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PAS 28, PAS 29, and PAS 32

INVESTMENT IN ASSOCIATES
Philippine Accounting Standards 28 (PAS 28)
• Derived from its international counterpart, the IAS 28 Investment in Associates and Joint Ventures
• Its main objective is to prescribe the accounting for investments in associates and to set out the
requirements for the application of the equity method when accounting for investments in associates
and joint ventures.

The following terms are used extensively in IAS 28:

• An associate is an entity over which the investor has significant influence.
• Consolidated financial statements are the financial statements of a group in which assets, liabilities,
equity, income, expenses, and cash flow of the parent and its subsidiaries are presented as those of a
single economic entity.
• Significant influence is the power to participate in the financial and operating policy decisions of the
investee but is not a control or joint control of those policies.
• The equity method is a method of accounting whereby the investment is initially recognized at cost
and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net
assets. The investor’s profit or loss includes its share of the investee’s profit or loss, and the investor’s
other comprehensive income includes its share of the investee’s other comprehensive income.
• A joint arrangement is an arrangement of which two (2) or more parties have joint control.
• Joint control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require the unanimous consent of the parties sharing control.
• A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement
have the rights to the net assets of the arrangement.
• A joint venturer is a party to a joint venture that has joint control of that joint venture.

Significant Influence
If an entity holds, directly or indirectly (e.g., through subsidiaries), 20% or more of the voting power of the
investee, it is presumed that the entity has significant influence unless it can be clearly demonstrated that this
is not the case. Conversely, if the entity holds, directly or indirectly (e.g., through subsidiaries), less than 20%
of the voting power of the investee, it is presumed that the entity does not have significant influence unless
such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an entity from having significant influence.

The existence of significant influence by an entity is usually evidenced in one (1) or more of the following ways:
a. representation on the board of directors or equivalent governing body of the investee;
b. participation in policy-making processes, including participation in decisions about dividends or other
distributions;
c. material transactions between the entity and its investee;
d. interchange of managerial personnel; or
e. provision of essential technical information.

Equity Method
Under this method, on initial recognition, the investment in an associate is recognized at cost, and the carrying
amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after
the date of acquisition. The investor’s share of the investee’s profit or loss is recognized in the investor’s profit

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or loss. Distributions or dividends received from an investee reduce the carrying amount of the investment.
Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest
in the investee arising from changes in the investee’s other comprehensive income. Such changes include
those arising from the revaluation of property, plant, and equipment and from foreign exchange translation
differences. The investor’s share of those changes is recognized in the investor’s other comprehensive income
(see IAS 1 Presentation of Financial Statements).

An entity with significant influence over an investee shall account for its investment in an associate or a joint
venture using the equity method except when that investment qualifies for exemption.

An entity need not apply the equity method to its investment in an associate if the entity is a parent that is
exempt from preparing consolidated financial statements by the scope exception in paragraph 4(a) of IFRS 10
or if all the following apply:
a. The entity is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its
other owners, including those not otherwise entitled to vote, have been informed about, and do not
object to, the entity not applying the equity method.
b. The entity’s debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets).
c. The entity did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organization, for issuing any class of instruments in a public market.
d. The ultimate or any intermediate parent of the entity produces financial statements available for
public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value
through profit or loss in accordance with IFRS 10.

An entity shall discontinue the use of the equity method from the date when its investment ceases to be an
associate or a joint venture as follows:
a. If the investment becomes a subsidiary, the entity shall account for its investment in accordance with
IFRS 3 Business Combinations and IFRS 10.
b. If the retained interest in the former associate or joint venture is a financial asset, the entity shall
measure the retained interest at fair value. The fair value of the retained interest shall be regarded as
its fair value on initial recognition as a financial asset in accordance with IFRS 9. The entity shall
recognize in profit or loss any difference between:
i. the fair value of any retained interest and any proceeds from disposing of a part interest in
the associate or joint venture; and
ii. the carrying amount of the investment at the date the equity method was discontinued.
c. When an entity discontinues the use of the equity method, the entity shall account for all amounts
previously recognized in other comprehensive income in relation to that investment on the same basis
as would have been required if the investee had directly disposed of the related assets or liabilities.

REPORTING IN HYPERINFLATIONARY ECONOMY

Philippine Accounting Standards 29 (PAS 29)
• Derived from its international counterpart, the IAS 29 Financial Reporting in Hyperinflationary
Economies.
• This standard shall be applied to the financial statements, including the consolidated financial
statements, of an entity whose functional currency is the currency of the hyperinflationary economy.

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Definitions, Concepts, and General Procedures

In a hyperinflationary economy, reporting of operating results and financial position in the local currency
without restatement is not useful. Money loses purchasing power at such a rate that comparison of amounts
from transactions and other events that have occurred at different times, even within the same accounting
period, is misleading.

Hyperinflation is indicated by characteristics of the economic environment of a country, which include, but
are not limited to, the following:
a. the general population prefers to keep its wealth in non-monetary assets or a relatively stable foreign
currency. Amounts of local currency held are immediately invested in maintaining purchasing power;
b. the general population regards monetary amounts not in terms of the local currency but in terms of a
relatively stable foreign currency. Prices may be quoted in that currency;
c. sales and purchases on credit take place at prices that compensate for the expected loss of purchasing
power during the credit period, even if the period is short;
d. interest rates, wages, and prices are linked to a price index; and
e. the cumulative inflation rate over three (3) years is approaching, or exceeds, 100%.

Monetary items are money held and items to be received or paid in money. All other assets and liabilities are
non-monetary.

The financial statements of an entity whose functional currency is the currency of a hyperinflationary
economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in
terms of the measuring unit current at the end of the reporting period. The corresponding figures for the
previous period required by IAS 1 Presentation of Financial Statements (as revised in 2007) and any
information in respect of earlier periods shall also be stated in terms of the measuring unit current at the end
of the reporting period.

The gain or loss on the net monetary position shall be included in profit or loss and separately disclosed.

In a period of inflation, an entity holding an excess of monetary assets over monetary liabilities loses
purchasing power and an entity with an excess of monetary liabilities over monetary assets gains purchasing
power to the extent the assets and liabilities are not linked to a price level. This gain or loss on the net
monetary position may be derived as the difference resulting from the restatement of non-monetary assets,
owners’ equity, and items in the statement of comprehensive income and the adjustment of index-linked
assets and liabilities. The gain or loss may be estimated by applying the change in a general price index to the
weighted average for the period of the difference between monetary assets and monetary liabilities.

When an economy ceases to be hyperinflationary, and an entity discontinues the preparation and
presentation of financial statements prepared in accordance with this Standard, it shall treat the amounts
expressed in the measuring unit current at the end of the previous reporting period as the basis for the carrying
amounts in its subsequent financial statements.

The following disclosures shall be made:

a. the fact that the financial statements and the corresponding figures for previous periods have been
restated for the changes in the general purchasing power of the functional currency and, as a result,
are stated in terms of the measuring unit current at the end of the reporting period;
b. whether the financial statements are based on a historical cost approach or a current cost approach;
and

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c. the identity and level of the price index at the end of the reporting period and the movement in the
index during the current and the previous reporting period.

FINANCIAL INSTRUMENTS - PRESENTATION

Philippine Accounting Standards 32 (PAS 32)
• Derived from its international counterpart, the IAS 32 Financial Instruments: Presentation
• The objective of this Standard is to establish principles for presenting financial instruments it
especially:
i. provides definitions of financial instruments;
ii. distinguishes equity from liabilities;
iii. includes the guidance for compound financial instruments;
iv. prescribes the rules for presenting the treasury shares; and
v. states condition when you can offset a financial asset and a financial liability in your statement
of financial position.

Financial Instrument
A financial instrument is any contract that gives rise to a financial asset of one (1) entity and a financial liability
or equity instrument of another entity.

The three (3) types of financial instrument are the following:

• A financial asset is any asset that is:
a. cash (such as petty cash, cash in bank, and other cash equivalents);
b. an equity instrument of another entity; or
c. a contractual right:
i. to receive cash or another financial asset from another entity (trade receivables, issued loans,
and purchased bonds); or
ii. to exchange financial assets or financial liabilities with another entity under conditions that are
potentially favorable to the entity (purchased call options).
• A financial liability is any liability that is:
a. A contractual obligation to:
i. deliver cash or another financial asset from another entity (trade payables, taken loan, and
issued bonds); and
ii. exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavorable to the entity (written call options and written put options).
b. A contract that will or may be settled in the entity’s own equity instruments and is:
i. a non-derivative for which the entity is or maybe obliged to deliver a variable number of the
entity’s own equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash
or another financial asset for a fixed number of the entity’s own equity instruments.
• An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities. In general, it is the entity’s own equity, and it may not include only the
shares but also certain warrants, options, and other instruments.

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Presentation
The fundamental rule in IAS 32 is to classify the financial instruments on initial recognition as a financial
liability, a financial asset, or an equity in accordance with:
• the substance of the contract; and
• the definitions of a financial asset, financial liability, and an equity instrument.

Compound Financial Instrument is a financial instrument with both liability and equity components.
For example, a convertible bond where an issuer issues a bond to a holder and the holder has an option to get
the bond repaid by some number of the ordinary shares of issuer instead of taking cash.

The following are the components of compound financial instrument (IFRSbox, 2018):
• A financial liability: a loan, because the issuer has a liability to settle the loan with transfer of cash;
and
• An equity instrument: a call option written to the holder to deliver some number of ordinary shares.
In this case, an issuer needs to classify and present these two (2) elements separately. The loan element is
presented as a financial liability, and the call option is presented as an equity instrument.

Treasury shares is the term used by IAS 32 for owned shares. If the entity acquires its own share, it shall be
deducted from equity and is not recognizable as a financial asset.

Offsetting a Financial Asset and a Financial Liability

Offsetting is a way of presenting a financial asset and a financial liability as one (1) single net amount in the
statement of financial position.
The following are the given set of rules when an entity must offset a financial asset with a financial liability
(IFRSbox, 2018):
• when the entity has a legally enforceable right to set off the recognized amounts; and
• when the entity intends to settle on a net basis, or realizes the asset and liability simultaneously.

References
IFRSbox. (2009). How to present financial instrument under IAS 32. Retrieved on November 5, 2018, from
https://www.ifrsbox.com: https://www.ifrsbox.com/ias-32-financial-instruments-presentation
International Financial Reporting Standards. (2001, April). IAS 29 financial reporting in hyperinflationary
economies. Retrieved on November 5, 2018, from https://www.ifrs.org: https://www.ifrs.org/issued-
standards/list-of-standards/ias-29-financial-reporting-in-hyperinflationary-economies
International Financial Reporting Standards Foundation. (2011, May). IAS 28 investments in associates and
joint ventures. Retrieved on November 5, 2018, from https://www.ifrs.org:
https://www.ifrs.org/issued-standards/list-of-standards/ias-28-investments-in-associates-and-joint-
ventures

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