CFAS

PAS 28 - INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025

LEARNING OBJECTIVES:
1. Define an investment in associate.
2. Describe the accounting requirements for
investments in associates and joint
ventures.

Introduction
PAS 28 prescribes the accounting for investments in Significant influence is "the power to participate in
associates and the application of the equity method to the financial and operating policy decisions of the
investments in associates and joint ventures. investee but is not control or joint control of those
policies" (PAS 28.3)
Investors apply PAS 28 when they have significant
influence or joint control over an investee.
● Significant influence means the ability to
have a say in a company’s decisions,
Investment in Associate
An associate is "an entity over which the investor especially about finances and operations, but
has significant influence." (PAS 28.3) not full control. The key difference from
control is that the investor doesn’t have the
The existence of significant influence distinguishes final say on all decisions.
an investment in associate from all other types of
investments. Significant influence is presumed to exist if the
investor holds, directly or indirectly (eg, through
subsidiaries), 20% or more of the voting power of
In simple terms: the investee. Conversely, significant influence is
presumed not to exist if the voting power is less
than 20%.
An associate is a company or entity in which another
company (the investor) has significant influence but
● Significant Influence allows an investor to
does not fully control. The investor owns a portion of
participate in the decision-making process
the associate’s shares, typically between 20% and 50%
but doesn’t mean they control the company.
of the voting shares, which gives it the ability to affect
● If an investor holds 20% or more of the voting
decisions but not control the entity.
shares of another company (the investee), it’s
assumed they have significant influence. This
● Significant influence means the ability to is a general rule, but it’s not always true.
participate in the decisions of the associate
company, such as influencing the
However, these are only presumptions, meaning
management or financial policies, but not
they are generally held to be true in the absence of
having full control over it. This is different
evidence to the contrary. Thus, an investor may
from owning a subsidiary, where the parent
have significant influence even if it has less than
company has control (more than 50% of 20% voting power, and conversely, may not have
voting shares). significant influence even if it has more than 20%
voting power, if these can be clearly demonstrated.
Example:
● Below 20%: If the investor holds less than
Imagine Company A buys 30% of the shares in 20%, it’s usually assumed that they don’t have
Company B. Because Company A owns a significant significant influence, unless there is evidence
portion of Company B, it can influence decisions like that proves otherwise.
voting on major issues, such as electing board ● Above 20%: Even if the investor holds more
members or making key business decisions. However, than 20%, there might be situations where
since Company A doesn’t own a majority of the shares they don’t actually have significant
(more than 50%), it cannot completely control influence—like if the company has many
Company B. other shareholders or there are other factors
that limit the investor’s power.
So, Company A has a significant influence on Company
B, making Company B an associate. Example:

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 CFAS
PAS 28 - INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
1. Investor A holds 25% of Company B’s shares. Example: If Company A regularly sells large amounts
This is over 20%, so Investor A is presumed to of goods to Company B or provides services to
have significant influence over Company B. Company B, this can show that Company A influences
2. Investor C holds 15% of Company D’s shares. Company B’s operations.
Normally, this would suggest no significant
influence, but if Investor C has special voting d. interchange of managerial personnel; or
rights or agreements with other shareholders, ● If the investor and investee share managers
they might still have significant influence, or key staff members, this can be a sign of
even though they hold less than 20%. significant influence, as it often leads to more
control over decisions and operations.
Potential Voting Rights:
Example: If Company A places some of its managers
When determining the existence of significant in Company B, this suggests Company A can influence
influence, an entity considers the effect of potential the way Company B is managed.
voting rights that are currently exercisable.

When determining significant influence, potential e. provision of essential technical

voting rights (like stock options or warrants) are also information. (PAS 28.6)
considered, as they could give the investor more power ● If the investor provides important technical
if exercised. expertise or resources to the investee, it
indicates that the investor has some level of
influence over the investee’s operations.
Any of the following may provide evidence of the
existence of significant influence: Example: If Company A provides technical know-how
a. representation on the board of directors or or patents to Company B, it shows that Company A can
equivalent governing body of the investee; influence the strategic direction of Company B.
● If the investor has one or more
representatives on the board of directors of
the company, it can be an indication that
they have significant influence. This means
they can participate in important decisions,
even if they don’t have control.

Example: If Company A owns 25% of Company B, and

has a seat on Company B’s board, it likely has
significant influence over Company B’s decisions.

b. participation in policy-making processes, Accounting for Investments in Associated

including participation in decisions about Investments in associates are accounted for using
dividends or other distributions; the equity method.
● If the investor is involved in important
decisions like setting company policies or Under the equity method, the investment is initially
deciding on dividends (how profits are recognized at cost and subsequently adjusted for
shared), it shows they have significant the investors share in the investee’s changes in
influence. equity (eg, profit or loss, dividends and other
comprehensive income).
Example: Company A, owning 30% of Company B, is
consulted before Company B announces dividends.
This means Company A has influence on how Company 1. Initial recognition at cost:
B allocates its profits.
When the investor first buys the associate’s shares, the
c. material transactions between the entity investment is recorded at the price they paid for them
and its investee; (the cost). This is the starting point.
● If the investor and the investee have
significant or important transactions with ● Example: If Company A buys 30% of
each other, it suggests a close relationship, Company B for $1,000, the investment is
which can be evidence of significant initially recorded as $1,000.
influence.

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 CFAS
PAS 28 - INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
2. Adjusting for the investor’s share in
changes in equity:

After the initial purchase, the investment’s value

changes based on the associate’s performance and
financial activities. These changes are adjusted to the
value of the investment. The investor’s share in the
associate’s changes in equity is added or subtracted
from the initial cost.

● Profit or loss: If the associate makes a profit,

the investor’s share of that profit (30% in this
case) is added to the investment. If the
associate incurs a loss, the investor’s share of
the loss is subtracted.
● Dividends: If the associate pays dividends,
the investor’s share of those dividends is
subtracted from the investment because it’s
like receiving a return on the investment.
● Other comprehensive income: If the associate
has other changes in equity (like unrealized Investment in associate is an asset: it has a normal
gains or losses on investments), the investor’s debit. It has a normal debit balance. Thus, the
share of these is also added or subtracted beginning balance is placed on the debit side of the
from the investment. T-account. The ending balance is placed on the
● Example: If Company B (the associate) earns opposite side to facilitate analysis of the equality of
a profit of $500, Company A (the investor) will debits and credits.
increase its investment by $150 (30% of
$500). If Company B then pays a dividend of ● The investment in an associate is an asset on
$100, Company A will reduce its investment the investor’s balance sheet. Assets typically
by $30 (30% of $100). have a debit balance, meaning they increase
on the debit side and decrease on the credit
In summary: side.
● T-account: When showing this in a T-account
● The investor starts by recording the (a simple accounting tool), the beginning
investment at cost. balance of the investment is recorded on the
● Over time, the investment’s value is updated debit side. The ending balance is placed on
to reflect the investor’s share of the the credit side to show the increase or
associate’s profits, losses, dividends, and decrease in the investment.
other equity changes. ● Example: If the investment starts at
$100,000, it is shown as a debit. If it increases
to $120,000, the $120,000 is shown on the
opposite side.

The share in profit is placed on the debit side

because it increases in the carrying amount of the
investment.

● The share in profit (the investor’s share of the

associate’s profit) increases the value of the
investment, so it’s recorded as a debit (which
adds to the asset).
● Example: If the associate made a profit of
$10,000 and the investor has a 30% share, the
investor’s share is $3,000. This $3,000 is
added to the investment (on the debit side).

Dividends from investments accounted for using the

equity method are not income but rather reductions
from the carrying amount of the investment.

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 CFAS
PAS 28 - INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● When an associate pays dividends, the ● If cost is less than the fair value of the
investor doesn’t count them as income. interest acquired, the deficiency is included
Instead, the dividends are a reduction in the as income in determining the entity's share
carrying amount of the investment. The in the investee's profit or loss in the period
investment balance decreases because the of acquisition.
investor is receiving a return of part of their
investment. Difference between cost and fair value: When the
● Example: If the associate pays a dividend of investor buys the shares of an investee, they compare
$2,000, the investment balance would be the cost of the investment (what they paid for it) with
reduced by $2,000, rather than recognizing the fair value of the investee’s assets and liabilities
the dividend as income. (what the company is worth in terms of assets and
liabilities). The difference is handled as follows:
The investment income in 20x1 is $20,000 - the
share in profit. ● If cost is greater than fair value: The extra
amount the investor paid (called the excess)
● In 20x1, the investor’s share of the associate’s is considered goodwill. This means the
profit is $20,000. This means the carrying investor paid more than the actual net value
value of the investment will increase by this of the investee’s assets and liabilities.
amount. The $20,000 is the share in profit (or
income) from the associate. Example: If the investor paid $1,000,000 for a 30%
● Example: If the investor has a 30% share and stake in a company whose assets and liabilities are
the associate made $66,667 in profit, the worth $800,000, the $200,000 difference is considered
investor’s share is $20,000 (30% of $66,667). goodwill.

Investments in associates are presented as ● If cost is less than fair value: If the investor
noncurrent assets. paid less than the fair value of the net assets,
this difference is treated as income in the
● Investments in associates are classified as year of acquisition. This means the investor
noncurrent assets on the balance sheet made a gain from buying the shares for less
because the investor generally holds these than their value.
investments for the long term (more than one
year). Example: If the investor paid $700,000 for a 30% stake
● Example: The investment in the associate in a company with assets worth $1,000,000, the
would be listed under noncurrent assets, not $300,000 difference would be recorded as income.
current assets, because it’s meant to be held
for a longer period. Any resulting goodwill is included in the carrying
amount of the investment and is not accounted for
Application of Equity Method separately. Meaning, the goodwill is neither
amortized nor tested for impairment separately.
An investor starts using the equity method as from
the date when it obtains significant influence or ● Goodwill is the extra amount paid above the
joint control over an investee. fair value of the investee’s assets and
liabilities. This goodwill is included in the
The equity method is used by an investor when it gains carrying amount of the investment and is not
significant influence or joint control over another treated separately. This means it isn’t
company (called an investee). This means the investor amortized or tested for impairment on its
can participate in decisions but doesn’t have full own.
control.
Example: If the investor paid $200,000 more than the
Example: If a company buys 30% of another company, fair value of the investee’s assets, this $200,000 is
it has significant influence and starts using the equity recorded as part of the investment and is not
method. separately tested for value loss.

On acquisition, the difference between the cost of Adjustments are subsequently made on the entity's
the investment and the entity's share in the net fair share in the investee's profit or loss to account for
value of the investee's identifiable assets and the depreciation or anortization of any
liabilities is accounted for as follows: undervaluation or overvaluation in the investe's
identifiable assets and liabilities.
● If cost is greater than the fair value of the
interest acquired, the excess is goodwill.

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 CFAS
PAS 28 - INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● If the investor paid more or less than the fair
value of the investee’s assets, they must Cumulative preference shares
adjust their share of the investee’s profit or
loss for things like depreciation or If the investee has outstanding cumulative
amortization. These adjustments are made preference shares that are held by parties other
based on any overvaluation or than the investor and classified as equity, the
undervaluation of the investee’s assets or investor computes its share of profits or losses after
liabilities. deducting one-year dividends on those shares,
whether declared or not.
Example: If the investor paid more for the investee’s
assets (overvalued), they would reduce their share of If the investee has cumulative preference shares held
the profit in the future to account for the extra paid. by other parties (not the investor), the investor deducts
Similarly, if they paid less (undervalued), they would the one-year dividends on those shares (even if not
adjust the profit upward. declared) before calculating its share of profits.

Example: If the investee earns $1,000,000 and owes

Investee’s Financial statements and Accounting $100,000 as preference dividends, the investor’s share
policies of profits is based on $900,000.

When applying the equity method, the investor uses

the investee's most recent financial statements.
When the reporting periods of the investee and the Share in Losses
investor do not coincide, the investee shall prepare
financial statements that coincide with the investors The investor shares in the investee's losses only up to
reporting period for purposes of applying the equity the amount of its interest in the associate or joint
method. If this is impracticable, adjustments shall venture.
be made for significant transactions and events
that occur between the end of the investee's Interest in the associate or joint venture includes the
reporting period and that of the investor's. The following:
difference between the investor's and investee's end a. Carrying amount of the investment in
of reporting periods shall not exceed three months.
associate/joint venture - The value of the
investor’s stake.
b. Investment in preference shares of the
Financial Statements: The investor uses the investee’s associate/joint venture - The investor’s
latest financial statements for equity method investment in preferred shares of the
accounting. If the reporting periods (financial investee.
year-end) of the investor and investee differ, the c. Unsecured, long-term receivables or loans -
investee must align its statements with the investor’s Loans provided by the investor to the
period. If that’s not possible, adjustments are made for associate that are not backed by collateral.
significant events during the gap. The gap between
reporting dates must not exceed three months. Interest in the associate or joint venture does not
include trade receivables and payables and secured
Example: If the investee’s year-end is December 31 but long-term receivables or loans
the investor’s is March 31, adjustments are made for
significant events (like dividends declared) between Excluded items: Trade receivables/payables and
January and March. secured loans (backed by collateral) are not considered
part of the interest.
Uniform accounting policies shall be used. If the
investee uses different accounting policies, its
financial statements need to be adjusted before the Shares in losses are applied first to the carrying
investor uses them for purposes of applying the amount of the investment in associate/joint
equity method. venture. After this is zeroed-out, shares in losses are
applied to the other components of the interest in
the associate or joint venture in the reverse order of
Uniform Accounting Policies: The investor adjusts the their seniority (ie, reverse order of priority in
investee’s financial statements to match its own liquidation).
accounting policies.
After the total balance of the interest in the
Example: If the investee uses a different method for associate or joint venture is zeroed-out, the investor
stops sharing in further losses, except to the extent
valuing inventory, the investor adjusts this before
that the investor
applying the equity method.

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 CFAS
PAS 28 - INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
a. has incurred legal or constructive Example: A subsidiary investor under a larger parent
obligations or company can skip the equity method if it doesn’t
b. made payments on behalf of the associate. prepare its own consolidated accounts.

Loss Sharing Order: Investments in associates and joint ventures held

by an entity that is a venture capital organization,
1. Losses reduce the carrying amount of the mutual fund, unit trust, investment-linked insurance
investment first. fund and similar entities may be measured at fair
2. After that, losses reduce other interests in value through profit or loss in accordance with
reverse order of seniority (lowest liquidation PFRS 9 Financial Instruments.
priority first).
3. Once all the interest is zero, the investor stops
sharing in further losses unless legally Special Entities:
obligated or payments are made on the
associate’s behalf. Venture capital funds, mutual funds, unit trusts, and
similar entities can use fair value through profit or loss
under PFRS 9 instead of the equity method.
If the investee subsequently reports profits, the
investor resumes recognizing its share in those Example: A mutual fund holding shares in an associate
profits only after its share in the profits equals the can value the shares at fair value (current market
share in losses not recognized. price) rather than tracking profits or losses using the
equity method.

Resuming Profit Recognition: If the associate starts

earning profits again, the investor only recognizes Classification as Held for sale
profits after recovering previously unrecognized losses. Investments in associates or joint ventures that are
classified as held for sale in accordance with PFRS 5
Example: Non-current Assets Held for Sale and Discontinued
Operation are accounted for using that standard. If
● An investor has: only a portion of the investment is classified as held
● $50,000 in the carrying amount. for sale, the remaining portion is accounted for
● $20,000 in preference shares. using the equity method until the portion classified
as held for sale is actually sold.
● $30,000 in unsecured loans.
● Total interest = $100,000.
● If the associate incurs $150,000 in losses, the Held for Sale: If an investment in an associate is
investor only recognizes $100,000 in losses. classified as held for sale under PFRS 5, it’s accounted
● When the associate earns $40,000 in profits for under that standard (not the equity method).
later, the investor doesn’t recognize its share
until the previous $50,000 of unrecognized Example: If an investor plans to sell a 40% stake in an
losses is fully recovered. associate, it stops using the equity method for the
stake classified as held for sale.

Partially Held for Sale: If only part of the investment

is classified as held for sale, the remaining portion
Exemptions from applying the Equity Method continues using the equity method.
An investor is exempt from applying the equity
method if it is exempted from preparing
consolidated financial statements, e.g., the investor After the sale, the retained portion is accounted for
is a parent but is a subsidiary of another parent under PFRS 9, unless significant influence or joint
and its securities are not being traded. control remains, in which case the equity method
continues to be applied.

Exemption from Consolidated Financial Statements:

After Sale:
If the investor doesn’t have to prepare consolidated
financial statements (e.g., it’s a subsidiary of another If the investor sells and no longer has significant
parent company and its securities aren’t publicly influence, the remaining portion is accounted for under
traded). PFRS 9.

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 CFAS
PAS 28 - INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● The gain or loss is calculated as: Fair value of
If the investor retains significant influence, it continues the retained interest + proceeds from sale –
using the equity method. carrying amount (equity method value).

If an investment in associate becomes an

If the investment previously classified as held for investment in joint venture or vice versa, the entity
sale ceases to be so classified, it is accounted for continues to apply the equity method and does not
using the equity method retrospectively from the remeasure the retained interest.
date of its classification as held for sale. The prior
year financial statements are restated accordingly. ● If an associate becomes a joint venture (or
vice versa), the equity method continues. The
Reclassified Back: If the investment is no longer held retained interest is not remeasured.
for sale, the investor resumes using the equity method ● Example: Two companies in a joint venture
retrospectively from the date it was first classified as restructure to give one party joint control
held for sale. instead of significant influence. The equity
method continues without changes.
Example: If the sale doesn’t go through, the investor
adjusts its financial statements as if the equity method
was never stopped. When the equity method is discontinued, all
amounts previously recognized in other
Classification as Held for sale comprehensive income in relation to the investment
are either reclassified to profit or loss as a
reclassification adjustment or transferred directly to
An entity stops using the equity method as from the
retained earnings using the provisions of other
date when it loses significant influence or joint control
PFRSs. For example, revaluation surplus is
over the investee.
transferred directly to retained earnings while
exchange differences from translating foreign
- If the investment becomes a subsidiary, it is operations are reclassified to profit or loss.
accounted for using PFRS 3 Business Combinations
and PFRS 10 Consolidated Financial Statements.
When the equity method is discontinued, amounts in
other comprehensive income (OCI) related to the
● The entity now controls the investee, so it
investment are adjusted:
uses the rules under PFRS 3 (Business
Combinations) and PFRS 10 (Consolidated
Financial Statements). ● Reclassify to profit or loss: Items like foreign
● Example: An investor acquires additional exchange differences may be reclassified to
shares to gain majority ownership of an profit or loss.
associate. The associate becomes a ● Example: A currency gain on foreign
subsidiary and is fully consolidated. operations is transferred to profit when the
investment is sold.
● Transfer to retained earnings: Items like
- If the investment becomes a regular investment,
revaluation surplus are moved directly to
it is accounted for using PFRS 9.
retained earnings.
● Example: A gain from asset revaluation
● The entity no longer has significant influence linked to the associate is moved to retained
or joint control. It switches to PFRS 9, valuing earnings when equity method use ends.
the investment at fair value (current market
price).
If ownership interest is reduced but significant
The fair value of the retained interest is regarded as influence or joint control is not lost, only a
its fair value on initial recognition under PFRS 9. proportionate amount of the OCI relating to the
The difference between the following is recognized reduction of interest is reclassified to profit or loss
in profit or loss: or transferred directly to retained earnings, as
a. the fair value of the retained interest and any appropriate.
proceeds from disposing part of the
investment; and
● Fair value is the market price of the retained
If the ownership percentage decreases but significant
interest.
influence or joint control remains, adjustments are
b. the carrying amount of the investment at the
made proportionately:
date the equity method was discontinued.

● A portion of OCI is transferred to profit or

loss or retained earnings.

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 CFAS
PAS 28 - INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● Example: An investor reduces its ownership 3. How to Account for a Joint Venture?
from 30% to 20% but still retains significant
influence. Only 10% of the OCI is adjusted. Once identified, the investment in a joint venture is
treated the same way as an investment in an associate
under PAS 28. This means the investor uses the equity
Gains and osses resulting from transactions method:
between an entity and its associate or joint venture
are recognized in the entity's financial statements ● Start by recognizing the investment at cost.
only to the extent of unrelated investors' interests in ● Adjust the investment for the investor’s share
the associate or joint venture. of the joint venture’s profit, loss, or changes in
equity.

● When an investor transacts with its associate

Example:
or joint venture, profits or losses are
recognized only to the extent of the interest
owned by unrelated parties. ● Initial investment: $100,000
● Example: An investor sells equipment to its ● Share of joint venture profit: $20,000
associate and recognizes a profit. If the ● New carrying amount: $100,000 + $20,000 =
investor owns 40% of the associate, only 60% $120,000
of the profit is recognized, as the investor
effectively owns part of the associate’s gain. Dividends reduce the carrying amount but are not
treated as income.

4. Key Takeaway:
Investment in Joint Venture
The investor uses PFRS 11 Joint Arrangements to Joint ventures are handled just like associates under
determine whether its interest in a joint PAS 28. Profits, losses, and equity changes in the joint
arrangement is an investment in joint venture. If venture are reflected in the investor’s records using the
this is so, the investor accounts for the investment equity method.
in joint venture in accordance with PAS 28 i.e., using
the equity method similar to an investment in
associate.
SUMMARY

1. What is a Joint Venture?

A joint venture is a business arrangement where two or

more parties share control and work together on a
specific project or business activity. Each party (called
a “venturer”) has an equal say in decisions but does
not individually control the venture.

2. How to Identify a Joint Venture?

The investor applies PFRS 11 (Joint Arrangements) to

check whether the arrangement qualifies as a joint
venture or a different type of joint arrangement (e.g.,
joint operation).

● A joint venture typically involves shared

control where the parties have rights to the
venture’s net assets, not its individual assets.

Example: Two companies create a separate entity to

develop a new product. They both control the entity
and share its profits, making it a joint venture.