UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL

CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 15 – PAS 28: INVESTMENT IN ASSOCIATES EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
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A. Definition of terms 5) Technically, if the investor has significant
Associate – is simply defined as an entity over which influence over the investee, the investee is said
the investor has significant influence. to be an associate. Accordingly, under the equity
method, the investment in ordinary shares
Significance influence – is the power to participate in should be appropriately described as investment
the financial and operating policy decisions of the in associate.
investee but not control over those policies. The 6) The investment in associate accounted for using
assessment of significant influence is a matter of the equity method shall be reported as
judgment. noncurrent asset.

However, PAS 28, paragraph 5, provides guidance in D. Excess of cost over carrying amount
the assessment of significant influence “if the investor If the investor pays more than the book value of the
holds, directly or indirectly through subsidiaries, 20% net asset acquired, the difference is commonly
or more of the voting powers of the investee, it is known as “excess of cost over carrying amount”.
presumed that the investor has significant influence” This excess may be attributed to the following:
unless it can be clearly demonstrated that this is not † Undervaluation of the investee’s assets such as:
the case.  Building, - if the excess is attributable to
undervaluation of building, it is amortized
Conversely, if the investor holds, directly or indirectly over the remaining life of the asset
through subsidiaries less than 20% of the voting  Land – if the excess is attributable to
power of the investee, it is presumed that the undervaluation of land, it is not amortized
investor does not have significant influence, unless because the land is non-depreciable
such influence can be clearly demonstrated. A  Inventory – if the excess is attributable to
substantial or majority ownership by another investor inventory, the amount is expensed when the
does not necessarily preclude an investor from having inventory is already sold.
significant influence. † Goodwill – if the excess is attributable to
goodwill, it is not amortized but the entire
Beyond the mere 20% threshold of ownership, the investment in associate is tested for impairment
existence of significant influence by an investor is at the end of each reporting period.
evidenced by any one or more of the following
factors: E. Excess of Fair value over cost
 Representation in the board of directors PAS 28 paragraphs 32, provides that any excess of
 Participation in policy making process the investor’s share of the net fair value of the
 Material transactions between the investor & the associate’s identifiable asset & liabilities over the cost
investee of the investment is included as income in the
 Interchange of managerial personnel determination of the investor’s share of the
 Provision of essential technical information associate’s profit or loss in the period in which
 Existence of convertible debt or equity the investment is acquired.
instrument of which if exercised or converted,
will give rise to additional voting power Computation of investment income
Share in NI xx
B. Measurement of investment in associates Add/Deduct:
The investment in associate is measured using the Amortization of excess – Equipment (xx)
equity method of accounting. The equity method is Amortization of excess – Inventory (xx)
based on the economic relationship between the Excess net fair value xx xx
investor and the investee. The investor and the Net investment income xx
investee are viewed as a single economic unit. The
investor and the investee are one and the same. The F. Impairment loss
equity method is applicable when the investor has a PAS 28 in conjunction with PAS 36 requires that an
significant influence. impairment loss shall be recognized, “whenever the
carrying amount of the Investment in Associate
C. Accounting procedures – Equity method exceeds its recoverable amount. The recoverable
1) The investment is initially recognized at cost amount is measured as the higher between fair
2) The carrying amount is increased by the value less cost to sell and value in use.
investor’s share of the profit of the investee and  Fair value less cost to sell – is the amount
decreased by the investor’s share of the loss of obtainable from the sale of the asset in an arm’s
the investee. The investor’s share of the profit length transaction between knowledgeable willing
or loss of the investee is recognized as parties less disposal cost.
investment income.  Value in use – is the present value of the
3) Dividend received from an equity investee reduce estimated future cash flows expected to arise
the carrying amount of the investment. from the continuing use of an asset and from its
4) Note that the investment must be in ordinary ultimate disposal The value in use of an
shares. If the investment is preference shares, Investment in Associate is the investor’s share in
the equity method is not appropriate regardless either of the following:
of the percentage because the preference share  PV of estimated future cash flows expected
is a non-voting equity. to be generated by the investee, including
cash flows from operations of the investee &
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 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 15 – PAS 28: INVESTMENT IN ASSOCIATES EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
the proceeds on the ultimate disposal of the ceases to be an associate shall be regarded as the
investment. fair value on initial recognition as a financial asset
 PV of the estimated future cash flows
expected to arise from dividends to be The difference between the carrying amounts of the
received from the investment and from its retained investment at the date the significant
ultimate disposal influence is lost, and the fair value of the retained
investment shall be included in profit or loss. Of
Note: Any resulting impairment loss for the course, the difference between the net proceeds from
investment is allocated first to any remaining disposal of part of the investment and the carrying
goodwill. amount of the investment sold is recognized as gain
or loss on disposal of investment.
G. Investee with noncumulative preference share
 Cumulative – when an associate has outstanding J. Equity method not applicable
cumulative preference share, the investor shall PAS 28, paragraph 17, provides that an investment in
compute its share of earning or losses after associate shall not be accounted for using the equity
deducting the preference dividends, whether or method if the investor is a parent that is exempt from
not such dividends are declared. preparing consolidated financial statements or all of
 Non-cumulative - when an associate has the following apply:
outstanding non-cumulative preference share, 1) The investor is a wholly-owned subsidiary or a
the investor shall compute its share of earning partially owned subsidiary of another entity and
after deducting the preference dividends, only the other owners do not object to the investor
when such dividends are declared. not applying the equity method.
2) The investor’s debt and equity instruments are
H. Discontinuance of equity method not traded in a public market or “over the
PAS 28, paragraph 22, provides than an investor counter” market
shall discontinue to use of the equity method from 3) The investor’s did not file or is is not in the
the date that is ceases to have significant influence process of filing financial statements with SEC for
over an associate. Consequently, the investor shall the purpose of issuing any class of instruments in
account for the investment as follows: a public market
1) Financial assets at fair value through profit or 4) The ultimate or any intermediate parent of the
loss. PAS 28 paragraph 18 as amended, also investor produces consolidated financial
provides that (on the date the significant statements available for public use that comply
influence is lost,) the investor shall measure with PFRS.
any retained investments in associate at fair
value. The difference between the carrying In those circumstances, the investment is accounted
amount of the investment (at the date the for as follows:
significant influence is loss) and the fair value of
the retained investment plus any proceeds 1) Financial assets at fair value through profit or
received from disposal of any part interest in the loss (trading security - @ Fair Value)
associate, shall be included in profit or loss. 2) Financial assets at fair value through other
2) Financial assets at fair value through other comprehensive income (Available for sale
comprehensive income. security - @ Fair Value)
3) Nonmarketable investment at cost or investment 3) Non-marketable investment at cost (or
in unquoted equity instrument. investment in unquoted equity instrument - @
Cost)
PAS 28 paragraph 18, provides that an investor shall
discontinue the use of the equity method only from
the date that it cease to have significant influence
over an associate and shall account for the
investment as AFS or Non-marketable equity
security.

PAS 28, Basic for Conclusion 18, requires an investor

that continues to have significant influence over an
associate to apply the equity method even if the
associate is operating under severe long-term
restrictions that significantly impair the ability to
transfer funds to the investor. Significantly influence
must be lost before the equity method ceases to be
applicable.

I. Measurement of after loss of significant influence

PAS 28, paragraph 22, provides that on the date the
significant influence is lost, the investor shall
measure any retained investment in associate at fair
value. The fair value of the investment at the date it

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