INVESTMENT IN ASSOCIATES (OTHER CONCEPTS – 2)

CHAPTER SUMMARY
1. An investor may acquire additional ownership interest over the associate. This has the
following accounting consequences:
• The cost of additional ownership interest shall be added to the carrying amount
of the investment in associate.
• Ownership interest, which is used in determining the investor’s share over
associate’s profit or loss, OCI, and dividends, shall be increased moving forward.
• The existing investment shall not be remeasured; thus, no gain or loss shall be
recognized.
2. An investor may sell a portion of its investment in associate but will not lose significant
influence. This has the following accounting consequences:
• The carrying amount of the investment shall be updated to reflect the share in
associate’s profit or loss,OCI, and dividends up to the date of partial selling.
• Allocate the updated carrying amount to the sold and unsold portions using the
proportion of sold and retained ownership interest percentages.
• Any difference between allocated carrying amount to sold portion and the
proceeds received shall be recognized in investor’s profit or loss.
• Portion of the share in associate’s OCI shall be transferred either directly to
retained earnings or through profit or loss, depending on the source of amount.
• Ownership interest, which is used in determining the investor’s share over
associate’s profit or loss, OCI, and dividends, shall be decreased moving forward.

3. Loss of significant influence shall be accounted for as follows:

• The carrying amount of the investment shall be updated to reflect the share in
the associate’s profit or loss, OCI, and dividends up to the date of loss of
significant influence.
• Any difference between the investment’s carrying amount (or if partial selling
the allocated carrying amount to sold portion) and the proceeds received shall
be recognized in investor’s profit or loss.
• Total share in associate’s OCI shall be transferred either directly to retained
earnings or through profit or loss, depending on the source of OCI amount.
• Any retained investment, if any, shall be measured at its fair value with the
corresponding changes always recognized in profit or loss. Subsequently, the
retained investment shall be accounted for either at FVTPL or FVTOCI.
• Equity method shall be discontinued moving forward.
4. Share in associate’s losses shall be charged using the following hierarchy:
a. Investment in associate
b. Investment in preference shares of the associate, if any
c. Long term and unsecured receivable from the associate, if any
5. Intercompany transactions are transactions between the investor and the associate.
Downstream transactions are those from the investor to the associate while upstream
transactions are those from the associate to the investor.

Unrealized gains and losses are recognized in the investor’s financial statements only to
the extent of unrelated investor’s interest in the associate.
6. The amount of loss on deemed disposal can be determined as follows:
 Carrying amount of investment before dilution xx
Multiply: Diluted % (ownership interest before dilution-ownership
Interest after dilution)/ ownership interest before dilution %
Carrying amount of diluted portion before proceeds Pxx
Less: Share in proceeds (proceeds from additional issuance x ownership
Interest after dilution) xx
Loss on demand disposal Pxx

Illustration 1. On January 1, 2023, STAR Company purchased 20% of voting shares of APPLE
Company for P2,000,000. On January 1, 2024, additional 10% were purchased for
P1,100,000. Lastly, on January 1, 2025, additional 10% was purchased for P1,000,000. APPLE
Company reported profit (loss) amounting to P800,000, (900,000) and P1,500,000 during
2023, 2024 and 2025, respectively. The fair value of 20% interest as of January 1, 2024 is
P2,200,000 while the fair value of the 30% interest as of January 1, 2025 is P3,000,000.

Required: Determine the STAR Company’s share in the net income of APPLE Company in
2023, 2024 and 2025, and the investment in associate balance as of December 31, 2023,
2024, and 2025.

2023 2024 2025

APPLE’s profit or (loss) P800,000 (P900,000) 1,500,000
% holdings during the period 20% 30% 40%
Share in net profit (loss) P160,000 (P270,000) P600,000
Add: Beg. Investment in associate 2,000,000 2,160,000 2,990,000
Cost of additional investment - 1,100,000 1,000,000
End. Investment in associate, 12/31 2, 160,000 2,990,000 p4,590,000

Illustration 2. As of January 1, 2023, FELLA Company had an investment in associate with

carrying amount of P2,160,000, representing 40% of voting shares of FRIENDS Company. For
the current year, FRIENDS Company reported P700,000 profit and P200,000 other
comprehensive income arising from associate’s equity securities at FVTOCI. On December
31, 2023, 10% out of 40% holdings of FELLA Company has been sold for P650,000 reducing
its ownership interest to just 30%.

In this case, the updated carrying amount of investment in associate as of December 31,
2023 shall be determined as follows.

Investment in associate, 1/1/23 P2,160,000

Add: Share in profit (P700,000 x 40%) 280,000
Share in OCI (P200,000 x 40%) 80,000
Investment in associate, 12/31/23 P2,520,000
From this updated carrying amount, the 10% (out of 40%) sold portion shall be computed as
follows: P630,000=(P2,520,000 x (10%/40%). To record the decrease in ownership interest
without losing significant influence, on December 31, 2023, is as follows:
 Cash 650,000
Investment in associate 630,000
Gain on partial sale of investment 20,000
Lastly, to proportionately reduce the accumulated OCI amount by P20,000
(P80,000x10%/40%) and directly transfer it to retained earnings:

Share in associate’s O.C. income 20,000

Retained earnings 20,000
After recording these entries, the investment in associate will now have a balance of
P1,890,000 (P2,520,000 – P630,000) while the share in associate’s O.C. income will now have
a balance of P60,000 (P80,000-P20,000)

Starting in 2024, in computing FELLA’s share in FRIEND’s profit or loss, OCI, and dividends,
the percentage to be used shall now be reduced to 30% (40%-10%). For example, if FRIEND
reported profit of P1,200,000 in 2024, FELLA’s share shall be computed as P360,000
(1,200,000 x 30%).

Illustration 3. As of July 1, 2023, GLOBE Company has a 40% interest over MAP Company.
Later that day, MAP Company issued additional shares for P1,000,000 in which GLOBE
Company did not participate. As a result, GLOBE Company interest has been diluted down to
30%. Updated carrying amount of investment in associate as of that date was P3,200,000.

The loss on deemed disposal can now be determined as follows:

Investment in associate, Jul. 1, 2023 P3,200,000

Multiply: Diluted % (40%-30%)/40% 25%
Carrying amount of diluted portion before share of proceeds P800,000
Less: Share in proceeds (P1,000,000x30%) (300,000)
Loss on deemed disposal P500,000

The journal entry to record the dilution is as follows:

Loss on dilution 500,000

Investment in associate 500,000

Illustration 4. As of December 31,2023, SWEET Company held 30% interest in SOUR

Company with carrying amount of P2,400,000. The related unrealized gain-OCI recognized as
share of SWEET Company in SOUR Company’s investment in equity securities at FVTOCI
amounted to P175,000. As of the same date, SWEET Company decided to sell its 20%
interest for P1,700,000 which brought down its interest to 10%. Consequently, it lost
significant influence over SOUR Company. The fair value of the retained 10% as of the date
of partial sale was P950,000.
 Required: Under each of the following independent scenarios, determine the journal entry
to record the loss on significant influence on December 31, 2023 and subsequent accounting
for the retained interest:
1. Retained interest is accounted for at FVTPL
2. Retained interest is accounted for at FVTOCI

Scenario 1
On December 31, 2023, to record the sale of 20% interest:

Cash 1,700,000
Investment in associate (P2.4Mx20%/30%) 1,600,000
Gain on sale of investment-P/L (squeeze) 100,000
To reclassify the remaining carrying amount of the investment in associate to financial asset
at FVTPL:

Financial asset at FVTPL 950,000

Investment in associate (P2.4Mx10%/30%) 800,000
Unrealized Gain -P/L (squeeze) 150,000

The P250,000 (100,000+150,000) total amount to be recognized in profit or loss can also be
computed as follows:

Cash proceeds
Add: Fair value of retained interest
Total proceeds
Less: Updated carrying amount of investment in associate
Total amount reported in profit or loss

Lastly, to record the transfer of the total share in OCI amount, arising from associate’s equity
securities at FVTOCI, directly to retained earnings:

Unrealized gain-OCI 175,000

Retained earnings 175,000

Scenario 2
On December 31, 2023, to record the sale of 20% interest:
Cash 1,700,000
Investment in associate (P2.4Mx20%/30%) 1,600,000
Gain on sale of investment-P/L (squeeze) 100,000
To reclassify the remaining carrying amount of the investment in associate to financial asset at
FVTOCI.
Financial asset at FVTOCI (at FV) 950,000
Investment in associate (P2.4Mx10%/30%) 800,000
Unrealized Gain -P/L (squeeze) 150,000

Illustration 5. As of January 1, 2023, the following amounts were reported by BEAR Company related
to its 25% interest over HONEY Company:
 Investment in associate P1,500,000
Trade receivables 300,000
Trade payables 250,000
Unsecured loan receivable 900,000
Secured loan receivable 2,000,000
Investment in preference shares 1,000,000
HONEY Company reported the following profit (loss)per year:

YEAR Profit (Loss)

2023 (3,600,000)
2024 (4,000,000)
2025 (8,000,000)
2026 7,200,000
2027 10,000,000
Required: Determined the journal entries to record BEAR Company’s share in profit (loss) for each
year.

Solution
The first thing to consider is the total interest that BEAR Company possesses over HONEY Company.
The following items are considered as part of its total interest.

Investment in associate P1,500,000

Unsecured loan receivable 900,000
Investment in preference shares 1,000,000
Total interest in the associate P3,400,000
Based on the above, the amount of cumulative losses needed to diminish the total interest is
P13,600,000 (P3,400,000/25%).

Year 2023
To record the share in loss for the year ended December 31, 2023 amounting P900,000 (P3,600,000
x 25%):
Share in associate’s loss- P/L 900,000
Investment in associate 900,000
After this entry, investment in associate account will have carrying amount of P600,000 (P1,500,000-
900,000). Balances of other interest are not affected.

Year 2024
To record the share in loss for the year ended December 31, 2024 amounting P1,000,000
(P4,000,000 x 25%):
Share in associate’s loss- P/L 1,000,000
Investment in associate 600,000
Investment in preference shares (squeeze) 400,000

Year 2025
To record the share in loss for the year ended December 31, 2025 amounting P2,000,000
(P8,000,000 x 25%):
 Share in associate’s loss- P/L 1,500,000
Investment in preference shares 600,000
Unsecured loan receivable 900,000

Year 2026
To record the share in profit for the year ended December 31, 2026 amounting P1,800,000
(P7,200,000 x 25%):
Investment in preference shares 400,000
Unsecured loan receivable 1,900,000
Share in associate’s profit-P/L 2,500,000

Year 2027
To record the share in profit for the year ended December 31, 2027 amounting P2,500,000
(P10,000,000 x 25%):
Investment in preference shares 600,000
Investment in associate 900,000
Share in associate’s profit-P/L 1,300,000

Illustration 6- Downstream. On December 31, 2023, an investor sold one of its idle buildings to its
associate, over which it has 40% ownership interest, for P6,000,000. This had original cost of
P8,000,000, accumulated depreciation of P3,000,000 and remaining useful life of 5 years.

Book of the Investor

The investor will record this transaction initially as follows:
Cash 6,000,000
Accumulated depreciaton-blgd. 3,000,000
Building 8,000,000
Gain on sale of building 1,000,000
To eliminate the investor’s interest over the amount of gain on sale (400,000 or P1,000,000x40%):
Gain on sale of building-P/L 400,000
Investment in associate 400,000
In effect, the net amount of gain on sale that shall be reported is P600,000(P1,000,000-P400,000),
which is equal to unrelated investor’s interest (P1,000,000x (1-40%).

Lastly, since the related sold asset is depreciable, the P400,000 deferred gain shall be recognized as
gain over its remaining useful life of 5 years or 80,000 per year (P400,000/5). For example, for 2024,
the following entry shall be made:
Investment in associate 80,000
Gain in sale of building-P/L 80,000

Books of the Associate

The associate will record the transaction as a normal acquisition of a building:
Building 6,000,000
Cash 6,000,000
Illustration 7. Upstream. At the end of 2023, an investor acquired a machinery from its associate on
which it has 25% ownership interest. The selling price was set at P3,200,000 while the original cost
and accumulated depreciation were P5,000,000 and P2,400,000 respectively. Remaining useful life is
set at 3 years. The associate reported P1,500,000 profit.

Books of the Associate

For upstream transactions, it is better to start the analysis in the perspective of the associate. The
associate has already recorded the sale as follows:
Cash 3,200,000
Accumulated depreciation 2,400,000
Machinery 5,000,000
Gain on sale of machinery-P/L 600,000

Book of the Investor- Method 1

The associate already included the amount of gain on sale from its reported profit. Consequently, for
the purposes of computing the investor’s share in profit, the amount of gain on sale shall be
deducted from the amount of reported profit. Investor’s share in profit can be computed as
P225,000 (P1,500,000-P600,000)x25%), which shall be recorded as follows:
Investment in associate 225,000
Share in associate’s profit –P/L 225,000
Book of the Investor- Method 2
The investor can also initially recognize its share in the associate’s unadjusted profit as follows
(P1,500,000x25%):

Investment in associate 375,000

Share in associate’s profit –P/L 375,000
To remove the investor’s share in the associate’s reported gain on sale (600,000X25%)

Share in associate’s profit-P/L 150,000

Investment in associate 150,000

Illustration 8. As of December 31, 2023, an investor reported a balance in its investment in associate
amounting to P5,000,000. Under each of the following independent scenarios, determine the
amount of impairment loss, if any:
1. FVLCD of P4,500,000 and value in use of P5,200,000
2. FVLCD of P5,600,000 and value in use of P4,900,000
3. FVLCD of P4,500,000 and value in use of P4,700,000

Scenario (A)FVLCD (B)Value in use Recoverable Amount,

Higher of (A) and (B)
1 P4,500,000 P5,200,000 P5,200,000
2 5,600,000 4,900,000 5,600,000
3 4,500,000 4,700,000 4,700,000

For scenarios 1 and 2, no impairment loss shall be recognized since the recoverable amount for each
scenario are both higher than the P5,000,000 carrying amount.

For scenario 3, impairment loss of P300,000 (P500,000-P4,700,00 shall be recognized as follows:

Impairment loss 300,000
Investment associate 300,000