Investment of less than 20%

If the investor holds, directly or

indirectly, through subsidiaries less
than 20% of the voting power of the
investee, it is presumed that the
investor does not have significant
influence, unless such influence can
be clearly demonstrated.
Accounting for investment of
less than 20%

Fair value method

Financial asset measured at fair

value through profit or loss, or
measured at fair value through other
comprehensive income.
Usually applied with respect to
investment in unquoted equity
instrument or nonmarketable equity
investment.
Under the fair value and cost
method, the investor does not share
in the profit or loss of the investee
because of the legal relationship
between the investor and the
investee.

Dividends received by the investor

from the investee are accounted for
as dividend income.
Dividends received from an investee
are recognized as dividend income,
regardless of whether the dividends
originated from preacquisition
retained earnings or postacquisition
retained earnings.
1. On January 1, 2017, an investor
purchased 10,000 shares of the
100,000 outstanding ordinary shares
of another entity at ₱200 per share.
The investment is unquoted and
represents a 10% equity interest.

Investment in equity securities 2,000,000

Cash 2,000,000
2. The investee reported net income
of ₱1,000,000 for 2017.
No entry is required.
The investor does not recognize a
share in the net income of the
investee.
3. The investor received a 20% share
dividend on December 31, 2017.

Memo-Received 2,000 ordinary

shares from investee as 20% share
dividend on 10,000 original
shares. Shares now held, 12,000
shares.
4. The investee reported a net loss of
₱3,000,000 for 2018.
No entry is required.
The investor does not recognize a
share in the net loss of the
investee.
5. The investee declared and paid a
cash dividend of ₱1,500,000 on
December 31, 2018.

Cash (10% x1,500,000) 150,000

Dividend income 150,000
6. The investor sold 3,000 ordinary
shares at ₱250 per share on
December 31,2018.

Cash 750,000
Investment in equity securities 500,000
Gain on sale of investment 250,000

Sale price (3,000x250) 750,000

Less: Cost of shares sold
(3,000/12,000x2,000,000) 500,000
Gain on sale of investment 250,000
An investor owned a 10% interest in an investee
on January 1, 2017. The investor acquired
additional 10% interest in the same investee on
January 1, 2018 enabling the investor to
exercise significant influence over the investee.
In 2017, the investment is accounted for under
the cost or fair value method. However in 2018,
the investment must be accounted for under the
equity method because the investee is now an
associate.
Fair Value Approach
a. The existing interest in the
associate is remeasured at fair value
with any change in fair value
included in profit or loss.
b. However, if the existing interest is
accounted for at fair value through
other comprehensive income, any
unrealized gain or loss at the date
the investee becomes an associate is
reclassified to retained earnings.
c. The fair value of the existing
interest plus the cost of the additional
interest acquired constitutes the total
cost of the investment for the initial
application of the acquired method.
d. The total cost of the investment for
the initial application of the equity
method minus the carrying amount of
the net assets acquired at the date
significant influence is obtained
equals excess of cost over carrying
amount or excess net fair value.
On January 1, 2017, an investor
acquired a 10% interest in an investee
for ₱2,000,000. The investment is
accounted for under the cost method
because the investment is unquoted.
On January 1, 2019, the investor
acquired a further 20% interest in the
investee for ₱4,000,000.
On such date, the carrying amount of
the net assets of the investee is
₱18,000,000.
Any excess cost over carrying amount
is attributable to an undervalued
equipment with remaining useful life
of 5 years.
On January 1, 2019, the 10% existing
investments has a fair value of
₱2,500,000.
The investee reported the following
net income and dividends:
Net income Cash dividend
2017 2,000,000 800,000
2018 3,000,000 1,000,000
2019 4,000,000 2,000,000
Journal entries
2017
Investment in equity securities 2,000,000
Cash 2,000,000

Cash (10%x800,000) 80,000

Dividend income 80,000

2018
Cash (10%x1,000,000) 100,000
Dividend income 100,000
2019
1. To record the new 20% interest:
Investment in associate 4,000,0000
Cash 4,000,000
2.To measure the 10% existing interest at fair value:
Investment in equity securities 500,000
Gain on remeasurement to equity 500,000
(2,500,000-2,000,000)
3. To reclassify the 10% existing interest:
Investment in associate 2,500,000
Investment in equity securities 2,500,000
4. To record the share in 2019 net income:
Investment in associate 1,200,000
Investment income
(30,000x4,000,000) 1,200,000

5. To record the share in 2019 cash dividend:

Cash 600,000
Investment in associate
(30%x2,000,000) 600,000
6. To record the amortization of excess of cost:
Investment income 220,000
Investment in associate 220,000

Fair value of 10% existing interest 2,500,000

Cost of 20% new interest 4,000,000
Total cost of investment 6,500,000
Carrying amount of net assets acquired
(30%x18,000,000) 5,400,000
Excess of cost over carrying amount 1,100,000
Amortization (1,100,000/5) 220,000