LECTURE NOTES

Investments in associates
An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant
influence and that is neither a subsidiary nor an interest in a joint venture.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not
control or joint control over those policies.

Identification of Associates
A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influence unless it
can be clearly demonstrated otherwise. If the holding is less than 20%, the investor will be presumed not to have significant
influence unless such influence can be clearly demonstrated.

The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
representation on the board of directors or equivalent governing body of the investee;
participation in the policy-making process;
material transactions between the investor and the investee;
interchange of managerial personnel; or
provision of essential technical information.

Potential voting rights are a factor to be considered in deciding whether significant influence exists.

Accounting for Associates

An investment in an associate shall be accounted for using the equity method except when:
(a) the investment is classified as held for sale in accordance with PFRS 5;
(b) the exception in paragraph 10 of PAS 27, allowing a parent that also has an investment in an associate not to present
consolidated financial statements, applies; or
(c) all of the following apply:
(i) the investor is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners,
including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not
applying the equity method;
(ii) the investors debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or
an over-the-counter market, including local and regional markets);
(iii) the investor did not file, nor is it in the process of filing, its financial statements with a securities commission or
other regulatory organization, for the purpose of issuing any class of instruments in a public market; and
(iv) the ultimate or any intermediate parent of the investor produces consolidated financial statements available for
public use that comply with PFRS.

Applying the Equity Method of Accounting

The equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter
for the post acquisition change in the investors share of net assets of the investee. The profit or loss of the investor
includes the investor's share of the profit or loss of the investee.

Distributions and other adjustments to carrying amount. Distributions received from the investee reduce the carrying
amount of the investment. Adjustments to the carrying amount may also be required arising from changes in the investee's
equity that have not been included in the income statement (for example, revaluations and foreign exchange translation
differences). The investors share of those changes is recognized directly in equity of the investor.

Potential voting rights. Although potential voting rights are considered in deciding whether significant influence exists, the
investor's share of profit or loss of the investee and of changes in the investee's equity is determined on the basis of present
ownership interests. It should not reflect the possible exercise or conversion of potential voting rights.

Implicit goodwill and fair value adjustments. On acquisition of the investment any difference between the cost of the
investment and the investors share of the net fair value of the associates identifiable assets, liabilities and contingent
liabilities is accounted for in accordance with PFRS 3 Business Combinations. Therefore:
(a) goodwill relating to an associate is included in the carrying amount of the investment. However, amortization of that

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 goodwill is not permitted and is therefore not included in the determination of the investors share of the associates
profits or losses.
(b) any excess of the investors share of the net fair value of the associates identifiable assets, liabilities and contingent
liabilities over the cost of the investment is excluded from the carrying amount of the investment and is instead included
as income in the determination of the investors share of the associates profit or loss in the period in which the
investment is acquired.

Appropriate adjustments to the investors share of the associates profits or losses after acquisition are also made to
account, for example, for depreciation of the depreciable assets based on their fair values at the acquisition date. Similarly,
appropriate adjustments to the investors share of the associates profits or losses after acquisition are made for impairment
losses recognized by the associate, such as for goodwill or property, plant and equipment.

Discontinuing the equity method. An investor shall discontinue the use of the equity method from the date that it ceases to
have significant influence over an associate and shall account for the investment in accordance with PAS 39 from that date,
provided the associate does not become a subsidiary or a joint venture. The carrying amount of the investment at the date
that it ceases to be an associate shall be regarded as its cost on initial measurement as a financial asset in accordance with
PAS 39.
Transactions with associates. If an associate is accounted for using the equity method, unrealized profits and losses
resulting from upstream (associate to investor) and downstream (investor to associate) transactions should be eliminated to
the extent of the investor's interest in the associate.

Date of associate's financial statements. In applying the equity method, the investor should use the financial statements of
the associate as of the same date as the financial statements of the investor unless it is impracticable to do so. If it
impracticable, the most recent available financial statements of the associate should be used, with adjustments made for
the effects of any significant transactions or events occurring between the accounting period ends. However, the difference
between the reporting date of the associate and that of the investor cannot be longer than three months.

Associate's accounting policies. If the associate uses accounting policies that differ from those of the investor, the
associate's financial statements should be adjusted to reflect the investor's accounting policies for the purpose of applying
the equity method.
Losses in excess of investment. If an investor's share of losses of an associate equals or exceeds its "interest in the
associate", the investor discontinues recognizing its share of further losses. The "interest in an associate" is the carrying
amount of the investment in the associate under the equity method together with any long-term interests that, in
substance, form part of the investor's net investment in the associate. After the investor's interest is reduced to zero,
additional losses are recognized by a provision (liability) only to the extent that the investor has incurred legal or
constructive obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the
investor resumes recognizing its share of those profits only after its share of the profits equals the share of losses not
recognized.

Impairment. The impairment indicators in PAS 39, apply to investments in associates. If impairment is indicated, the
amount is calculated by reference to PAS 36. The recoverable amount of an investment in an associate is assessed for each
individual associate, unless the associate does not generate cash flows independently.

- done

PROBLEMS
1. Augustus Corp. acquired a 25% interest in Octavius Co. on January 1, 2009, for P5,000,000. At that time, Octavius had
1,000,000, P1 par, ordinary shares issued and outstanding. During 2009, Octavius paid cash dividends of P2.2 per
share and thereafter declared and issued a 5% share dividend when the market value was P2 per share. Octavius'
profit for 2009 was P4,800,000. What should be the balance in Augustus investment in Octavius Co. at the end of
2009?
a. P5,650,000 c. P5,752,500
b. P5,890,000 d. P5,512,500

2. On January 2, 2009, Tuao Company purchased 10% of Abulug Companys outstanding ordinary shares for P20,000,000.
Tuao is the largest single shareholder in Abulug and Tuaos officers are majority of Abulugs board of directors. Abulug
reported net income of P10,000,000 and paid dividend of P4,000,000. In its December 31, 2009 balance sheet, what
amount should Tuao report as investment in Abulug Company?
a. P20,000,000 c. P21,000,000
b. P20,600,000 d. P21,400,000
3. On April 1, 2009, Etcha Co. purchased 25,000 ordinary shares of Pwera Co. at P180 per share which reflected book
value as of that date. At the time of the purchase, Pwera had 100,000 ordinary shares outstanding. The shares are

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 intended as a long term investment. The first quarter statement ending March 31, 2009 of Pwera recorded profit of
P480,000. For the year ended December 31, 2009, Pwera reported profit of P2,400,000. Pwera paid Etcha dividends of
P60,000 on June 1, 2009 and again P60,000 on December 31, 2009. The shares of Pwera are selling at P190 per share
on December 31, 2009.
Etcha is entitled to appoint two directors to the board, which consists of eight members. The remaining of the voting
rights are held by two other companies, each of which is entitled to appoint three directors. The board makes decisions
on the basis of simple majority. Because board meetings are often held at very short notice, Etcha does not always
have representation on the board. Often the suggestions of the representative of Etcha are ignored, and the decisions
of the board seem to take little notice of any representations made by the director from Etcha Corp.
Based on the above information, the carrying amount of the investment in Pwera Co. as of December 31, 2009 should
be
a. P4,750,000 c. P4,860,000
b. P4,500,000 d. P4,950,000

4. Alcala Company owns 50% of Aparri Companys preference shares and 30% of its ordinary shares. Aparris shares
outstanding at December 31, 2009 includes P20,000,000 of 10% cumulative preference shares and P50,000,000 of
ordinary shares. Aparri reported profit of P10,000,000 for the year 2009. What amount should Alcala report as share
of profit of associate for the year 2009?
a. P3,000,000 c. P2,400,000
b. P3,400,000 d. P4,400,000

5. Allapacan Company bought 20% of Amulung Corporations ordinary shares on January 1, 2009 for P20,000,000.
Carrying amount of Amulungs net assets at purchase date totaled P60,000,000. Fair value and carrying amounts were
the same for all items except for plant and inventory, for which fair values exceed their carrying amounts by
P15,000,000 and P5,000,000 respectively. The plant has a 5-year life. All inventory was sold during 2009. Goodwill, if
any, has an indefinite life. During 2009, Amulung reported net income of P40,000,000 and paid a P15,000,000 cash
dividend. What amount should Allapacan report as investment income for 2009?
a. P6,200,000 c. P6,400,000
b. P3,000,000 d. P7,600,000
6. Jumong Company bought 20% of Sosimo Corporations ordinary shares on January 1, 2009 for P11,400,000. Carrying
amount of Sosimos net assets at purchase date totaled P50,000,000. Fair value and carrying amounts were the same
for all items except for plant and inventory, for which fair values exceed their carrying amounts by P10,000,000 and
P2,000,000 respectively. The plant has a 5-year life. All inventory was sold during 2009. During 2009, Sosimo
reported net income of P30,000,000 and paid a P10,000,000 cash dividend. What amount should Jumong report as net
income related to this investment in 2009?
a. P5,200,000 c. P5,400,000
b. P6,200,000 d. P4,200,000

7. Chu Company acquired a 40% interest in Wawa Company for P1,700,000 on January 1, 2009. The shareholders' equity
of Wawa Company on January 1 and December 31, 2009 is presented below:
January 1 December 31
Share capital 3,000,000 3,000,000
Revaluation surplus - 1,300,000
Retained earnings 1,000,000 1,500,000
On January 1, 2009, all the identifiable assets and liabilities of Wawa Company were recorded at fair value. Wawa
Company reported profit of P650,000, after income tax expense of P350,000 and paid dividends of P150,000 to
shareholders during the current year.
The revaluation surplus is the result of the revaluation of land recognized by Wawa Company on December 31, 2009.
Additionally, depreciation is provided by Wawa Company on the diminishing balance method whereas Chu Company
uses the straight-line. Had Wawa Company used the straight line, the accumulated depreciation would be increased by
P200,000. The tax rate is 35%. Chu Company should report its investment in associate on December 31, 2009 at
a. P2,920,000 c. P2,420,000
b. P2,550,000 d. P1,900,000

8. Intor Company acquired 20% of the ordinary shares of Intee Company on January 1, 2008. At this date, all the
identifiable assets and liabilities of Intee were recorded at fair value. An analysis of the acquisition showed that
P200,000 of goodwill was acquired. Intee Company recorded a profit of P1,000,000 for 2009 and paid dividend of
P700,000 during the same year. The following transactions have occurred between the two entities.
In December 2009, Intee sold inventory to Intor for P1,500,000. This inventory had previously cost Intee
P1,000,000 and remains unsold by Intor in December 31, 2009.

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 In November 2009, Intor sold inventory to Intee at a before tax profit of P300,000. Half of this was sold by Intee
before December 31, 2009.
In December 2008, Intee sold inventory to Intor for P1,800,000. This inventory had cost Intee P1,200,000. At
December 31, 2008, this inventory remained unsold by Intor. However, it was all sold by Intor in 2009.
Ignoring income tax, Intor company shall report a "share of profit of associate" in 2009 at
a. P200,000 c. P160,000
b. P190,000 d. P140,000

9. On July 1, 2005, Cleopatra Corporation acquired 25% of the shares of Marcus, Inc. for P1,000,000. At that date, the
equity of Marcus was P4,000,000, with all the identifiable assets and liabilities being measured at amounts equal to fair
value. The table below shows the profits and losses made by Marcus during 2005 to 2009:
Year Profit (Loss)
2005 P 200,000
2006 (2,000,000)
2007 (2,500,000)
2008 160,000
2009 300,000
What is the carrying amount of the investment in Marcus, Inc. as of December 31, 2009?
a. P40,000 c. P75,000
b. P15,000 d. P 0

10. Santo, Inc. acquired 30% of Nino Corp.'s voting stock on January 1, 2008 for P360,000. During 2008, Nino earned
P150,000 and paid dividends of P90,000. Santo's 30% interest in Nino gives Santo the ability to exercise significant
influence over Nino's operating and financial policies. During 2009, Nino earned P180,000 and paid dividends of
P60,000 on April 1 and P60,000 on October 1. On July 1, 2009, Santo sold half of its stock in Nino for P237,000 cash.
What should be the gain on sale of this investment in Santo's 2009 income statement?
a. P57,000 c. P52,500
b. P43,500 d. P34,500

Use the following information for the next two questions.

On January 3, 2007, JR Company purchased for P500,000 cash a 10% interest in Judi Corp. On that date the net assets of
Judi had a book value of P3,750,000. The excess of cost over the underlying equity in net assets is attributable to
undervalued depreciable assets having a remaining life of 10 years from the date of JR's purchase. The investment in Judi
Corp. is not intended for trading.

The fair value of JR's investment in Judi securities is as follows: December 31, 2007, P570,00; December 31, 2008,
P525,000; December 31, 2009, P2,200,000.

On January 2, 2009, JR purchased an additional 30% of Judi's stock for P1,545,000 cash when the book value of Judi's net
assets was P4,150,000. The excess was attributable to depreciable assets having a remaining life of 8 years.

During 2007, 2008, and 2009 the following occurred:

Judi Dividends Paid by
Net Income Judi to JR
2007 P350,000 P15,000
2008 400,000 20,000
2009 550,000 70,000

11. The adjustment to retained earnings as of January 1, 2009 as a result of the acquisition of the additional 30% interest
in Judi Corp. is.
a. P50,000 c. P15,000
b. P40,000 d. P 7,500

12. The carrying amount of the investment in Judi Corp. as of December 31, 2009 is
a. P2,200,000 c. P2,160,000
b. P2,195,000 d. P2,045,000

Problem

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1. On July 1, 2009, Diamond, Inc, paid P1,000,000 for 100,000 ordinary shares (40%) of Ashley Corporation. At that date
the net assets of Ashley totaled P2,500,000 and the fair values of all of Ashley's identifiable assets and liabilities were
equal to their book values. Ashley reported net income of P500,000 for the year ended December 31, 2009, of which
P300,000 was for the six months ended December 31, 2009. Ashley paid cash dividends of P250,000 on September 30,
2009. Diamond does not elect the fair value option for reporting its investment in Ashley. In its income statement for
the year ended December 31, 2009, what amount of income should Diamond report from its investments in Ashley?
a. P 80,000 c. P120,000
b. P100,000 d. P200,000
P18 App. B pp. 1315 Wiley08-09

2. On December 1, 2009, Citrus purchased 200,000 shares representing 45 percent of the outstanding stock of Berry for
cash of P2,500,000. As a result of this purchase, Citrus has the ability to exercise significant influence over the
operating and financial policies of Berry. 45 percent of the profit of Berry amounted to P20,000 for the month of
December and P350,000 for the year ended December 31, 2009. On January 15, 2010, cash dividends of P0.30 per
share were paid to shareholders of record on December 31, 2009. Citrus' longterm investment in Berry should be
shown in Citrus' December 31, 2009, balance sheet at:
a. P2,520,000 c. P2,460,000
b. P2,509,000 d. P2,449,000

3. On January 1, 2009, Solana Co. purchased 25% of Orr Corp.'s ordinary shares; no goodwill resulted from the purchase.
Solana appropriately carries this investment at equity and the balance in Solanas investment account was P480,000 at
December 31, 2009. Orr reported net income of P300,000 for the year ended December 31, 2009, and paid dividends
totaling P120,000 during 2009. How much did Solana pay for its 25% interest in Orr?
a. P435,000 c. P510,000
b. P525,000 d. P585,000

4. Investor company acquired a 40% interest in an associate for P3,000,000. The investor is part of a consolidated group.
In the financial period immediately following the date on which it became an associate, the investee took the following
action:
revalued assets up to fair value by P500,000
generated profits of P1,600,000
declared a dividend of P300,000
The balance in the investors account of Shares in associate, after equity accounting has been applied, is:
a. P3,000,000 c. P3,720,000
b. P3,960,000 d. P3,840,000
Applying IAS TB

5. Baggao Company purchased 15% of Badoc Companys 500,000 outstanding ordinary shares on January 2, 2009, for
P15,000,000. On December 31, 2009, Baggao purchased additional 125,000 shares of Badoc for P35,000,000. There
was no goodwill as a result during 2009. Badoc reported earnings of P20,000,000 for 2009. What amount should
Baggao report in its December 31, 2009 balance sheet as investment in Badoc Company?
a. P50,000,000 c. P58,000,000
b. P55,000,000 d. P53,000,000

6. On January 1, 2008 Ballesteros Company acquired 10% of the outstanding voting stock of Buguey Company. On
January 1, 2009, Ballesteros gained the ability to exercise significant influence over financial and operating control of
Buguey by acquiring 30% of Bugueys outstanding stock. The two purchases were made at prices proportionate to the
value assigned to Bugueys net assets, which equaled their carrying amounts. For the years ended December 31, 2008
and 2009, Buguey reported the following:
2008 2009
Net income P8,000,000 P15,000,000
Dividends paid 5,000,000 10,000,000
In 2009, what amounts should Ballesteros report as current year investment income and as an adjustment to 2008
income, respectively?
a. P6,000,000 and P800,000
b. P6,000,000 and P300,000
c. P4,500,000 and P300,000
d. P4,500,000 and P800,000

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