Chapter 14

Investments in Associate

An investment made in another entity where the investor has significant influence but not control.

Associate

A company in which an investor has significant influence, typically through ownership of 20% to 50% of voting rights.

Significant Influence (Accounting)

The power to participate in financial and operating policy decisions of an investee but not control or jointly control those policies.

Investment in Joint Venture

An investment where two or more parties share control and have joint decision

Investment measured at fair value

A method where investments are recorded at their market price rather than cost.

Investment in subsidiary

An investment where the investor has control, typically owning more than 50% of the voting rights.

Voting rights

The rights of shareholders to vote on corporate policies and decisions.

Ordinary shares

Common stock that entitles the holder to voting rights and dividends.

Preference shares

Shares that provide fixed dividends and have priority over ordinary shares in asset distribution.

PAS 28

The Philippine Accounting Standard that outlines accounting for investments in associates and joint ventures.

Illustration: Determining the ownership interest

A scenario demonstrating how to calculate the ownership percentage in an associate or joint venture.

Equity Method

An accounting method where the investor recognizes its share of the associate’s profits and losses.

Share in the Investee’s changes in Equity

The investor's proportional recognition of changes in the equity of the associate, including other comprehensive income.

Illustration: Equity Method

A practical example of applying the equity method in accounting for associates.

Investment in Associate

The amount recorded as an investment in an associate using the equity method.

Cash

Liquid assets, including bank deposits, used in transactions.

Share in Profit of Associate

The investor’s proportionate share of the associate’s net income.

Share in Loss of Associate

The investor’s proportionate share of the associate’s net loss.

Share in OCI of associate

revaluation surplus

Share in OCI of associate

translation of foreign operation

Application of the Equity Method

The process of applying the equity method to account for an investment in an associate.

Goodwill

The excess of purchase price over the fair value of the net assets acquired in an investment.

Investment income

Income derived from investments, including dividends and share in profits.

Investment account

The ledger account used to track the value of investments.

Illustration: Purchase cost exceeds fair value of interest acquired

A scenario explaining the accounting treatment when the purchase price exceeds the fair value of acquired interest.

Fair value of net assets acquired

The market value of an investee’s identifiable net assets at the acquisition date.

Book Value

The recorded value of an asset in financial statements.

Overvaluation of inventory

When inventory is recorded at a value higher than its fair market price.

Undervaluation of depreciable asset

When a depreciable asset is recorded at a value lower than its fair market price.

Fair value of net assets

The estimated value of an entity’s assets minus liabilities at market conditions.

PFRS 5

The Philippine Financial Reporting Standard related to non

Election

A choice made by an entity regarding accounting treatments under applicable standards.

Potential voting rights

Rights that may be exercised in the future, such as share warrants or options, affecting control and influence.

Present ownership interest

The current equity ownership in an entity, excluding potential voting rights.

Share warrants

Financial instruments granting the holder the right to purchase shares at a fixed price.

Share call options

Contracts that give the buyer the right to purchase shares at a predetermined price before expiration.

Debt or equity instruments

Financial securities representing either a debt obligation or ownership interest.

Illustration: Potential voting shares

A scenario explaining the impact of potential voting rights on ownership calculations.

Cumulative preference shares

Preference shares where unpaid dividends accumulate and must be paid before ordinary shareholders receive dividends.

Noncumulative preference shares

Preference shares where unpaid dividends do not accumulate.

Redeemable preference shares

Preference shares that can be bought back by the issuing company at a predetermined price.

Illustration: Cumulative Preference Shares

A scenario showing how cumulative preference shares function in financial reporting.

Retained earnings

Accumulated net income that has not been distributed as dividends.

PFRS 3

The Philippine Financial Reporting Standard for business combinations.

PFRS 10

The Philippine Financial Reporting Standard for consolidated financial statements.

PFRS 9

The Philippine Financial Reporting Standard for financial instruments.

Prospectively

Applying accounting changes only to future transactions and events.

Gain on sale of investment

The profit earned when an investment is sold for more than its carrying amount.

Held for trading securities

Investments intended for short

Gain on reclassification

The profit recognized when an investment is reclassified from one accounting category to another.

Dividend receivable

The amount of declared dividends not yet received.

Dividend Income

Earnings received from share ownership in another company.

Unrealized gain

P/L

Reclassification of cumulative other comprehensive income

Transferring accumulated OCI balances to retained earnings or profit and loss.

Loss on sale of investment

The loss incurred when an investment is sold for less than its carrying amount.

Translation of foreign operation

The process of converting a foreign subsidiary’s financial statements into the parent company’s reporting currency.

Gain on reclassification

P/L

Revaluation surplus

associate

Retained earnings

The cumulative net income retained by a company instead of being distributed as dividends.

Severe long

term restrictions

Change to equity method

gain of significant influence

PAS 28

Philippine Accounting Standard governing investments in associates and joint ventures.

PFRS 3

Philippine Financial Reporting Standard for business combinations.

PFRS 3.42

A specific section of PFRS 3 addressing the allocation of purchase consideration.

Unrealized Loss

OCI

Investment in FVOCI securities

Investments measured at fair value through other comprehensive income.

Loss on remeasurement

P/L

Investment in equity securities

Cost

Intercompany transactions with an associate

Transactions between a parent company and its associate that require special accounting treatment.

Downstream

Transactions from the investor to the associate.

Upstream

Transactions from the associate to the investor

Deferred gain

A gain from an intercompany transaction that is not immediately recognized.

Investment in preference shares

The purchase of preference shares in another entity.

Advances to associate

Loans or funding provided by an investor to its associate

Loss on associate

Losses recognized from an investment in an associate.

Liability incurred on behalf of associate

Obligations assumed by an investor on behalf of its associate.

Impairment losses

The reduction in value of an asset when its recoverable amount falls below its carrying value.

PAS 36

The Philippine Accounting Standard for impairment of assets.

Recoverable amount

The higher of an asset’s fair value less costs to sell or its value in use.

Fair value

The price at which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

Costs of disposal

Expenses incurred in selling an asset.

Value in use

The present value of expected future cash flows from an asset.