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Investment in Associates Overview

This document discusses accounting for investments in associates where an entity has significant influence over the associate. It notes that significant influence is presumed with a 20% or more ownership stake. The equity method of accounting should be used, where the investment is initially recorded at cost and subsequently adjusted for the investor's share of the associate's net income or losses. Preference shares in an associate are not accounted for using the equity method since they do not convey voting rights. The document also discusses accounting for excess of an investment's cost over its share of the net fair value of an associate's identifiable assets.

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181 views2 pages

Investment in Associates Overview

This document discusses accounting for investments in associates where an entity has significant influence over the associate. It notes that significant influence is presumed with a 20% or more ownership stake. The equity method of accounting should be used, where the investment is initially recorded at cost and subsequently adjusted for the investor's share of the associate's net income or losses. Preference shares in an associate are not accounted for using the equity method since they do not convey voting rights. The document also discusses accounting for excess of an investment's cost over its share of the net fair value of an associate's identifiable assets.

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miss independent
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Investment in Associate

Significant Influence
- Power to participate in financial and operating decisions but not control
- Matter of judgement
- GR: Investor holds directly or indirectly 20% or more of the voting power
XPN: unless clearly demonstrated

Pas 28 par. 6 Significant Influence


- Representation in BOD
- Participation in policy making process
- Material transaction between investor and investee
- Interchange of managerial personnel
- Provision of technical information

Lose of Significant Influence


- Lose the power to participate in financial and operating policy decision
- Can occur with or without change in the absolute or relative ownership interest.
- Can also occur as a result of contractual agreement

Equity Method
- Based on economic relationship between investor and investee
- Investor and investee are viewed as single economic unit
- Dividend received from the investee reduces the carrying amount of investment
- Applicable when investor has significant influence
- Influence over investee (20% - 50%)

Investment
must be ordinary share.
initially, at cost
subsequently, increased by net income of investee and decrease by net loss of investee

Investment in ordinary share


under equity method
shall be classified as non-current asset
described as investment in associate

Investment in preference share


is a non-voting share, therefore equity method is not appropriate
may be accounted for as: (a) Fair value thru profit/loss (b) Fair value thru Other
Comprehensive Income (c) Non-marketable investment

Excess of Cost over CA


- Cost > CA
- May be due to the following:
a. Undervaluation of Investees depreciable assets (FV>CA)
b. Amortization over remaining life of depreciable asset
c. Goodwill if depreciable asset is fairly valued: not amortized; entire investment is
tested for impairment; if asset is non depreciable (land)

Undervaluation of Land no effect on share in net income / nor amortized.


Excess of net fair value over cost included as income

Other comprehensive income (OCI)


1. Revaluation surplus
2. Actuarial gain or loss
3. FVOCI
4. Translation of foreign operation
5. Effective portion of CF hedge

Kinds of preference share


1. Cumulative PS deduct 1yr dividend whether declared or not
2. Non -cumulative PS deduct only what was declared

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