In progress - PAS 28 Investment in Associates and Joint Ventures

Question 1

What is the objective of PAS 28?

Answer 1

• To prescribe the accounting for investment in associates
• To set out the requirements for the application of equity method with accounting for investments in associates and joint ventures

Question 2

What is the scope of PAS 28?

Question 3

When to recognize an investment in associate?

Answer 3

If the investor acquires significant influence over an investee

Question 4

Presumption of significant influence

What is the quantitative criterion in assessing the existence of a significant influence?

Answer 4

20% or more of the voting power directly (or through subsidiaries) on an investee

This is only a presumption.

The entity may still have a significant influence over an investee even if has less than 20% voting power if qualitative factors indicate the existence of such significant influence.

Or the entity may not have a significant influence even if it holds at least 20% voting power if qualitative factors indicate the abscence of such significant influence.

Question 5

Qualitative criteria in assessing significant influence

What are the evidences of the existence of a significant influence?

Answer 5

• Representation in the BOD
• Participation in the policy-making process, including participation in decisions about dividends or other distributions
• Material transactions between the entity and the investee
• Interchange of managerial personnel; or
• Provision of essential technical information

Question 6

What does significant influence mean?

Answer 6

Power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies

Question 7

What are considered when assessing whether the entity has at least 20% voting power?

Answer 7

The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights of other entities

(Outstanding ordinary shares held + Potential voting shares)/(Total outstanding ordinary shares + total potential voting shares)

Question 8

What accounting policy is required to account for investments in associates and joint ventures?

Answer 8

Equity method

Question 9

Explain the equity method of accounting for investment in associates.

Answer 9

Initial Measurement
at cost

Subsequent Measurement
The carrying amount is
- increased (decreased) by the entity’s share in the investee’s adjusted comprehensive income (loss)
- decreased by the dividends received
- decreased by impairment loss, if any
- increased or decreased by the effect of adjustments arising from difference in accounting policy and/or difference in accounting period

Question 10

What is the initial measurement of an investment in associate?

Answer 10

at cost

purchase price plus transaction costs

Question 11

What is the initial measurement of an investment in associate achieved in stages?

Answer 11

Cash paid for the additional ownership interest plus fair value of the existing investment

Question 12

What is the effect if the cost of the investment is higher than the entity’s share in the fair value of the investee’s net assets?

Answer 12

Implied goodwill

The implied goodwill is already included in the recorded cost of the investment, and is not separately recorded.

Question 13

Excess of cost over carrying amount (Cost > CA)

What is the treatment of the excess of cost of the investment over carrying amount of the net assets acquired?

Answer 13

If excess is attributable to undervaluation of identifiable assets, adjustment is made to the investee’s comprehensive income for the purpose of determining the entity’s share.

If the assets of the investee are fairly valued, the excess is attributable to an implied goodwill. (no further adjustments)

Question 14

How to compute for the entity’s share in the investee’s profit or loss?

Answer 14

The investee’s profit or loss is multiplied by the entity’s existing ownership interest over the investee.

Question 15

Adjustments to P/L

What are the adjustments that should be made to the associate’s profit or loss before computing the entity’s (i.e. investor) share in such profit or loss?

Answer 15

• material one-time transactions
• preference share dividends
• undervaluation or overvaluation of associate’s identifiable assets
• differences in accounting policies used
• different periods covered by the investor and investee’s financial statements

These adjustements are made solely for the purpose of computing the investor’s share in the associate’s profit or loss.

Question 16

Significant influence acquired during the year

How to compute for the entity’s share in the associate’s profit or loss if significant influence is obtained on a date other than the beginning or end of the entity’s reporting period?

Answer 16

The entity will only share on the profit (loss) earned (incurred) after obtaining significant influence.

If problem is silent as to when the profit or loss was earned or incurred, the P/L is presumed to have been earned or incurred evenly during the year, hence, proration is necessary. However, the effects of material one-time transactions (e.g. gain or loss on sale) shall be segregated before attributing equal amounts of profit or loss per month.

Question 17

Does the dividend to be deducted from the carrying amount of the investment include preference share dividends received by the entity?

Question 18

How to treat preference share dividends?

Answer 18

Non-cumulative - deduct declared dividends
Cumulative - deduct one year dividend (whether declared or not)
Redeemable PS - no effect (if the interest expense is properly recognized)