PAS 28: Investments in Associates & Joint Ventures

Applicability
- Investors apply when they have significant influence or joint control over an investee.

Investment in Associate
- Associate: an entity over which the investor has significant influence.
- Significant Influence: power to participate in the financial & operating policy decisions
of the associate but not control/ joint control over those policies. It is presumed to exist if
the investor holds, in/directly, 20% or more of the voting power of the investee.
- Any of the following may provide evidence of the existence of significant influence:
A. Representation in the board of directors;
B. Participation in policy-making processes;
C. Material transactions between the entity and its investees;
D. Interchange of managerial personnel; and
E. Provision of essential technical information.

TYPE OF NATURE OF RELATIONSHIP APPLICABLE REPORTING STANDARD

INVESTMENT
•Investment measured at
fair value
•Investment in associate
•Investment in subsidiary
•Investment in joint
venture
WITH INVESTEE
Regular investor PFRS 9, Financial Instruments
Significant influence PAS 28, Investments in Associates and Joint Ventures
Control PFRS 3, Business Combinations and PFRS 10,
Consolidated Financial Statements
Joint control PFRS 11, Joint Arrangements and PAS 28, Investments in
Associates and Joint Ventures

SUBSIDIARY ASSOCIATE JOINT FINANCIAL ASSETS

ARRANGEMENT AT FAIR VALUE
CRITERIA CONTROL SIGNIFICANT JOINT CONTROL REGULAR INVESTOR
INFLUENCE
SHARE >50% 20%+ EQUAL >20%
ACCOUNTI ACQUISITION METHOD (FULL EQUITY METHOD DEPENDS ON FAIR VALUE
NG CONSOLIDATION) TYPE METHOD

Measurement of investment in associate

- Investments in associates are accounted for using the equity method of accounting. It is
based on the economic relationship between the investor and the investee.
- Investor & Investee: a single economic unit.
- The equity method is applicable when the investor has a significance influence over the
investee.

Accounting procedures – equity method

- Under this method, the investment is initially recognized at cost and subsequently
adjusted for the investor’s share in the investee’s changes in equity.
- CA 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.
- The investor’s share of the profit/loss of the investee is recognized as investment
income.
 - Dividends received from an equity investee reduce the CA of the investment.
- Investment must be in ordinary shares. If the investment is in preference shares, the
equity method is not appropriate.
- The investment in ordinary shares should be appropriately described as investment in
associate.
- The investment in associate accounted for using the equity method shall be reported as
noncurrent asset.

Application of the Equity Method

- An investor starts using the method as from the date when it obtains significant influence
or joint control over an investee.
- The difference between the cost of the investment and the entity’s share in the net fair
value of the investee’s identifiable assets and liabilities is accounted for as follows:
- If cost > NFV, the excess is goodwill (not accounted)
- If cost < NFV, the deficiency is included as income

Excess of cost over carrying amount

- An accounting problem arises if the investor pays more/less for an investment than the
CA. It is the difference.
- Ex. If the earning potential of the investee is abnormally high, the current value of the
investee’s net assets is frequently higher than their CA.
- It may be attributed to the ff:
A. Undervaluation of the investee’s assets
- If the excess is attributable to undervaluation of depreciable asset, amortized
over the remaining life of the dep asset.
- For the land, it is not amortized because land is not depreciable. The amount is
expensed when the land is sold.
- For inventory, the amount is expensed when the inventory is sold
B. Goodwill
- If the assets of the investee are fairly valued, the excess of the cost over CA of
the underlying net assets is attributable to goodwill.
- Excess is attributable to goodwill, it is included in the CA of the investment &
not amortized.
*The entire investment in associate including the goodwill is tested for impairment at the end of
each reporting period.

Impairment Loss
- It shall be recognized whenever the CA of the investment in associate exceeds
recoverable amount.
- Recoverable amount: measured as the higher between fair value less cost of
disposal & value in use
- Fair value: price that would be received to sell an asset in a transaction
- Value in use: present value of the estimated future cash flows expected to
arise from the continuing use of an asset & from the ultimate disposal.
Share in Losses
The investor shares in the investee’s losses only up to the amount of its interest in the associate
or joint venture.
- Carrying amount of the investment in associate/joint venture
- Investment in preference shares of the associate/joint venture
- Unsecured, long-term receivables or loans

Investee w/ cumulative preference shares: an associate w/ outstanding cumulative preference

shares, the investor shall compute its share of earnings/losses after deducting the preference
dividends, whether or not such dividends are declared.

Investee w/ non-cumulative preference shares: w/ outstanding noncumulative preference

shares, the investor shall compute its share of earnings after deducting the preference dividends
only when declared.

Discontinuance of equity method

- An investor shall discontinue the use of equity method from the date that it
ceases to have significant influence
- The investor shall account for the investment as follows:
A. Financial asset at fair value through P/L
B. Financial asset at fair value through OCI
C. Non-markable investment at cost/ investment in unquoted equity
instrument.

Measurement after loss of significant influence

- Investor shall measure any retained earnings in associate at fair value
- Fair value of the investment at the date it ceases to be an associate shall be
regarded as the fair value on initial recognition as a financial asset.
- Difference between the carrying amount of the retained investment at the date
the significant influence is lost
- Fair value of the retained investment shall be included in the P/L
- Difference between the net proceeds from disposal of part of the investment &
CA of the investment sold is recognized as gain/loss on disposal of
investment.
Exemptions from applying equity method
- An investor is exempt from applying the equity method if it is exempted
from preparing consolidated financial statements. Investments in
associates/joint ventures held by an entity that is a venture capital
organization, mutual fund, unit-trust or any similar entities may be
measured at fair value through profit or loss.

Classification as held for sale

- If only a portion is classified as held for sale, the remaining is still accounted
for using the equity method.
- If the investment previously classified as held for sale ceases to be classified,
it is accounted for using the equity method retrospectively.