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Investments in AssociatesIn reference to pas 28What is an Associate?An entity (including an unincorporated entity such as a partnership) which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.

What is considered as a Significant Influence?The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. Significant InfluenceEntity has, directly or indirectly, 20% of the voting power.Representation on the governing body of the investee.Participation in the policy making process.Interchange of managerial personnelMaterial transaction between the entity and investee.Provision of technical information.

Potential Voting Rights are considered.

Equity MethodAng Method sa pag-aaccount ng investment in associatesAno na nga kasi yun?It is where the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investors share of net assets of the investee. Under the equity method, on initial recognition the investment in an associate is recognised at cost, and the carrying amount is increased or decreased to recognise the investors share of the profit or loss of the investee after the date of acquisition.Oh, tapos, ano pa?The profit or loss of the investor includes its share of the profit or loss of the investee and the other comprehensive income of the investor includes its share of other comprehensive income of the investee.

Hindi ko gets, kamo? Ieexplain ko na, labyu.Dont worry guyth. Mukha lang maraming slides pero mabilis lang to. Pramis.Illustration:Investor purchased 20% of outstanding shares for P5,000,000.00.Net assets are fairly values except for a depreciable asset that had a FV of P2,000,000.00 greater than CA. (remaining life 5 years)CA of net assets was P20,000,000.00Illustration:Acquisition cost5,000,000.00CA of net assets (20mx20%)4,000,000.00Excess of cost over CA1,000,000.00

IllustrationIf depreciable and intangible assets of investee are undervalued decrease investment income.Goodwill part of the CA of the investment in AssociateExcess of Cost over CAIf depreciable and intangible assets of investee are undervalued decrease investment income.If the inventory has FV adjustments, adjust when SOLD.Goodwill part of the CA of the investment in Associate.

Undervaluation of Asset (2m x 20%)400,000Goodwill-remainder600,000Excess of Cost over CA 1,000,000Excess of Cost over CAUnder the equity method, on initial recognition the investment in an associate is recognised at cost, and the carrying amount is increased or decreased to recognise the investors share of the profit or loss of the investee after the date of acquisition. If depreciable and intangible assets of investee are undervalued decrease investment income.

Acquistion: Investment in Assoc.5mCash5m

Post-Acquisition Investment Income400kInvestment in Assoc400kOther factors:Share in the net income:Investment in AssociatesxxInvestment Incomexx

Investment income = Net income preference share dividend*

*if PS dividend is cumulative, always deduct*if PS dividend is non-cumulative, deduct only when declared.Other factors:Cash DividendCashxxInvestment in Associatesxx

Note that only cash dividends are recorded. Stock dividends are not included.Pano kung sa kakadebit mo ng loss ay nag-zero or negative yung Investment in Associates account?Oo nga naman.Illustration:Investment in Assoc beg. Bal200,000.00Net Losses for the current year500,000.00Trade A/R (30,000 is from Assoc.) 130,000.00Loans Rec (45,000 is from Assoc.) 155,000.00Inventory 90,000.00Short term investments 30,000.00Long-term L/R from Assoc 100,000.00Long-term L/R from Assoc (pledged as collateral) 100,000.00

Solution:Investment in Assoc beg. Bal 200,000.00(Net Losses for the current year)(500,000.00)Total(300,000.00)Trade A/R from Assoc. 30,000.00Loans Rec from Assoc. 45,000.00Long-term L/R from Assoc 100,000.00Total(125,000.00)

Answer:The investors discontinues its share of further losses. Investment in Associate is recorded at zero value. Losses recognised using the equity method in excess of the entitys investment in ordinary shares are applied to the other components of the entitys interest in an associate or a joint venture in the reverse order of their seniority (ie priority in liquidation). Entry:

Loss on Investment375,000Investment on Assoc200,000Trade A/R 30,000Loans Rec 45,000Long-term L/R100,000 Illustration:Investment in Assoc beg. Bal200,000.00Net Losses for the current year340,000.00Trade A/R (30,000 is from Assoc.) 130,000.00Loans Rec (45,000 is from Assoc.) 155,000.00Inventory 90,000.00Short term investments 30,000.00Long-term L/R from Assoc 100,000.00Long-term L/R from Assoc (pledged as collateral) 100,000.00

Answer:The investors discontinues its share of further losses. Investment in Associate is recorded at zero value. Losses recognised using the equity method in excess of the entitys investment in ordinary shares are applied to the other components of the entitys interest in an associate or a joint venture in the reverse order of their seniority (ie priority in liquidation). Entry:

Loss on Investment340,000Investment on Assoc200,000Loans Rec 40,000Long-term L/R100,000 Illustration:Investment in Assoc beg. Bal (125,000.00)Net Profit for the Year 200,000.00Total 75,000.00

Entry:Investment in Assoc75,000Investment Income75,000What is the Equity Method?The profit or loss of the investor includes its share of the profit or loss of the investee and the other comprehensive income of the investor includes its share of other comprehensive income of the investee. On initial recognition the investment in an associate is recognised at cost, and the carrying amount is increased or decreased to recognise the investors share of the profit or loss of the investee after the date of acquisition.

What is the Equity Method?Changes in investees P/L charged to Investment Income Account

Changes in investees equity not in P/L recognized directly on investors equity accountRevaluation surplus, forex gain/loss on translation, etc.Debit/credit Investment in Assoc. to balance the entryAdjustments in Investees OperationsMost recent available FS of the associate is used in applying the equity methodWhen the reporting dates are different, the associate must prepare an FS for the investor as of the same date, or in anycase, at least the time difference doesnt exceed three months.Associate shall adjust accounting policies to conform with the investor.Profits from upstream and downstream transaction are eliminated.Upstream and Downstream TransactionsYehey malapit nang matapos.Anu na nga ba yun?Sales of Assets:Upstream associate is sellerDownstream associate is buyer

Interentity profit must be eliminated in determining the investors share in the profit or loss of the associate.Profit or Loss is recorded on the year it is realized.Example of Upstream TransactionNet Income of investee2,000,000.00Sale of inventory to investee 300,000.00Unsold for the current yearCost of inventory 200,000.00Unrealized Profit on End Inv 100,000.00Solution:Net Income of investee 2,000,000.00Sale of inventory to investee 300,000.00Unsold for the current yearCost of inventory 200,000.00Unrealized Profit on End Inv 100,000.00

Net Income2,000,000Unrealized Profit- 100,000Total1,900,000

Investors Share on NI:1,900,000 x 20% = 380,000

Solution:Entry:Investment in Assoc.380,000Investment Income380,000

On the next year, inventory is sold and income is realized:Investment in Assoc.+20,000Investment Income+20,000Net Income2,000,000Unrealized Profit- 100,000Total1,900,000

Investors Share on NI:1,900,000 x 20% = 380,000

Example of Upstream TransactionNet Income of investee2,000,000.00Sale of equipment to investor 300,000.00Cost of equipment 200,000.00Unrealized Profit 100,000.004 year life for equipmentSolution:Net Income of investee 2,000,000.00Sale of equipment to investee 300,000.00Cost of equipment 200,000.00Unrealized Profit on End Inv 100,000.00

Net Income2,000,000Unrealized Profit- 100,000Total1,900,000

Investors Share on NI:1,900,000 x 20% = 380,000

Solution:Entry:Investment in Assoc.380,000Investment Income380,000

On the next year, profit is realized proportionate to its depreciation:Investment in Assoc.+5,000Investment Income+5,000(100,000 x 20%)/4 years = 5,000Net Income2,000,000Unrealized Profit- 100,000Total1,900,000

Investors Share on NI:1,900,000 x 20% = 380,000

Discontinuance of Equity MethodKonti na lang talaga!When to stop using the Equity Method:When there is no significant Influence.Measurement after loss of Significant InfluenceInvestor shall measure retained investment in associate at fair valueExcess of CA and fair value is included in the P/LAmounts recognized in other comprehensive income reclassified to profit or lossIllustration To measure remaining investment in assoc account to fair value:Investment in AssociatesxxGain from remeasurement for fair valuexx

To reclassify the remaining investment in assocInvestment in Equity SecuritiesxxInvestment in AssociatesxxWhen is Equity Method Unapplicable?Konting Gapang pa!Investment in Associate not accounted using the Equity Method when:Investment is classified as held for saleInvestor is a wholly or partially owned subsidiary of another entity an the entity are ok with the investor not applying the equity method.Investors debt and equity instruments are not on the stock exchange or o-t-c marketinvestor did not (or at least not in the process of) file its FS with the SEC for the purpose of issuing any class of instruments in the public marketParent of investor produces consolidated FS available for public use and complies with PFRSCost MethodLiterally recording the investment at costUses investment in equity securities accountNo entry kapag net incomeMemo Entry for Stock DividendsEntry to record cash dividends:CashxxDividend Incomexx

Cost Method to Equity MethodInvestor shall remeasure the previously held interest in an investee using the equity method.Illustration 12011:10% interestAcq cost 2,000,000CA 1,600,000Net Income 2,000,000Cash Dividend 800,000

*Excess of 2m and 1.6m = 400k, attributable to depreciable asset

201320% interestAcq cost 4,000,000CA 2,800,000Net Income 4,000,000Cash Dividend 3,000,000

2012Net Income 3m, Cash Div 1mIllustration 12011:10% interestAcq cost 2,000,000CA 1,600,000Net Income 2,000,000Cash Dividend 800,000

*Excess of 2m and 1.6m = 400k, attributable to depreciable asset

2011 EntriesInvestment in ES2mCash 2m

Cash80kDividend Income80kIllustration 12012 EntriesCash100kDividend Income100k2013Investment in Assoc4mCash 4mInvestment in Assoc2mInvestment in ES2m201320% interestAcq cost 4,000,000CA 2,800,000Net Income 4,000,000Cash Dividend 3,000,000

2012Net Income 3m, Cash Div 1mIllustration 12013 EntriesInvestment in Assoc160kGain on remeas. To Eq160k201320% interestAcq cost 4,000,000CA 2,800,000Net Income 4,000,000Cash Dividend 3,000,000

2012Net Income 3m, Cash Div 1mIllustration 12013 EntriesInvestment in Assoc160kGain on remeas. To Eq160k

Share in the Net Income:2011 (10% x 2m)200,0002012 (10% x 3m)300,000Amortization of Excess of cost=(400,ooo x 2yrs/5yrs)-160,000Dividend inc recorded-180,000Gain on remeasurement 160,000Illustration 12013 EntriesInvestment in Assoc160kGain on remeas. To Eq160k

Investment in Assoc1.2mInvestment Inc1.2mCash600kInvestment in Assoc600k

Share in the Net Income:2011 (10% x 2m)200,0002012 (10% x 3m)300,000Amortization of Excess of cost=(400,ooo x 2yrs/5yrs)-160,000Dividend inc recorded-180,000Gain on remeasurement 160,000Illustration 12013 EntriesInvestment Inc360kInv in Assoc360k

First acq201140,000201240,000201340,000Second acq (1.2m/5)240,000Total Amortization360,000Illustration 22011:10% interestAcq cost 2,000,000CA 1,600,000Net Income 2,000,000Cash Dividend 800,000

*Excess of 2m and 1.6m = 400k, attributable to goodwill*FV of investment end of 2011 = 3m

201220% interestAcq cost 4,000,000CA 2,800,000Net Income 4,000,000Cash Dividend 3,000,000

Illustration 22011:10% interestAcq cost 2,000,000CA 1,600,000Net Income 2,000,000Cash Dividend 800,000

*Excess of 2m and 1.6m = 400k, attributable to goodwill*FV of investment end of 2011 = 3m

2011Investment in ES2mCash2mCash800kDividend Inc800kInvestment in ES1mUnrealized gain OCI1mIllustration 22012Investment in Assoc4mCash4mUnrealized gain-OCI1mInvestment in Assoc2mInvestment in ES3mInvestment in Assoc1.2mGain on remeasurement1.2m201220% interestAcq cost 4,000,000CA 2,800,000Net Income 4,000,000Cash Dividend 3,000,000

Illustration 22012Investment in Assoc4mCash4mUnrealized gain-OCI1mInvestment in Assoc2mInvestment in ES3mInvestment in Assoc1.2mGain on remeasurement1.2m=Share in the Net Income 2011 Divdends recorded

=2,000,000 800,000

=1,200,000