INVESTMENT IN ASSOCIATE

Learning Outcomes
To explain the related requirements of
statutes and standard on investment in
associate
To record journal entries using equity
method of accounting
To account invenstment in associate in
consolidation

To prepare consolidated financial

statements

Introduction
Investment in associated companies
represent another popular form of long
term investments by Malaysian
companies.
Investors - no control - only allowed the
investor to exercise significant influence
over financial and operating policy
decisions (BOD)

Requirements of Statutes
and
Accounting Standard
1. Companies Act, 1965
not mention specifically regarding an
associate company
thus, it should be treated as investments in
shares or corporations or other investments,
which must be separately disclosed in the
investors Balance Sheet [2(1)(j) of the Ninth
Schedule]
the investment should be accounted using
cost method in the separate financial
statements (at cost)

2. MFRS 101 - Presentation of FS

investment as one of the line items that should
be presented in the B/S (para 66)
share of profits and losses as one of the line
item that should be presented in IS (para 75)

3. MFRS 124 - Related Party Disclosures

by definition and scope is fall under MFRS 124

4. MFRS 128 - Investment in Associates

deals specifically with accounting for associates
in both consolidated FS and the separate FS of
investor

Definition
MFRS 128 Investment in Associates
an enterprise which investor has
significant influence and which is neither
a subsidiary nor a joint venture of the
investor.
The criterion used to test for the existence
of an associate is significant influence
that is the power to participate in the
financial and operating policy decisions of
the investee but not control over those
policies
Para 7 evidences of significant influence

The % ownership interest in an investee is not

included in the definition but is applied for
presumption purpose as follows:
1. If an investor holds, directly or indirectly through
subsidiaries, 20% or more of the voting power of
the investee, it is presumed that the investor
does have significant influence unless it can be
clearly demonstrated that this is not the case;
and
2. Conversely, if the investor holds directly or
indirectly through subsidiaries, less than 20% of
the voting power of the investee, its presumed
that the investor does not have significant
influence unless such influence can be clearly
demonstrated.

Associates Structures
P

P
51%

30%

R
S

P
60%
R
10%

10%

51%

10%

10%

Methods of Accounting
In separate Financial Statement:(if not
classified as held for sale)
1)At cost

record investment at cost

recognises income on dividends distributed
from net profits of the investee

2)In accordance with MFRS 139 Financial

Instrument

Classified as available-for-sale investment &

shall be measured at fair value with changes
in
fair
value
recognised
in
other
comprehensive income & retained in a fair
value reserve in equity.

Methods of Accounting
In Consolidated Financial
Statement:
1. Equity method
2. MFRS 5 if investment is
classified as held for sale
(para13(a), MFRS 128)
3. MFRS 139 if investor ceases to
have significant influence
(para18, MFRS 128)

Equity method
investment initially recorded at cost
carrying amount is increased / decreased to
recognise the investors share of the profits
or losses of investee
dividends received reduce the carrying
amount of the investment.
Carrying amount also adjusted for changes in
the investors share of the componens of
other comprehensive income of the associate
after the acquisition date
Eg: revaluation of PPE, foreign exchange
translation difference & fair value changes in AFS

Equity method

(cont)

No fair value adjustment & no

recognition of unrecorded intangible
assets and contingent liability.
Goodwill should be included in the
carrying amount of the investment
(para 23, MFRS 128).
Thus, no separate account for
goodwill relating to associate in the
CFS.

Equity method

(cont)

Transactions between Parent &

Associate:
a) Only unrealized intragroup profit and
losses are eliminated.
Intragroup account balances arising from
intragroup transactions are not eliminated.

b) For URP/L, partial rather than full

elimination is used (to the extent of the
investors interest in associate)
MFRS 128

Journal Entries
1)Share of profit in the current year:
Single-line item basis (recommends by MFRS
101):
Dr Investment in assoc.
xxx
Cr Share of profit in associate xxx
Two-line items basis:
DR Inv in assoc.
xxx
DR
Share of tax in assoc
xxx
CR Share of profit b4 tax in assoc
xxx

Equity method

(cont)

2) To eliminate dividend income at the

group level
Dr Dividend income (gross)
Cr Taxation expense
Inv in assoc

xxx
xxx
xxx

(to convert from cost method to equity

method for dividend from associate)

Example 1
H Bhd acquired a 75% interest in S Bhd
when the retained profits of S Bhd were
RM1,000,000. On 1 January 2003, H
acquired a 30% interest in the equity
capital of A Bhd for a consideration of
RM4,500,000.
The summarized accounts of the three
companies for the year ended 31
December 2003 were as follows:

Solution:
(i) CJE:
(a)
Share Capital of S
7,500
Retained Profit B/F
750
Goodwill on con
1,250
Investment in S Bhd
9,500
(to eliminate COI against share of net assets and to establish
goodwill on consolidation)

(b)

Share Capital of S
2,500
Retained Profit B/F
1,450
Goodwill on con
417
NCI in the SFP
4,367

(to credit NCI for their share of net assets)

NCI in the SCI

NCI in the SFP

1,050
1,050

(to credit NCI for their share of profit )

Solution (cont)
c)

Investment in A
840
Share of tax in Associate
360
Share of profit before tax
in associate
1,200
(to equity account for share in current year profit)

d) Dividend income
Tax expense
Investment in A

342
102
240

(to eliminate dividend income from A bhd)

Sales

H Bhd. S Bhd.
RM000 RM000
20,000
18,000

Less: operating expenses

(13,000) (12,000)
7,000
342
7,342
(2202)
5,140
-

6,000
6,000
(1,800)
4,200
-

Eliminations
and Adjustments

Group
RM000
38,000
(25,000)

Operating profit
Gross dividend income
Profit before tax-Group
Share of profit of associate co.
Less: Taxation
Share of tax in associate
Profit for the period
Attributable to:
NCI (SCI)
Equity holders of the Parent
Dividend paid

(1,000)

(1,050)
8,890
(1,000)

Retained profit for current year

4,140

4,200

7,890

Retained profit brought forward

7,860

5,800

Retained profit carried forward

12,000

10,000

Ordinary shares (RM1 each)

20,000

10,000

(d) 342
(c) 1,200
(c) 360
(b) 1,050

(a) 750
(b) 1,450

11,460

(a) 7500
(b) 2500

20,000
(b) 5,417

32,000

20,000

Investment in H Bhd

9,500

Investment in S Bhd
Sundry net assets

4,500
18,000

20,000

1,200
(3,900)
(360)
9,940

19,350

NCI (SFP)

Goodwill on consolidation

13,000
-

5,417
44,767

(c) 840
(a) 1,250

(a) 9,500

(d) 240

5,100
38,000
1,667

(ii) Carrying amount of investment in

associate:
Cost of share
RM4,500
Add: Share of post-acq
[30%x (5000-3000)] RM 600
RM5,100
Alternative:
c) Single-line item basis:
Investment in A
840
Share of profit in associate

840

Intercompany Sales of
Inventories
with Associate

Downstream Sales:
To eliminate share of unrealised profit on
sales to assoc
Dr Sales
Cr COGS
Inv in assoc

xxx
xxx
xxx

To restate opening unrealised profit and

to account for its realisation in the current
year for FIFO basis
Dr Retained profit b/f
COGS
Cr Sales

xxx
xxx
xxx

Intercompany Sales of
Inventories
with Associate

Upstream Sales:

To eliminate share of unrealised profit on

sales to assoc
Dr Share of profit in assoc
xxx
Cr Inventories (SFP)
xxx
To restate opening unrealised profit and
to account for its realisation in the current
year for FIFO basis
Dr Share of assocs prof b/f
Cr Share of profit in assoc

xxx
xxx

Example 2
Hansom Bhd, a parent company with subsidiaries,
owns a 40% interest in the equity capital of Lawe Bhd,
its associated company.
During the year ended 31 Dec 2005, inter-company
sales between Hansom Bhd and Lawe Bhd totaled
RM10,000,000. At year end, stocks of RM2,000,000
attributable to these sales were held by the buyer. The
gross profit margin to the seller was 30% on selling
price.
Ignore tax effect accounting.
REQUIRED:
In respect of the above inter-company sales, show the
equity accounting journal adjustments required if:
i. the transaction were downstream sales
ii. the transaction were upstream sales

End of the Chapter