FINAL-Investment in Associate

INVESTMENT IN ASSOCIATE
P R E PA R E D BY J OYC E S H E R LY A N N LU C E RO
INTERCORPORATE SHARE INVESTMENT
• It is the purchase of the equity shares of one entity by another entity. In other
words, it is the process of investing of a company to another company through
acquisition of share capital.
• When you purchase a share of a company, its percentage out of the whole capital
of the investee has definitions. Ex. the owner of more than 20% of the
company’s stock has a significant influence and is called an associate
INVESTMENT IN ASSOCIATE
• Investment in ordinary shares that covers up to 20% or more of the investee’s
stock is called an investment in associate.
SIGNIFICANT INFLUENCE
• The assessment of significant influence is a matter of judgement
• It is a power to participate in financial and operating policy decisions of the investee
but not control or joint control over those policies.
• If the investor holds, directly or indirectly through subsidiaries, 20% or more of the
voting stocks of the investee, it is presumed that investor has a significant influence
unless otherwise stated.
SIGNIFICANT INFLUENCE IS PRESUMED WHEN:

(PAS 28)
• There is a representation in the board of directors
• Participation in the policy making process
• Material transactions between the investor and the investee
• Interchange of the managerial personnel
• Provision of essential technical information
LOSS OF SIGNIFICANT INFLUENCE
• an investor losses its influence over the investee’s company whenever it losses
the power to participate in the financial and operating policy decisions of the
investee.
• The loss of influence can occur without change in the absolute or relative
ownership interest.
• Example: a loss of influence occurs when an associate becomes subject to
control of a government, court, administrator or regulator.
• Influence may lose once stated in an agreement.
EQUITY METHOD
• Accounting for Investment in Associate is done through EQUITY METHOD.
• EQUITY METHOD- is based on economic relationship between the investor and
investee, they are view as a single economic unit. They are one and the same.
• This method is applicable whenever the investor has a significant influence over
the company.
EQUITY METHOD-ACCOUNTING PROCEDURES
• The investment is initially recognized at cost.
• The carrying amount is increased by the investor’s share of profit of the investee
and decreased by the investor’s share of the loss of the investee. The investor’s
share of profit or loss is recognized as INVESTMENT INCOME
• Distributions or dividends received from an equity investee reduce the carrying
amount of investment.
• Note that the investment must be in ordinary shares.
If the investment is preference shares , equity method is NOT APPROPRIATE since

the equity method is for non-voting equity. This type of share may be accounted
for as at FAIR VALUE THROUGH PROFIT AND LOSS OR AT FAIR VALUE THROUGH
OTHER COMPREHENSIVE INCOME.
• If the investor has significant influence over the investee, is said to be an
asssociate. Accordingly, under the equity method, the investment in ordinary
shares should be appropriately described as investment in associate
• The investment in associate accounted for using equity method shall be
classified as non-current asset.
ILLUSTRATION-EQUITY METHOD
1. On Jan.1, 2019, an investor purchased 20,000 shares of the 100,000
outstanding ordinary shares of an entity at 200 per share.
The investment represents 20% of equity interest and the investor has a
significant influence over the investee. The acquisition cost is equal to the net
assets acquired. (investor’s entry)
Investment in Associate 4,000,000

Cash 4,000,000
2. The investee reported net income of P5,000,000 for 2019.
The investor recognized a share of the net income of the investee equals to 20%
of 5,000,000 or 1,000,000

Investment Incoome 1,000,000
3. 3. Received a 25% share dividend from the investee on Dec. 31,2019. (MEMO
ENTRY ONLY)
MEMO- Received 5,000 ordinary shares as 25% of share dividend on 20,000

original shares. Shares now held, 25,000 shares.
NOTE: 20% equity interest would not be affected by the share dividend, The
equity interest is the same before and after the share dividend.
ILLUSTRATION-EQUITY METHOD ..
4. The investee reported a net loss of 1,000,000 for 2020.
The investor recognized a share in the net loss of investee equal to 20% of
1,000,000 or 200,000
Loss on investment 200,000

Investment in Associate 200,000
5. The investee declared and paid cash dividend od 2,500,000 on ordinary shares
on Dec. 31,2020
The investor recognized a share in cash dividend of the investee equal to 20% of
2,500,000 or 500,000
Cash 500,000
NOTE that under equity method, cash dividend is not an income but a return or
reduction of investment
ACCOUNTING ISSUE- EXCESS OF COST OVER
CARRYING AMOUNT
• An accounting problem arises if the investor pay more or less for an investment
than the carrying amount of underlying net assets.
• For example, if the earning potential of the investee is abnormally high, the
current value of the net assets is frequently higher than their carrying amount.
• If the investor pays more than the carrying amount of the net assets acquired,
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 land , building and inventory
b. Goodwill
ACCOUNTING PROCEDURES-EXCESS OF COST OVER

CARRYING AMOUNT
• In practice, it is often difficult to determine which specific identifiable assets are
undervalued.
• If the assets of the investee are fairly valued, accountants frequently attribute
excess of cost over carrying amount of underlying net assets to goodwill.
• If the excess is attributable to undervaluation of depreciable asset, it is
amortized over the remaining life of depreciable asset.
• If the excess is attributable to undervaluation of land, it is not amortized because
land is non-depreciable
The amount is expensed when the land is sold.
• If the excess is attributable to inventory, the amount is expensed when the
inventory is sold.
• If the excess is attributable to goodwill, it is included in the carrying amount of
the investment and not amortized.
• However, the entire investment in associate including the goodwill is tested for
improvement at the end of each reporting period.
ILLUSTRATION
At the beginning of the current year, an investor purchased 20% of the outstanding ordinary
shares of an investee for P5,000,000
The net assets of the investee on the date of acquisition are fairly valued, except for a
depreciable asset for which the fair value is P2,000,000 greater than its carrying amount.
Any remaining excess is attributable to goodwill.
Solution:
The carrying amount of the investee’s net assets was P20,000,000. The investor therefore
paid P1,000,000 in excess of the carrying amount of net assets, computed as follows:
Acquisition Cost 5,000,000
Carrying Amount of net assets acquired (20%*20m) 4,000,000
Excess of cost over carrying amount 1,000,000
Undervaluation of depreciable asset 400,000

Goodwill-remainder 600,000
JOURNAL ENTRY to amortize the excess cost attributable to depreciable asset:

Investment Income 80,000
(400,000/5years)
NOTE: EXCESS OF COST UNDER GOODWILL IS NOT AMORTIZED. IT IS INCLUDED

IN THE CARRYING AMOUNT OF THE INVESTMENT IN ASSOCIATE
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 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.
• Appropriate adjustments to the investor’s share of the associate’s profit or loss
after acquisition are also made to account, for example, for depreciation of
depreciable assets based on their fair value on the acquisition date.
ILLUSTRATION- EXCESS OF NET FAIR VALUE

OVER COST
• At the beginning of the current year, an investor purchased 40% of the ordinary
shares outstanding of an investee for P15,000,000 when the net assets of the
investee amounted to P30,000,000
At acquisition date, the carrying amounts of the identifiable assets and liabilities of
the investee were equal to their fair value except for the following
a. Equipment whose fair value was P7,000,000 greater than carrying amount
b. Inventory whose fair value was P2,500,000 greater than the carrying amount
• The equipment has a remaining life of 4 years and the inventory was all sold during
the year
• The investee reported net income of P20,000,000 for the current year ad paid
P5,000,000 cash dividend at year-end.
COMPUTATION
Acquisition cost 15,000,000

Carrying amount of net assets acquired (40%of30m) 12,000,000

Excess attributable to equipment (40%x7,000,000) (2,800,000)
Excess attributable to inventory (40%x 2,500,000) (1,000,000)
Excess net fair value over cost 800,000
JOURNAL ENTRIES
1. To record the investment
Cash 15,000,000
2. To record the share in net income
Investment income (40%of20m) 8,000,000
3. To record the share in cash dividend
Cash (40%of 5,000,000) 2,000,000
Investment in associate 2,000,00
4. To record the amortization of the excess attributable to inventory
Investment income 1,000,000
5. To record the “excess net fair value” as investment income
Investment in associate 800,000
DETERMINATION OF INVESTMENT INCOME

Share in Net Income 8,000,000
Amortization of excess attributable to equipment (700,000)
Amortization of excess attributable to inventory (1,000,000)
Excess net fair value 800,000
NET INVESTMENT INCOME 7,100,000

EXAMPLE PROBLEM : AICPA ADAPTED
Boorish Company acquired a 30% interest for P5,000,000 on January 1,2019.
This cost exceeds the underlying net assets of the investee by P1,000,000 which
is attributed to an undervalued equipment by the investee with the useful life of 5
years.
The investee reported the following information for 2019 and 2020
Net Income Dividends Paid
2019 4,000,000 3,000,000
2020 6,000,000 5,000,000
REQUIRED: Prepare journal entries on the books of Boorish Company from

October 1, 2019 to December 31, 2020.
SOLUTION
2019.
Cash 5,000,000
Investment Income (4m*30%x3/12) 1,200,000
Cash(3m*30%) 900,000
Investment in Associate (1m/5) 200,000
2020.
Investment Income (6m*30%) 1,800,000
Cash (5m*30%) 1,500,000
Investment Associate 200,000
THANK YOU!

FINAL-Investment in Associate

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INVESTMENT IN ASSOCIATE

SIGNIFICANT INFLUENCE IS PRESUMED WHEN:

If the investment is preference shares , equity method is NOT APPROPRIATE since

Investment in Associate 4,000,000

Investment in Associate 1,000,000

MEMO- Received 5,000 ordinary shares as 25% of share dividend on 20,000

Loss on investment 200,000

ACCOUNTING PROCEDURES-EXCESS OF COST OVER

Excess of cost over carrying amount 1,000,000

Undervaluation of depreciable asset 400,000

JOURNAL ENTRY to amortize the excess cost attributable to depreciable asset:

NOTE: EXCESS OF COST UNDER GOODWILL IS NOT AMORTIZED. IT IS INCLUDED

ILLUSTRATION- EXCESS OF NET FAIR VALUE

Acquisition cost 15,000,000

Excess of cost over carrying amount 3,000,000

Excess net fair value over cost 800,000

DETERMINATION OF INVESTMENT INCOME

NET INVESTMENT INCOME 7,100,000

REQUIRED: Prepare journal entries on the books of Boorish Company from

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