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    Investments in Associates: Rowena Buan-Yost, CPA-MBA

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    RowenaBuan-Yost
    This document discusses accounting for investments in associates under the equity method. It defines an associate as an entity over which the investor has significant influence. Significant influence is presumed with a 20% or more voting interest. The equity method requires the investor to initially record the investment at cost and subsequently adjust the carrying amount for the investor's share of the associate's net income or loss. It also discusses how to account for excess of cost over fair value, impairment losses, investees with preference shares or heavy losses, and discontinuing use of the equity method.

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    Investments in Associates: Rowena Buan-Yost, CPA-MBA

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    RowenaBuan-Yost
    409 views21 pages
    This document discusses accounting for investments in associates under the equity method. It defines an associate as an entity over which the investor has significant influence. Significant influence is presumed with a 20% or more voting interest. The equity method requires the investor to initially record the investment at cost and subsequently adjust the carrying amount for the investor's share of the associate's net income or loss. It also discusses how to account for excess of cost over fair value, impairment losses, investees with preference shares or heavy losses, and discontinuing use of the equity method.

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    Investments

    Original Title

    Investment in Associate

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    This document discusses accounting for investments in associates under the equity method. It defines an associate as an entity over which the investor has significant influence. Significant influence is presumed with a 20% or more voting interest. The equity method requires the investor to initially record the investment at cost and subsequently adjust the carrying amount for the investor's share of the associate's net income or loss. It also discusses how to account for excess of cost over fair value, impairment losses, investees with preference shares or heavy losses, and discontinuing use of the equity method.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    409 views21 pages

    Investments in Associates: Rowena Buan-Yost, CPA-MBA

    Uploaded by

    RowenaBuan-Yost
    This document discusses accounting for investments in associates under the equity method. It defines an associate as an entity over which the investor has significant influence. Significant influence is presumed with a 20% or more voting interest. The equity method requires the investor to initially record the investment at cost and subsequently adjust the carrying amount for the investor's share of the associate's net income or loss. It also discusses how to account for excess of cost over fair value, impairment losses, investees with preference shares or heavy losses, and discontinuing use of the equity method.

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    © All Rights Reserved
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    of 21

    Chapter 22

    Investments in Associates

    Rowena Buan-Yost, CPA-MBA

    Definitions

    Definitions

    4
    Significant influence
    Determining if significant (SI) influence
    exists requires judgement
    SI presumed if investor holds, directly or
    indirectly, 20% of voting power of
    associate, unless clearly demonstrate this
    is not the case
    conversely, if the investor holds <20%...
    a majority ownership by another investor
    does not preclude an investor from
    having SI

    Significant influence continued


    Determining if SI exists requires
    judgement. This means considering all
    factors, eg

    potential voting rights (currently exercisable or


    convertible
    representation on the board of directors or
    equivalent governing body
    participation in policy-making processes,
    including participation in decisions about
    dividends or other distributions
    material transactions between the investor
    and the investee
    providing essential technical information
    interchange of managerial personnel

    Loss of Significant influence

    Factors
    Loses the power to participate in
    the financial and operating policy
    decisions of the associate
    Can occur with or without change
    in the absolute or relative
    ownership interest
    As a result of a contractual
    agreement

    Equity method

    Based on the economic relationship between the


    investor and the investee
    Investor and investee are one and the same
    SI exists
    Investment must be in ordinary shares
    Investment in associate shall be classified as
    noncurrent asset
    Parent investor has control over the investee
    (Subsidiary)

    Equity method

    (Illustration on Page 753)

    In the books of investor:


    Initial recognition : At cost
    Subsequent recognition :
    Increase / decrease carrying amount with profit /loss of the associate
    Recognize profit / loss of subsidiary in P& L account of investor
    Reduce the carrying amount with dividends received from associates
    Adjust the carrying amount for the following:
    changes in the investees other comprehensive income due to :
    Changes arising from the revaluation of property, plant and
    equipment
    foreign exchange translation differences.
    Adjust investors other comprehensive income:
    With the investors share of those changes arising from revaluation
    exchange difference etc.

    Excess of Cost over CA

    Investor pays more for an investment than the carrying amount of the asset
    Undervaluation of the investees assets (bldg, land, inventory)
    Goodwill
    If the assets of the investee are fairly valued
    attribute the excess of cost over CA of the net assets to goodwill
    If the excess is attributable to undervaluation of depreciable asset
    It is amortized over the remaining life of the depreciable asset
    If the excess is attributable to undervaluation of land
    It is not amortized because land is nondepreciable
    If the excess is attributable to inventory
    It is expensed when the inventory is already sold
    If the excess is attributable to goodwill
    It is included in the CA of the investment and not amortized
    The entire investment is tested for impairment at the end of each period.

    Excess of Net Fair Value over Cost

    10

    Included as income in the determination of


    the investors share of the associates profit or
    loss in the period in which the investment is
    acquired
    Investment in Associate
    Investment Income

    xxx
    xxx

    Investee with Heavy Losses

    11

    Share of losses equals or exceeds the CA of


    investment
    Investor discontinues recognizing its share of further
    losses
    The investment is reported at nil or zero value
    Subsequently reports income

    - Investor resumes recognizing income if its share of


    income equals the share of losses not recognized

    Impairment Loss

    12

    Impairment loss shall be recognized


    When the CA of investment in associate exceeds its
    recoverable amount
    Recoverable amount = higher between (FV cost of
    disposal) and (value in use)
    FV = proceeds of sale at measurement date
    Value in use = PV of the estimated future cash flows
    expected to arise from the continuing use of an asset and
    from its ultimate disposal
    Allocated first to remaining goodwill

    Investee with Preference Share

    13

    Cumulative
    Investors share of profit or loss is computed
    after deducting the preference dividends,
    declared or not

    Non Cumulative
    Investors share of profit or loss is computed
    after deducting the preference dividends only
    when declared

    Other Changes in Equity

    14

    Changes arising from Revaluation of PPE


    and from Foreign translation differences
    Changes are recognized directly in equity of the
    investor

    Adjustment of Investees Operations

    15

    The most recent available FS of the associate are used by


    the investor in applying the equity method (difference shall
    be not > 3 mos)
    Adjustments shall be made to conform the associates
    accounting policies to those of the investor
    Investors share in the associates P/L resulting from
    upstream/ downstream transactions is eliminated
    Upstream transactions are sales of assets from an associate to the investor
    Downstream transactions are sales of assets from the investor to an
    associate

    When Equity Method Not Applicable

    16

    If the investor is a parent that is exempt from preparing


    consolidated FS
    The investor is a wholly-owned or partially-owned
    subsidiary of another entity and the other owners do not
    object to the investor not applying the equity method
    The investors debt and equity instruments are not traded
    in a public market or over the counter market
    The investor did not file or in the process of filing FS with
    SEC for the purpose of issuing any class of instruments in
    a public market
    The parent of the investor produces consolidated FS
    available for public use that comply with PFRS

    Discontinuance of equity method

    17

    Stop using equity method when SI


    ceases, account for the investment as:
    Financial asset at FV through profit
    or loss
    Financial asset at FV through other
    comprehensive income
    Nonmarketable investment at cost or
    investment in unquoted equity
    instrument

    Measurement after loss of SI

    18

    Any retained investment shall be


    measured at FV included in P&L
    If disposal, derecognise Associate &
    recognise in profit or loss the difference
    between (i) proceeds + fair value of
    retained interest & (ii) CA when SI lost.
    without disposal regard FV at that
    date as a new cost

    Associate Held for Sale

    19

    Accounted for in accordance with PFRS 5


    Shall be measured at the lower of CA and FV
    less cost of disposal

    Investment of less than 20%

    20

    The investor does not share in the P/L of the investee


    Dividends received by the investor is regarded as dividend
    income
    Fair Value Method:
    Financial assets are measured at FV through P/L
    Financial assets are measured at FV through OCI
    Used when associate is acquired in stages
    Cost Method:
    Applied to investment in unquoted equity instrument or
    nonmarketable equity investment

    21

    ~~~END~~~

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