Chapter 17 and 18 – INVESTMENT IN ASSOCIATES Accounting procedures of investment in associate

1. Initially recognized at COST

What is an associate? Illustration: On January 1, 2021, Pedro
Is an entity, including an unincorporated entity such purchased 20,000 shares of the 100,000
as a partnership, over which the investor has significant outstanding shares of another entity at P200 per
influence and that is neither a subsidiary nor an interest share.
in a joint venture. Investment in associate 4,000,000
Cash 4,000,000
What is significant influence? 2. Profit will increase the investment in associate
Is the power to participate in the financial and recorded as “investment income (credit)”.
operating policy decisions of the investee but is not Illustration: Pedro is an associate with 20%
control or joint control over those policies. share. The investee reported net income of
P5,000,000 for the current year.
What is equity method? Investment in associate 1,000,000
Is a method of accounting whereby the Investment income 1,000,000
investment is initially recognized at cost and adjusted 3. Loss will decrease the investment in associate
thereafter for the post acquisition change in the recorded as “investment income (debit)”.
investor’s share of net assets of the investee. The profit Illustration: Pedro is an associate with 20%
or loss of the investor includes the investor's share of the share. The investee reported net loss of
profit or loss of the investee. P5,000,000 for the current year.
Investment in income 1,000,000
Identification of Associates Investment in associate 1,000,000
4. Cash and property dividends will decrease the
➢ A holding of 20% or more of the voting power investment in associate.
(directly or through subsidiaries) will indicate Illustration: Pedro is an associate with 20%
significant influence unless it can be clearly share. He received cash dividends of P100,000.
demonstrated otherwise. Cash 100,000
➢ If the holding is less than 20%, the investor will Investment in associate 100,000
be presumed not to have significant influence 5. Investment in associate must be in ORDINARY
unless such influence can be clearly SHARES. Otherwise, the FVPL or FVOCI shall be
demonstrated. followed and not equity method.
➢ The existence of significant influence by an 6. Investment in associate is classified as
investor is usually evidenced in one or more of NONCURRENT ASSETS.
the following ways:
Excess of cost over carrying amount
a) Representation on the board of directors or Illustration
equivalent governing body of the investee; Pedro Penduko purchased 20% of the outstanding
b) Participation in the policy-making process; ordinary shares of an investee for P5,000,000.
c) Material transactions between the investor The net assets of the investee on the date of acquisition
and the investee; are fairly valued except for a depreciable asset with 5
d) Interchange of managerial personnel; or years remaining useful life for which the fair value is
e) Provision of essential technical information. P2,000,000 greater than its carrying amount. Any
remaining excess is attributable to goodwill.
Carrying amount of the investee’s net assets was The profits and losses made by the associate over the
P20,000,000. first 5 years of operations were:
Profit (losses) Investor’s share
Solution: 2021 (1,000,000) (250,000)
Cost P5,000,000 2022 (10,000,000) (2,500,000)
Carrying amount of net assets acquired 2023 (12,000,000 (3,000,000)
(20M x 20%) (4,000,000) 2024 2,000,000 500,000
Excess of cost over carrying amount 1,000,000 2025 2,500,000 625,000
Depreciable asset (2Mx20%) –amortized (400,000)
Attributable to goodwill – not amortized 600,000 How much is the profit or loss for:
1. 2021 – 250,000 loss
To record the amortization of depreciable asset 2. 2022 – 2,500,000 loss
Investment income 80,000 3. 2023 – 2,250,000 loss
Investment in associate 80,000 4. 2024 – None
5. 2025 – 375,000 profit
Excess of net fair value over cost
Illustration: Same problem above, except that there is Impairment loss
additional depreciable asset with 10 years remaining - There is impairment loss if the carrying amount
useful life that is undervalued with P4M. of the investment in associate is higher than its
Solution: fair value less cost of disposal or value in use.
Cost P5,000,000
Carrying amount of net assets acquired
(20M x 20%) (4,000,000)
Excess of cost over carrying amount 1,000,000
Depreciable asset (2Mx20%) –amortized (400,000)
Depreciable asset (4Mx20%) – amortized (800,000)
Excess of net fair value over cost (200,000)

To record the amortization of depreciable asset

Investment income (400K/5) 80,000
Investment in associate 80,000

Investment income (800K/10) 80,000

Investment in associate 80,000

To record the excess of net fair value over cost

Investment in associate 200,000
Investment income 200,000

Investee with heavy losses

Illustration: On January 1, 2021, an investor acquired
25% of the ordinary shares of an associate for
P5,000,000.