CHAPTER 17 & 18
Intermediate Accounting 2
Investment in Associate
Intercorporate Share Investment
 The purchase of the equity shares of one entity by
another entity through the acquisition of share
capital.
Signicifant Influence
 Matter of judgement
 Power to participate in the financial and operating
policy decisions of investee but not joint control over
those policies.
If the investor holds;
 20% or more has significant influence
 Less than 20% does not have significant influence
PAS 28; provides that existence of significant influence is
usually evidenced by the ff factors:
a) Representation in the board of directors
b) Participation in policy making process
c) Material transactions between the investor &
investee
d) Interchange of managerial personnel
e) Provision of essential technical information
Potential Voting Rights
 PAS 28, paragraph 7
 Entity may own share warrants, debt/equity
instruments that are convertible or exercised into
ordinary shares that have the potential.
 Should be currently convertible, If not; cannot be
exercised until a future date/occurrence of future
event.
 When potential voting rights exist: profit/loss and
changes in the investee’s equity determined on the
basis of “ present ownership interest.”
Loss of Significant Influence
 Entity “LSI” over Investee when it loses the power
to participate in the financial and policy decisions
of the investee.
 Can occur w/wo change in the absolute/relative
ownership interest.
 Occur also as a result of “contractual agreement”
 For example: when an associate becomes subject
to control of a gov’t, court, administrator /
regulator.
Equity Method
 Based on the economic relationship between
investor & investee.
 Investor & investee – viewed as a single economic
unit, are one & the same.
 Applicable when investor has a significant
influence over investee.
 Cash dividend – not an income but a
“return/reduction of investment”
Accounting Procedures
a) Investment initially recognized @ lost
b) Carrying amount is increased and decreased by
the investor’s share of profit and loss of the
investee; recognized as investment income.
c) Distributions/dividends from an equity reduced
the CM of the investment.
d) “Investment must be in ordinary shares”
 If preference share; equity method is
not appropriate because it is nonvoting
equity.
 Accounted as; @ FVTPL or @ FVTOCI
e) Investee is “associate” - If the investor has a
significant influence over investee
 Investment in ordinary share – described
as “investment in associate” under equity
method
f) Investment in associate using the equity method
are classified as “noncurrent asset”
Excess of Cost Over Carrying Amount/CM
Accounting problem arises if:
 Investor pays more or less for an investment than
CM of underlying net assets
 Investor pays more than the CM of net assets
acquired, difference is known as “excess of cost
over carrying amount.” Attributed to the ff:
i.
Undervaluation of investee’s asset (bldg.,
land, inventory)
ii.
Goodwill
 Assets of investee are “fairly valued” goodwill
 Excess attributable to undervaluation of
“DA/depreciable asset”, it’s amortized over
remaining life of DA.
Entry: Investment income XXX
Investment in Assoc XXX
 Attributable to inventory, amount is expensed
when already sold
 Attributable to goodwill, included in CM of
investment & not amortized.
 HOWEVER: entire investment in associate
including goodwill is tested for impairment at the
end of reporting period.
Excess of Net Fair Value Over Cost
 PAS 28, paragraph 32, provides that any excess of
the investor’s share of the net fair value of the
identifiable assets & liabilities over the cost of
investment is included as income in the
determination of the investor’s share of associate’s
profit/loss in the period in which the investment is
acquired.
 Adjustments to investor’s share of associate P/L
after acquisition are made to account.
IACC 2 NOTES from Valix & Empleo AY 2019-2020
Prepared by: Michelle Mejos ACT 186
1
CHAPTER 17 & 18
Intermediate Accounting 2
Investment in Associate
Journal entries
1. To record investment:
Investment in associate XXX
Cash
XXX
2. To record the share in net income:
Investment in associate XXX
Investment income
XXX
3. To record the share in cash dividend
Cash
XXX
Investment in associate XXX
4. To record amortization of excess attributable
to the equipment:
Investment income
XXX
Investment in associate XXX
5. To record amortization of excess attributable
to inventory:
Investment income
XXX
Investment in associate XXX
 Excess is fully “expensed” because all the
inventory was already sold during the year.
6. To record “excess in net fair value” as
investment income:
Investment in associate XXX
Investment income
XXX
Investee with Heavy Losses
 PAS 28, paragraph 38, if an investor’s share of
losses of an associate equals or exceeds the CM of
an investment, investor discontinues recognizing
its share of further losses.
 Investment is reported at nil/zero value
 CM includes other long-term interest (long-term
receivables, loans & advances, investment in
preference shares.)
 If associate reports income; investor resumes
including its share of income equals the share of
losses not recognized.
 Loss to be recognized cannot exceed the CM of
investment reduced to zero.
ii.


Present value expected to arise from
dividends to be received from the
investment and ultimate disposal.
Both methods give the same result.
PAS 28, paragraph 42, goodwill is not separately
recognized from the investment amount,
impairment loss recognized is applied to the
investment as a whole.
Investee with Preference Share
When an associate has outstanding;
 Cumulative preference shares – investor compute
its share of earnings/losses after deducting the
preference dividends, whether/not such dividends
are declared
 Noncumulative PS – investor compute its share of
earnings after deducting the preference dividends
only when declared.
Other Changes in Equity
 Arising from revaluation of PPE and foreign
exchange translation differences.
Journal entries:
1. Share in net income:
Investment in associate XXX
Investment income
XXX
2. Share in dividend paid:
Cash
XXX
Investment in associate XXX
3. Share in Revaluation surplus:
Investment in Associate XXX
Revaluation Surplus – investee X
Impairment Loss
 PAS 28, paragraph 40, requires that an
impairment loss shall be recognized whenever the
carrying amount of the investment in associate
exceeds recoverable amount.
 Recoverable amount – measured as the higher
between fair value less cost of disposal and value in
use. Assessed for each individual associate.
 Value in use – the present value of estimated
future cash flows expected to arise from the
continuing use of an asset and from its ultimate
disposal.
i.
Present value expected to be generated
by investee, (cash flows from operations
& proceeds on the ultimate disposal of
investments)
IACC 2 NOTES from Valix & Empleo AY 2019-2020
Prepared by: Michelle Mejos ACT 186
2