1

Lecture 2:

Investment in associates








2
3
Associate: Introduction
It deals with accounting for an interest in an
associate in the books of the investor and in the
consolidated financial statements
Definition (MFRS 128):
an entity over which the investor has
significant influence and that is neither a
subsidiary nor an interest in a joint venture.
20% test


Significant Influence
Investor holds, directly or indirectly, 20% or more of the
voting rights of the investee, unless it can be clearly
demonstrated that this is not the case.
An investor may exercise significant influence in several
ways: by representation on the board of directors; by
participation in policy-making processes; material inter-
company transactions; interchange of managerial
personnel; or dependency on technical information.

4
Accounting Treatment
The associate is accounted for using the equity method except in the
following situations:
The investment is classified as held for sale in accordance with MFRS
5 Non-current Assets Held for Sale and Discontinued Operations;
The parent is exempted from presenting consolidated financial
statements; or

When all of the following apply:
The investor itself is a wholly-owned subsidiary or a partially-owned
subsidiary and the other owners have been informed about, and do
not object to, the parent not presenting consolidated financial
statements.
The investors debt or equity instruments are not traded in a public
market (not a listed entity).
The investor is not in the process of issuing in a public market its debt
or equity instruments by filing its financial statements with the
regulatory authorities like the securities commission.
The ultimate or any other intermediate parent of the investor is
incorporated in Malaysia and produces consolidated financial
statements that comply with the Financial Reporting Standards.

5
Equity Method
The investment in the associate is initially recorded at
cost; and
the carrying amount is increased or decreased by the
investor's share of the post-acquisition profits or losses
of the investee.
The investors share of the net profits is recognised in
the investors income statement.
Dividends and other distributions from the investee
reduce the carrying value of the investment.

6
Accounting Techniques
Determining goodwill
Goodwill or bargain purchase

Depreciation adjustments
Appropriate adjustments are made for depreciation based on
the fair values of the associate's depreciable assets.

Inter-company transfer of assets (including sales)

7
8
Assoc: Consolidation adjustment
CJE required
to convert from cost to equity for
(i) Investment and
(ii) Investment income


9
Assoc: Conso adjustment - cont
Equity: one line proportionate consolidation
share of net asset:
Investment in assoc
share of profit:
share of profit

IE 6.1 (pp 332)

10
Assoc: Conso adjustment - cont
Difference between cost of investment and
net asset of assoc
No fair value adjustment
Goodwill (para 32)
Positive goodwill: remain with
Investment
Negative goodwill: written off to P&L

11
Assoc: Conso adjustment - cont
Inter-company transactions
no elimination of account balances
partial elimination of unrealised g/l

IE 6.4 (pp 343)


12
Assoc: Further issues
Further issues
Changes in shareholding
Indirect associate


13
Assoc: Change in shareholding
MFRS 128 deals with
Disposal of shares in associate with no loss of
significant influence,
Disposal of shares in associate with loss of significant
influence
(Does not deal with piecemeal acquisition and
increase in shareholding in associate)




14
Assoc: Change in shareholding
Disposal of shares in associate with no loss of
significant influence (MFRS 128.25)

Realisation of other comprehensive income

(See illustration in pp 369)





15
Assoc: Change in shareholding
Disposal of shares in associate with loss of
significant influence (MFRS 128.22)
(a) the remaining shareholding must be re-measured,
and the gain/loss arising therefrom is treated as part
of profit/loss on disposal of associate and
(b) if remaining shares held classified as AFS, the
AFS reserve for company will not be equal to AFS
reserve for the group
IE 6.7 (pp 361)


16
Assoc: Indirect associates
Indirect associates

Associates held by subsidiary

NCI has a share in the associates profit and
net assets

IE 6.9 (pp 370)

17


Thank you