INVESTMENT IN ASSOCIATE Intercorporate share investment - the purchase of the equity securities of one entity by another entity - case

of one entity investing in another entity through the acquisition of share capital Significant influence - power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies Control - power to govern the financial and operating policies of an entity so as to obtain benefits from its activities Associate - 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 Subsidiary - an entity including an unincorporated entity such as a partnership that is controlled by another entity known as the parent SIGNIFICANT INFLUENCE If the investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. If less than 20% - does not have SI Substantial or majority ownership by another investor - does not necessarily preclude an investor from having SI

Manifestations of SI a. Representation in the BOD b. Participation in policy making process c. Material transactions between the investor and investee d. Interchange of managerial personnel e. Provision of essential technical information Potential voting rights - Considered in assessing whether an entity has SI - BUT the investors share in the P/L of the investee and of changes in investees equity is determined on the basis of present ownership interest and does not reflect the possible exercise or conversion of potential voting rights Loss of SI - When an entity loses the power to participate in the financial and operating policy decisions of the investee - Can occur with or without change in the absolute or relative ownership interest - Could occur when an associate becomes subject to control of a government, court, administrator or regulator - Could also occur as a result of a contractual agreement Equity method - Based on the economic relationship between the investor and the investee - viewed as a single economic unit - Applicable when an investor has a SI over the investee - Investment is initially recorded at cost but it is subsequently increased by the net income of the investee and decreased by the net loss and dividend payments of the investee - Investment must be in ordinary shares (not preference shares bec. it is a non voting equity) *PS at FVTPL or at FVTOCI

If the investor has SI but not control over the investee, the investee is said to be an associate or associated company IIA accounted for using the equity method shall be classified as noncurrent asset Investment in ordinary shares should be appropriately described as investment in associate If the investor has control over the investee, investor=parent; investee=subsidiary Cash dividend is not an income but a return of investment

Entry to amortize the excess of cost attributable to the undervaluation of depreciable assets: SANI XX IIA XX When the depreciable and intangible assets of the investee are undervalued, depreciation and amortization are naturally understated resulting to overstatement of the investees net income. Thus, investor should decrease investment income. Goodwill is included in the carrying amount of the IIA. Excess of cost attributable to goodwill not amortized EXCESS OF NET FAIR VALUE OVER COST (negative goodwill) Any excess of the entitys share of the net fair value of the investees identifiable assets and liabilities over the cost of the investment -included as income in the determination of the entitys share of the associate or joint ventures profit or loss in the period in which the investment is acquired

EXCESS OF COST OVER BOOK VALUE - The investor pays more than the book value of the net assets acquired - May be attributed to: a. Undervaluation of the investees assets, such as building, land and inventory b. Goodwill - Often difficult to determine which specific identifiable assets are undervalued; attribute to goodwill - if the excess is attributable to undervaluation of depreciable asset amortized over the remaining life of the depreciable asset - if the excess is attributable to undervaluation of land not amortized because land is nondepreciable - if the excess is attributable to inventory the amount is expensed when the inventory is already sold - if the excess is attributable to goodwill it is not amortized but the entire IIA is tested for impairment at the end of each reporting period