Investment in
Associates
Investment in Associates
• An entity may purchase enough shares of another entity in order to
exert significant influence over the financial and operating policies of
the investee entity.
• Significant influence – is the power to participate in the financial and
operating policy decisions of the investee but not control or joint
control over those policies.
• If the investor holds 20% or more of the voting power of the investee,
it is presumed that the investor has significant influence.
Investment in Associates
• Beyond the 20% threshold ownership, PAS 28, paragraph 6 provides
that the existence of significant influence is usually evidenced by the
following factors:
a) Representation in the board of directors
b) Participation in policy making process
c) Material transactions between the investor and the investee
d) Interchange or managerial personnel
e) Provision of essential technical information
Loss of significant influence
• An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of
the investee.
• The loss of significant influence can occur with or without change in
the absolute or relative ownership interest.
Example: the associate becomes subject to control of government, court,
administrator or regulator, or as a result of contractual agreement.
Equity Method
• Is based on the economic relationship between the investor and the
investee.
• Is applicable when the investor has a significance influence over the
investee.
Accounting for Investment in
Associate
a) The investment is initially recognized at cost.
b) The carrying amount is increased by the investor’s share of the
profit of the investee and decreased by the investor’s share of the
loss of the investee.
c) Dividends received reduce the carrying amount of the investment.
d) This only applies in ordinary shares (voting shares).
e) The investor has significant influence over the investee.
f) It is to be classified as noncurrent assets.
Exercise 1
On July 1, 2022, BMW Inc. purchased 10,000 shares of 50,000 outstanding ordinary shares of
Apple Inc. at P200 per share.
On December 1, 2022, BMW Inc received a 20% share dividend from Apple Inc. Apple Inc.
reported net income of P6,000,000 for 2022.
On October 1, Apple Inc. declared and paid cash dividends of P3,000,000. On December 31,
2023, Apple Inc. reported a net loss of P2,000,000.
Compute the balance of investments associate on December 31, 2023, and prepare the
journal entries.
1/7/2022 Investment in associate 2,000,000
Cash 2,000,000
12/1/2022 Memo entry: Received 2,000 share dividend on 10,000 original
shares. Shares now held, $12,000 shares.
12/31/2022 Investment in associate 1,200,000
Investment income 1,200,000
10/1/2023 Cash 600,000
Investment in associate 600,000
12/31/2023 Loss on investment 400,000
Investment in associate 400,000
Investment balance
Beg bal, 7/22 2,000,000
Income 2022 1,200,000
Dividends (600,000)
Loss 2023 (400,000)
Balance, 12/31/2023 2,200,000
Excess of cost over 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 investees assets, such as building, land
and inventory
b. Goodwill
Excess of cost over carrying amount
• If the assets of the investee is fairly valued, accountants frequently
attribute the excess of cost over carrying amount of the underlying
net assets to goodwill.
-if the excess is attributable to goodwill, it is included in the
carrying amount of the investment and not amortized.
-but the entire investment including the goodwill is tested for
impairment at the end of each reporting period.
Excess of cost over carrying amount
• If the assets of the investee is not fairly valued, it could be:
1. Undervaluation of depreciable asset – excess is amortized over
the remaining life of the depreciable asset
2. Undervaluation of land – excess is not amortized. The amount
is expensed when the land is sold.
3. Undervaluation of inventory – excess is not amortized. The
amount is expensed when the inventory is sold.
Exercise 2
On January 1, 2022, Gem Co. purchased 20% of the outstanding ordinary
shares of an Stone Co. for P10,000,000.
The net assets of Stone Co. on the January 1, 2022 are fairly valued,
except for a depreciable asset with the fair value is P2,000,000 greater
than its carrying amount. The depreciable asset’s remaining useful life is
5 years. The remaining excess is attributed to goodwill. The carrying
amount of Stone’s net assets was P40,000,000.
Compute the excess of cost over carrying amount and the allocation of
the excess.
Carrying amount of net assets acquired 40,000,000
Undervaluation of depreciable asset of investee
with remaining life of 5 years 2,000,000
Updated Net Assets 42,000,000
Multiply: Acquired Percentage – 20% 8,400,000
Acquisition cost 10,000,000
Net Assets Acquired 8,400,000
Excess 1,600,000
Undervaluation of depreciable assets (2,000,000*20%) (400,000)
Goodwill 1,200,000
The entry to amortize the “excess of cost” attributable to the
undervaluation of depreciable asset is recorded as reduction of
investment income and investment balance.
Investment income 80,000
Investment in associate 80,000
(2M * 20%) = 400,000/5
Excess of net fair value over cost
Excess of the investor’s share in the net fair value of the associate’s
identifiable assets and liabilities over the cost of 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.
Exercise 3
On January 1, 2022, Donna Inc. purchased 30% of the ordinary shares of P&G Co. for P9,000,000, when the net
assets of the investee amounted to P25,000,000.
On January 1, 2022, the carrying amounts of the identifiable assets and liabilities of the investee were equal to
their fair value, except for the following:
a. Factory equipment whose fair value was P5,000,000 greater than carrying amount
b. Inventory whose fair value was P2,000,000 greater than the carrying
The equipment has a remaining life of 5 years and the inventory was all sold during the current year.
On December 31, 2022, P&G co. reported net income of P15,000,000 and paid P3,000,000 cash dividend at year
end.
Compute the excess net fair value over cost, and the carrying amount of investment associate as of December 31,
2022.
Carrying amount of net assets acquired 25,000,000
Undervalued Factory equipment 5,000,000
Undervalued Inventory 2,000,000
Updated Net Assets 32,000,000
Multiply: Acquired % - 30% 9,600,000
Acquisition cost 9,000,000
Net Assets Acquired 9,600,000
Excess net fair value over cost (600,000)
Beg. Investment,1/1/2022 9,000,000
Excess net fair value over cost 600,000
Share in net income (15M * 30%) 4,500,000
Share in dividends (3M * 30%) (900,000)
Amortization of excess attributable to equipment
(5M*30%)= 1,500,000 / 5 (300,000)
Amortization of excess attributable to inventory
(2M*30%) (600,000)
Investment in associate, 12/31/2022 12,300,000
Investee with heavy losses
• If an investor’s share of loses of an associate equals or exceeds the
carrying amount of an investment, the investor discontinues
recognizing its share of further losses.
• The investment is reported at nil or zero value.
• If the associate subsequently reports income, the investor resumes
including its share of such income after its share of the income equals
the share of losses not recognized.
Exercise 4
On January 1, 2021, an AMC Inc. acquired 25% of the ordinary shares of GMA Co. for P10,000,000.
On this date, the identifiable assets and liabilities of the associate were measured at fair value and
there is no goodwill arising from the acquisition.
The profits and losses made by the associate of the first 5 years of operations were:
Profit (loss) Investor’s share
2021 (2,000,000) (500,000)
2022 (20,000,000) (5,000,000)
2023 (24,000,000) (6,000,000)
2024 4,000,000 1,000,000
2025 5,000,000 1,250,000
Prepare the journal entries.
2021 Loss on investment 500,000
Investment in associate 500,000
2022 Loss on investment 5,000,000
Investment associate 5,000,000
2023 Loss on investment associate 4,500,000
Investment in associate 4,500,000
Original investment 10,000,000
Loss on 2021 (500,000)
Loss on 2022 (5,000,000)
Carrying amount on Jan 1 2023 4,500,000
2024 No entry
Share in loss in 2023 6,000,000
Loss recognized in 2023 (4,500,000)
Unrecognized loss in 2023 1,500,000
Share in profit for 2024 (1,000,000)
Remaining unrecognized loss 500,000
2025 Investment in associate 750,000
Investment income 750,000
Remaining unrecognized loss (500,000)
Share in profit for 2023 1,250,000
Share in profit to be recognized in 2025 750,000
Investee with preference shares
• When an investee has outstanding cumulative preference shares, the
investor shall compute its share of earnings or losses after deducting
the preference dividends, whether or not such dividends are
declared.
• When an associate has outstanding noncumulative preference
shares, the investor shall compute its share of earnings after
deducting the preference dividends only when declared.
Exercise 5
An investee reported the following capital accounts at the beginning of the current year:
Preference share capital, 12% cumulative, P100 par,
50,000 shares issued 5,000,000
Ordinary share capital, P50 par, 500,000 shares
authorized and 200,000 shares issued 10,000,000
Retained earnings 5,000,000
On same date, an investor acquired 40,000 ordinary shares of the investee representing a 20% interest
for P3,000,000. The net assets of the investee are fairly valued.
The investee reported net income P2,000,000 for the current year and paid cash dividends of
P500,000 to ordinary shareholders and the preference dividends at the preference rates.
Compute the ending balance of investment in associate.
Beg. Investment 3,000,000
Investment income 280,000
Dividend income (100,000)
Ending investment 3,180,000
*Investment income
Net income 2,000,000
Preference dividend (12%*5M) (600,000)
Net income to ordinary shares 1,400,000
Share in net income 20% 280,000
