entity by another entity
do not give the investor an ability to influence or control the operations of the investee
in certain circumstances, an entity may purchase enough shares of another entity in
order to exert significant influence or control the operations of the investee
Significant influence
the power to participate in the financial and operating policy decisions of the investee
but not control or joint control over those policies
the power over the investee or to govern the financial and operating policies of an
investee so as to obtain benefits
an entity over which the investor has significant influence
an entity controlled by another entity
Significant Influence
assessment of significant influence is a matter of judgment
PAS 28, paragraph 5
Representation in the board of directors
Participation in policy making process
Material transactions between the investors and the investee
Interchange of managerial personnel
Provision of essential technical information
Potential Voting Rights
PAS 28, paragraph 7 - Existence is considered in assessing whether an entity has significant
Should be currently exercisable or convertible
Not currently exercisable or convertible WHEN the rights cannot be exercised or
converted until a future date or occurrence of a future event
WHEN exist, the investor’s profit or loss of the investee and of changes in the investee’s
equity is DETERMINED on the basis of “present ownership interest” and DOES NOT
reflect the possible exercise or conversion of potential voting rights
Loss of Significant Influence
When it loses the power to participate
Can occur with or without change in the absolute or relative ownership interest
An associate becomes subject to control of a government, court, administrator or
Result of a contractual agreement
Equity Method
Based on the economic relationship between the investor and the investee
The investor and investee are viewed as a single economic unit
Applicable when the investor has a significance influence over the investee
Accounting Procedures
The investment is initially recognized at cost
The carrying amount
 increased by the investor’s share of the profit of the investee (investment
 decreased by the investor’s share of the loss of the investee
Distributions or dividends received from an equity investee reduce the carrying amount
of the investment
Note that the investment must be in ordinary shares
 Investments in preference shares may be accounted for as at FV through P/L or at
FV through OCI or at cost
If the investor has significant influence over the investee, the investee is said to be an
 Accordingly, under the equity method, the investment in ordinary shares should
be appropriately described as investment in associate.
Investment in associate accounted for using the equity method shall be classified as
noncurrent asset.
Journal Entry (net income)
Investment in associate (20% of reported income)
Investment income
Journal Entry (net loss)
Loss on investment
Investment in associate
Excess of Cost Over Carrying Amount
If the investor pays more than the carrying amount of the assets required, the difference
is commonly known as “excess of cost over carrying amount” and may be attributed to
the following:
a. Undervaluation of the investee’s assets, such as building, land and inventory.
b. Goodwill
If the assets are fairly valued, accountants frequently attribute the excess of cost over
book value to goodwill
If the excess is attributable to land, it is not amortized because the land is nondepreciable
If the excess is attributable to inventory, the amount is expensed when the inventory is
already sold.
If it is attributable to goodwill, it is not amortized but the entire investment in associate
is tested for impairment at the end of each reporting period. Goodwill is included in the
carrying amount.
If the fair value of equipment is 2,000,000 greater than its carrying amount, the investor should
decrease its investment income by 80,000(2M/5 x 20%) since the investee’s income is
overstated by 400,000 by the unrecorded depreciation of 400,000(2M/5). The share in loss of
the investor is equal 20 percent of 400,000.
Undervaluation of depreciable asset(2Mx20%)
Goodwill - remainder
Excess of cost over net asset acquired
400,000(share in FV of 2M)
Journal Entry
Investment income (400000/5 years)
Investment in associate
Excess of Net Fair Value Over Cost
PAS 28, paragraph 32 – any excess of the investor’s share of the net fair value of the associate’s
identifiable assets and liabilities over the cost of the investment is included as income in the
determination of the investor’s share of the associate’s profit or loss in the period in which the
investment is acquired
Investee with Heavy Losses
PAS 28, paragraph 38 - if an investor’s share of losses of an associate equals or exceeds the
carrying amount of an investment, investor discontinues recognizing its share of further losses.
The investment is reported at nil or zero value
The carrying amount of the investment in associate also includes other-long term
interests in an associate, such as long-term receivables, loans and advances. However,
trade receivables and any long-term receivables for which adequate collateral exists,
such as secured loans, are excluded from the carrying amount of the investment in
If the associate subsequently reports income, the investor resumes including its share of
such income after its share of income equals the share of losses not recognized.
Impairment Loss
The recoverable amount is measured as the higher between fair value less costs to sell
and value in use
The recoverable amount is assessed for each individual associate, unless an individual
associate does not generate cash inflows from continuing use that are largely
independent of those from other assets of the reporting entity
Investee with cumulative preference shares
When an associate has outstanding cumulative preference share, the investor shall
compute its share of earnings or losses after deducting the preference dividends,
whether or not such dividends are declared.
Investee with noncumulative preference shares
When an associate has outstanding noncumulative preference share, the investor shall
compute its share of earnings after deducting the preference dividends only when
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