8.3.1: Investments in Associates (Significant Influence)

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For IFRS, investments between 20% and 50% of the voting shares in another company are reported using the equity method. For ASPE companies, management can choose the equity method, the fair value through net income method (if this investment is traded in an active market), or the cost method if no market exists. Transactions costs are expensed for the equity and fair value methods and added to the investment (asset) account for the cost method. Investments in associates are reported as long-term investments and income from associates is to be separately disclosed.

This chapter has already discussed the fair value and cost models, so the focus will now be on the equity method.

The equity method initially records the shares at the cost of acquiring them which is also fair value. Subsequent measurement of the investment account includes recording the proportionate share of the investee's:

net income (loss) adjusted for any inter-company transactions
dividends
amortization of any fair value difference in the investee's capital assets
impairments, if any
proceeds of sale

The equity method is often referred to as the one-line consolidation because all the related transactions are recorded as increases or decreases in a single investment asset account. For example, if the investee company reported net income, this would result in a proportionate increase in the investor's investment (asset) due to the added profit. Conversely, a net loss reported or dividend received would be recorded as a proportionate decrease in the investment. Any amortization of fair value adjustments from the date of purchase or impairment would also be recorded as a decrease in the investment account. Below is an example of how the investment is accounted for using the equity method.

On January 1, 2020, Tilton Co. purchased 25% of the 100,000 outstanding common shares of Beaton Ltd. for $455,000. Beaton currently is one of Tilton's suppliers of manufactured goods. The outstanding shares are widely held, so with this purchase, Tilton can exercise significant influence over Beaton. This investment solidified the relationship between Tilton and will guarantee a steady supply of goods needed by Tilton for its customers. The following financial information relates to Beaton:

Below are the entries recorded to Tilton's books that relate to its investment in Beaton:

On December 31, Tilton recorded its 25% share of dividends received, net income (loss), and amortization of Beaton's net depreciable assets. But what about the $80,000 excess paid for the investment? The excess of $60,000 relates to Beaton's net depreciation assets, so this portion of the excess is amortized over ten years. The remaining $20,000 is inexplicable, so it will be treated as unrecorded goodwill. Goodwill is discussed in detail in Chapter 11: Intangible Assets and Goodwill. Since there is unrecorded goodwill, an intangible asset, Tilton must evaluate its investment each reporting date to determine if there has been any impairment in the investment's value.

Below is a partial balance sheet and income statement reporting the investment at December 31, 2020.

Tilton Co.
Balance Sheet
December 31, 2020

Long-term investment:
Investment in associates (equity method)*	$	474,000

*()

For IFRS, investments in this classification are assessed each balance sheet date for possible impairment. If it was determined that the investment's recoverable amount—being the higher of its value in use (the present value of expected cash flows from holding the investment, discounted at the current market rate) and fair value less costs to sell, both of which are discounted cash flow concepts—was $460,000, then the carrying value is more than the recoverable amount and an impairment loss of $14,000 () is recorded as a reduction to the investment (or valuation account) and to net income (loss).

For ASPE, impairment evaluation and measurement is the same as IFRS except "fair value" does not include netting the costs to sell.

Since there is $20,000 of unrecorded goodwill, the $14,000 impairment charge represents a loss in an intangible asset and is therefore not reversible. If there had been no unrecorded goodwill, any subsequent impairment charge would be reversible, but limited and the recovery amount could not result in a carrying value balance greater than if there had been no impairment.

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