Chapter 6 Investment IN Associate PDF

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CHAPTER 6 INVESTMENT IN ASSOCIATE

CHAPTER OBJECTIVES  Distinguish the differences of investment in associates from other investments  Described and apply the equity method of accounting for investment and associate.  Understand the concept and treatment of associate with excessive losses.  Apply proper accounting for derecognition and loss of significant influence. 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.  A holding of 20% or more of the voting power (directly or indirectly) 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: o Representation on the board of directors or equivalent governing body of the investee; o Participation in the policy-making process; o Material transactions between the investor and the investee; o Interchange of managerial personnel; or o Provision of essential technical information. Accounting for Associates  In its consolidated financial statements, an investor should use the equity method of accounting for investments in associates, unless: 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 investor’s 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.

Applying the Equity Method  The equity investment is initially recorded at cost and is subsequently adjusted to reflect the investor's share of the net profit or loss of the associate.  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 OTHER changes in the investee's equity (revaluation surplus and translation gains and losses. Equity method achieved in stages

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The previously held interest that was accounted for under the cost or fair value method shall be remeasured to fair value on the date the investor gains significant influence.  The difference between the fair value and the carrying amount of the previously held investment shall be recognized in profit or loss.  The total of the fair value of the previously held investment and the new acquisition cost shall be regarded as the total cost of the investment classified as “associate”.  If the FVOCI was used to account for the previously held investment, any cumulative unrealized gain or loss as OCI shall be reclassified to retained earnings. Share in profit or loss 1. With cumulative preference shares  The investor computes its share of profits or losses after adjusting for the dividends on such shares, whether or not the dividends have been declared on cumulative preference shares. 2. With non-cumulative preference share  if the preference shares are non-cumulative, adjustments for dividends are made only if there is a declaration. 3. Undervaluation of depreciable asset  If depreciable asset is undervalued the depreciation expense presented in the income statement of the associate is understated and net income will be overstated.  Undervaluation of depreciable asset should be amortized over remaining useful life.  The amortization of undervaluation of asset decreases the net income of the associate. 4. Undervaluation of inventory at the time of purchase  Undervaluation of inventory at the time of purchased will understate the cost of goods sold and will overstate the net income presented by the associate. 5. Undervaluation of non-depreciable asset  No adjustment to net income of the associate because revenue and expenses presented is not affected by the undervaluation. Share in excessive Losses of the associate The investor’s share in the associates losses cannot exceed the “interest in the associate” and shall discontinue the application of the equity method is this is the case. 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. Further share in losses should temporarily no recognized if interest in the associate equal to zero. 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. Transactions with associates  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 if the asset sold between the associate and investor has not yet been sold to an unrelated party.  However, realized profits and losses shall be recognized once the asset is sold to an unrelated party or if the asset is being consumed through depreciation. Goodwill

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The excess of cost of investment over fair value of interest acquired. Goodwill relating to an associate is included in the carrying amount of the investment. Amortization of goodwill is not permitted and is therefore not included in the determination of the investor’s share of the associate’s profits or losses. Gain on bargain purchased or negative goodwill  The excess of fair value of interest acquired over cost of investment.  Is excluded from the carrying amount of the investment  Included as income in the determination of the investor’s share of the associate’s profit or loss in the period in which the investment is acquired. Loss of significant influence  Use of the equity method should cease from the date that significant influence ceases. 1. Loss of significant influence due to sale of investments.  The difference between the selling price and carrying amount of the investment sold shall be recognized in profit or loss.  The remaining balance of investment not sold is accounted for under PFRS 9 and recorded at fair value at the time significant influence ceases.  The difference between fair value and carrying amount of remaining investment is recognized in Profit or loss or other comprehensive income. 2. Loss of significant influence due to increase or additional purchase of interest.  If the investor interest increases to more than 50%, the investor has control over the associate. In this case the investor shall use PFR 3 business combination.  The difference between the fair value and the carrying amount of the previously held investment shall be recognized in profit or loss. Date of associate's financial statements  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. The difference between the reporting date of the associate and that of the investor cannot be longer than three months....