Substantive Test of Investments

Module 1

Instructor: Mr. Almario G. Parco, Jr., CPA, MBA

Intended Learning Outcomes:
• After studying this chapter, you should be able to:

1. Identify the audit objectives for investments and related accounts.

2. Describe the primary substantive audit procedures for investments and related
accounts

3. Identify assertions addressed by audit procedures for investments and related accounts
Introduction
Accounting for investments can vary depending on whether cost, fair value, equity, or
consolidation methods are used. Much depends on the entity's business model and
management's intentions, which are assessed through inquiry and knowledge of the
client's business and industry. Only auditors knowledgeable about the business can
determine the economic substance of an acquisition and whether it makes sense from an
industry perspective and the business's strategic plan.

In the audit of investments, the auditor should consider the related income statement
accounts such as investment income, holding gains (loss), impairment loss, derecognition
loss and other items.
Audit Objectives
When auditing investments, the principal objective for the substantive tests is to
determine the following:
Assertion Category Account Balances Audit Objectives

Existence All recorded investments on the statement of financial position exist

Occurrence All recorded income from investments has accrued to the entity at the reporting date.

Completeness All investments owned by the entity at the reporting date are included on the statement of financial
position. All income accruing from investments at the reporting date has been recorded.
Valuation and Allocation Investments are included on the statement of financial position at the appropriate amounts.

Accuracy Investment income is included on the statement of comprehensive income at the appropriate amount

Classification Income statement related items are appropriately recorded in the proper accounts in the statement of
comprehensive income.
Rights and Obligations The entity owns, or has a legal right to the investments included on the statement of financial position.

Presentation and Disclosure Investments and related investment income accounts are properly classified, described, and disclosed
in the financial statements, including notes, in accordance with the applicable PFRS.
All investment pledged or other security interests are adequately and properly disclosed.
Audit Procedures for Investments
The auditor's primary substantive procedures for investments typically include the
following:

1. Verifying the existence and ownership of securities;

2. Performing valuation procedures in accordance with accounting policies;

3. Investigating current and potential impairments of investments;

4. Reviewing board of director's (BOD) minutes of meetings, shareholders meeting,

committee (i.e., investment committee) meetings and agreements; and

5. Reviewing appropriateness of presentation and adequacy of disclosure;

Verification of Existence and Ownership
To verify the existence and ownership of investments by the entity, the auditor's procedure depends
whether the securities or evidence of ownership are held by the client or held by a third party.

Securities or evidence of ownership held by the client

If the securities (such as stock certificates) or evidence of ownership is held by the client during the
year, the auditor counts the securities or instruments on hand and examines evidence of ownership. The
count of securities is ideally performed at the reporting date and simultaneously with the count of cash
and other negotiable instrument to prevent substitution. When inspecting the securities, the auditor
should note the following:

1. The name(s) of the indicated owner(s) of the securities;

2. The names of the issuers of securities;

3. Whether the security is debt or equity;

4. The certificate numbers on the documents;

5. Any certificates; evidence and of pledging or restrictions on disposal shown on the certificates; and

6. The number of shares of stock or the face value of debt securities.

Quick Check
Which of the following is considered a primary audit procedure to establish the existence
and ownership of investments?

a. Inspection of property, plant and equipment.

b. Inquiry with management regarding ownership of investments.

c. Inspection and count of securities.

d. Recomputation of ending balance of investments.

Quick Check
Which of the following is considered a primary audit procedure to establish the existence
and ownership of investments?

a. Inspection of property, plant and equipment.

b. Inquiry with management regarding ownership of investments.

c. Inspection and count of securities.

d. Recomputation of ending balance of investments.

Securities or evidence of ownership held by a third party

Some of the company's securities and other financial instruments held by a custodian
such as brokerage firm or banks for safekeeping. If this is the case, the auditor will
confirm to the custodian. Note that the dispatch and receipt of the confirmation request
should be always under the control of the auditor after it was signed by the client. The
auditor would normally include the information mentioned above ( e.g., name of
registered owner, number of shares, etc.) in the confirmation request.
Quick Check
To establish the existence and ownership of a long-term investment in the common stock
of a publicly traded company, an auditor ordinarily performs a security count or

a. Relies on the client's internal controls if the auditor has reasonable assurance that the
control procedures are being applied as prescribed.

b. Confirms the number of shares owned that are held by an independent custodian.

c. Determine the market price per share at the reporting date from published quotations.

d. Confirms the number of shares owned with the issuing company.

Quick Check
To establish the existence and ownership of a long-term investment in the common stock
of a publicly traded company, an a1llditor ordinarily performs a security count or

a. Relies on the client's internal controls if the auditor has reasonable assurance that the
control procedures are being applied as prescribed.

b. Confirms the number of shares owned that are held by an independent custodian.

c. Determine the market price per share at the reporting date from published quotations.

d. Confirms the number of shares owned with the issuing company.

Quick Check
To establish the existence and ownership of a long-term investment in the common stock
of a publicly traded company, an a1llditor ordinarily performs a security count or

a. Relies on the client's internal controls if the auditor has reasonable assurance that the
control procedures are being applied as prescribed.

b. Confirms the number of shares owned that are held by an independent custodian.

c. Determine the market price per share at the reporting date from published quotations.

d. Confirms the number of shares owned with the issuing company.

Evaluate the Accounting Methods Used
and Test the Valuation
The method of valuation of investments depends on the types of investments. For
example, investments in associate is accounted under PAS 28, investment in joint venture
is accounted in accordance with PAS 28 and PFRS 11, financial asset at amortized cost or
at fair value is accounted in accordance with PAS 39/PFRS 9. Therefore, the procedure
applied by the auditor depends on the type of investment.

Investment in associate and joint venture

Investment in associate and joint venture should be accounted under equity method, that
is the investor should account the investment initially at cost, plus (less) any share of
investees net income (net loss), plus (less) any change in investees other comprehensive
income less any dividends received. The auditor can verify the share in net income or loss
by examining the audited financial statement of the investee and making independent
calculation. For divided received, the auditor can examine published dividend record of
the investee. For impairment loss, please refer to a separate discussion in this module.
Investment in subsidiary

The investment in subsidiary is accounted at cost and subsequently adjusted for

impairment, if any. To verify the beginning balance of the investment for the current year,
the auditor will normally refer to its prior working paper. The auditor will then examine
any addition or disposal by examining supporting documentation.

Financial asset at amortized cost

Financial asset at amortized cost, based on its designation, is measured subsequently at

amortized cost using effective interest method. To verify the carrying amount of the said
financial asset, the auditor would obtain evidence regarding the original issuance price of
the asset and prepare an amortization table using the appropriate rate (nominal and
effective/yield rate) and compare with the amount reported by the client. For impairment
loss, please refer to a separate discussion in this module.

Financial asset at fair value

Financial at fair value through profit or loss or other comprehensive income is measured
at fair value every reporting date. To evaluate the appropriate valuation of the asset, the
auditor will examine quoted market price if there is an active market. For example, if the
shares are quoted in Philippine Stock Exchange, the auditor will check the valuation by
using the quoted price and multiplying it in the number of shares.
Quick Check
Of the following, which is the most efficient audit procedure for verification of interest
earned on bond investments?

a. Tracing interest declarations to an independent record book.

b. Recomputing interest earned.

c. Confirming interest-rate with the issuer of the bonds.

d. Vouching the receipts and deposit of interest checks.

Quick Check
Of the following, which is the most efficient audit procedure for verification of interest
earned on bond investments?

a. Tracing interest declarations to an independent record book.

b. Recomputing interest earned.

c. Confirming interest-rate with the issuer of the bonds.

d. Vouching the receipts and deposit of interest checks.

Test Impairments of Investments
Accounting -for impairment depends on the type of investment The auditor therefore should consider
the applicable PFRS in evaluating the impairment made by management. For example, impairment of
investment in affiliates (e.g., associate, subsidiary, joint venture) should be accounted in accordance
with PAS 36 Impairment of Assets. Impairment of financial asset (e.g., at amortized cost) covered by
PAS 39 or PFRS 9 should be made in accordance with the said standard.

In assessing the proprietary of impairment, the auditor should inquire with management their approach
in identifying indicators of impairment, and the actions taken as a result of any potential impairment
noted. If an impairment provision was made or the auditor considers it necessary, the auditor ordinarily
should perform the following procedures:

1. Evaluate the appropriateness of the valuation model and assumptions used;

2. Assess the reasonableness of management's estimates; and

3. Evaluate the accuracy, completeness, and the relevance of the important data on which the estimates
or measurements are based.

The auditor should obtain and review minutes (shareholders, board, executive committee, etc.),
agreements and confirmation replies for evidence of existence, liens, pledges or other security interests
in investments; and of commitments to acquire or dispose of investments. This step may also disclose
unrecorded purchases and sales of securities or other financial instruments.
Review Financial Statement Presentation and Disclosure
of Investments Including Related Account
The auditor must determine that
investments are properly classified and
presented in the statement of financial
position. Short-term investments are
included in the current asset section
while long-term investments are
presented in the non-current asset
section. The auditor should also
determine that the related income
statement accounts should be reported
appropriately in profit or loss or as a
component of other comprehensive
income. The following table
summarizes investment related items
and where to report them:
Investment in Equity and Debt
Securities; and
Investment in Associate
Module 3

Instructor: Mr. Almario G. Parco, Jr., CPA, MBA

Intended Learning Outcomes
After reading this chapter, you should be able to:

1. Identify and describe the type of financial instruments.

2. Identify and explain the different classifications of financial assets.

3. Describe the initial recognition, initial measurement, subsequent measurement,

reclassification, derecognition and financial statement presentation of financial asset.

4. Differentiate the accounting for FVTPL, FVTOCI and FAAC.

Investment Defined
An asset held by an enterprise for purposes of accretion of wealth through distribution of interest,
royalties, dividends, and rentals or for capital appreciation or other. benefits to be obtained.

Asset that is not directly related to the central revenue producing activities of the enterprise but
are acquired for any of the following purposes:

• For other sources of income

• To establish long-term relationship with suppliers and customers

• To acquire control or significant influence over another company

• To accumulate funds for future use

• For appreciation in value

Investments are expected to contribute to the success of the business either by exercising certain
favorable effects upon sales and operations or by making an independent contribution to earnings
over the long term.
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Financial assets are recognized on the Statement of Financial Position

Summary of Initial recognition

Initial
when the entity becomes a party to the contractual provisions of the

Fair Value
instrument
Fair value plus Fair value plus Fair value plus

Classification,
measurement transaction cost transaction cost transaction cost
Subsequent
Fair Value Fair Value Fair Value Amortized Cost
measurement

Measurement
G/L on
P&L OCI, net of tax OCI, net of tax N/A
remeasurement
Interest income on Effective rate Effective rate
Nominal rate

(initial and
debt (EIR x Beginning N/A (EIR x Beginning
(NR x Face value)
securities(P&L) amortized cost) amortized cost)

Dividends on

subsequent) and
P&L N/A P&L N/A
equity instruments
Subject to
No Yes No Yes
impairment test?

derecognition of Impairment Loss

Impairment Gain
(i.e. Reversal)
N/A
N/A
P&L
P&L (no limit)
N/A
N/A
P&L
P&L (no limit)

financial asset Derecognition

Gain or Loss -
Presentation
P&L P&L
Directly closed to
Retained Earnings
P&L

under PFRS 9 UG/UL recognized

in OCI
N/A Recycled to P&L
Directly closed to
Retained Earnings
N/A
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives

Classification
CATEGORIES OF FINANCIAL ASSETS

1. Financial Asset at fair value

a. through profit or loss (FVTPL)
b. Through other comprehensive income (FVTOCI)

2. Financial Assets at amortized cost (FAAC)

BASIS OF CLASSIFICATION

An entity shall classify financial assets as subsequently measured at amortized cost, fair
value through other comprehensive income or fair value through profit or loss on the
basis of both:

a. The entity's Business Model for managing the financial assets

b. The Contractual Cash Flow Characteristics of the financial asset

 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives

Business Model Assessment

The assessment on the entity's business model centers around whether financial asset are
held for the collection of contractual cash flows. This is based on how the entity is run,
and on the objective of the business model as determined by key management personnel
(per PAS 24 Related Party Disclosure). The assessment therefore is not on an instrument
by instrument basis – rather overall business model of the entity .

Contractual Cash Flow Characteristics

(or SPPI test) The assessment of the contractual terms for cash flows is carried out on an
instrument by instrument basis. Contractual cash flows are made up of:

a. Principal – the fair value of the financial asset at initial recognition [PFRS 9.4.1.3a]

b. Interest – consists of consideration for the time value of money, for the credit risk
associated with the principal amount outstanding during a particular period of time
and for other basic lending risks and costs, as well as a profit margin [PFRS 9.4.1.3b]
Summary of Classification of Financial Assets (PFRS 9 version 2014)
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Financial assets are recognized on the Statement of Financial Position
Initial recognition when the entity becomes a party to the contractual provisions of the
instrument

Initial recognition
Financial assets are recognized on the Statement of Financial Position when the entity
becomes a party to the contractual provisions of the instrument
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Initial Fair value plus Fair value plus Fair value plus
Fair Value
measurement transaction cost transaction cost transaction cost

Initial measurement
All financial assets are measured initially at fair value, plus, for those financial assets not
classified at fair value through profit or loss, directly attributable transaction costs.

Transaction cost is expensed outright for FVTPL as initial measurement

Debt investment may be acquired thru the following scheme

 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Subsequent
Fair Value Fair Value Fair Value Amortized Cost
measurement

Subsequent measurement
Investment in equity securities with fair value may subsequently be classified as to either
financial assets at (1) FVTPL or (2) FVTOCI.
SUBSEQUENT MEASUREMENT: FVTPL FVTOCI

Measurement at reporting date Fair Value Fair Value

Change in Fair Value (Unrealized gains or Loss) P/L OCI (Equity)

Note:

✓ Unrealized holding gain or loss is also called paper gain or loss.

✓ The unrealized gain or loss that was recognized during the year for the Fair Value through
Other Comprehensive Income is presented in the Statement of Comprehensive Income (SCI).

✓ The accumulated balance of unrealized gain or loss for the Fair Value through Other
Comprehensive Income (FVTOCI) is presented in the Statement ·Financial Position and
Statement of Changes in Equity.
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Subsequent
Fair Value Fair Value Fair Value Amortized Cost
measurement

Subsequent measurement
Investment in bonds(debt investment) classified as financial asset at fair value through profit
or loss (FVTPL) is subsequently measured at fair value, with changes in fair value included in
profit or loss. The formula is as follows:

Nonamortization of Premium or Discount

The premium or discount on the financial asset at fair value through profit or loss is not
amortized at the end of reporting period.
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Subsequent
Fair Value Fair Value Fair Value Amortized Cost
measurement

Subsequent measurement
Subsequent to initial recognition, investment in bonds (debt investment) classified as financial
asset at fair value through other comprehensive income (FVTOCI) is measured at fair value.
However, the amortized cost of the investment will still be computed using effective interest
method. The difference between the fair value and the amortized cost is the cumulative amount
presented in equity.

Journal entries to record amortization of premium or discount and computation of interest

income are actually the same under FAAC and FVTOCI. The only difference is the recognition
of changes in fair value under FVTOCI.

Subsequent to initial recognition, investment in bonds (debt investment) classified as financial

asset at amortized cost (AC) is measured at amortized cost using effective interest method.

Unrealized gain or loss due to change in fair value is ignored.

 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
G/L on
P&L OCI, net of tax OCI, net of tax N/A
remeasurement

Gain/Loss on remeasurement
• Equity Instrument

• Debt Instrument

FVTPL FVTOCI
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Interest income on Effective rate Effective rate
Nominal rate
debt (EIR x Beginning N/A (EIR x Beginning
(NR x Face value)
securities(P&L) amortized cost) amortized cost)

Interest income on debt securities(P&L)

 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives

Dividends on
P&L N/A P&L N/A
equity instruments

Dividends on equity instruments

Other Transactions Subsequent to Initial Recognition of Equity Investments at Fair Value

1. Cash and property dividends received from equity investments at fair value are recognized as
dividend revenue unless they are considered as return . of investments (liquidating dividend)
or if they represent distribution of earnings earned prior to acquisition of shares. Such
dividends are credited to investment account.

2. Property dividends are distributions in the form of the investee's non-cash assets. They are
usually in the. form bf shares held by the investee in other companies. The investor records the
property dividends received as dividend revenue at the assets fair market value.

3. Share dividends (also called bonus issue) and share splits are accounted by the investor by
adjusting the amount of the previous shares held. No formal journal entry is required in the
accounts. A memorandum entry is made indicating the effect of the bonus issue.

4. However, when the bonus issue is in the form of another class of share capital (different from
shares held), the transaction is treated similar to a property dividend. The shares received are
recorded at its fair value with a credit to dividend revenue.
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives

Dividends on
P&L N/A P&L N/A
equity instruments

Dividends on equity instruments

4.) Share/stock rights

Share rights are granted shares to are existing shareholders to subscribe for new shares
before such shares are offered for sale to the public. There is usually no fair value for the
rights upon their receipt; thus, only a memorandum entry is made. An investor that
receives the stock rights has three possible options:

a. Exercise the rights;

b. Sell the rights; or

c. Allows the rights to lapse

 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Subject to
No Yes No Yes
impairment test?

Subject to impairment test?

 FVTPL
Impairment Loss – Debt Classification Debt, Equity or
Derivatives
FVTOCI - Debt FVTOCI - Equity FAAC - Debt

Instrument (FAAC and Impairment Loss N/A P&L N/A P&L

FVTOCI
In accordance with paragraph 5.5.8 of PFRS 9, an entity shall recognize in profit or loss,
as an impairment gain or loss, the amount of expected credit losses (or reversal) that is
required to adjust the loss allowance at the reporting date. Note the following difference,

*The reversal shall not result in a carrying amount of the financial asset that exceeds what
the amortized cost would have been had the impairment not been recognized at the date
the impairment is reversed.
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Impairment Gain
N/A P&L (no limit) N/A P&L (no limit)
(i.e. Reversal)

Impairment Gain (i.e. Reversal)

Statement of Financial Position

FVTOCI

PV = Gross CA PXX

Statement of Comprehensive Income

Impairment Loss – P&L PXX

Loss Allowance XX

========================================

Statement of Financial Position

FAAC

PV = Gross CA PXX

Less: Loss Allowance in SFPXX

Amortized Cost XX

Statement of Comprehensive Income

Impairment Loss – P&L PXX

 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Derecognition
Directly closed to
Gain or Loss - P&L P&L P&L

Derecognition
Retained Earnings
Presentation

Equity Securities

When derecognized, gain or loss on investment in equity securities classified as FVTPL or FVTOCI is computed as
follows:

Formula:

Consideration received xx

Less: Dividend acquired (dividend-on)* xx

Transaction Cost xx *Note:

Net selling price xx
The dividend income of
Add: New asset obtained xx the investment sold is
Less: New liability assumed xx deducted from the
Total xx
consideration received if
the entity sold the
Less: Carrying amount(@ date of derecognition) xx investment in the date of
Gain (loss) on derecognition -P&L xx declaration and date of
record of dividends.
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Derecognition
Directly closed to
Gain or Loss - P&L P&L P&L

Derecognition
Retained Earnings
Presentation
 FVTPL
Classification Debt, Equity or FVTOCI - Debt FVTOCI - Equity FAAC - Debt
Derivatives
Derecognition
Directly closed to
Gain or Loss - P&L P&L P&L
Retained Earnings
Presentation
 FVTPL

UNREALIZED GAIN OR Classification Debt, Equity or

Derivatives
FVTOCI - Debt FVTOCI - Equity FAAC - Debt

LOSS ON FVTOCI: DEBT UG/UL recognized

in OCI
N/A Recycled to P&L
Directly closed to
Retained Earnings
N/A

vs. EQUITY
Note the following difference in accounting for any gain or loss
due to changes in fair value accumulated in other
comprehensive income:
1. FVTOCI (debt) -UG (UL) recognized in equity is recycled
to profit or loss.

2. FVTOCI (equity) - UG (UL) recognized in equity is

transferred directly to retained earnings.
Reclassification
PFRS 9 allows reclassification of debt investment, Therefore, reclassifications to and
from financial asset that are equity investment is prohibited.

Reclassifications from Investment in Associate (PAS 28) to Equity Investment at fair

value (irrevocable choice of designating as FVTPL or FVTOCI). The securities shall be
transferred at fair value at the date of reclassification and any difference between the fair
value and carrying value of the reclassified investment is reported ln profit or loss.
Reclassification of Debt Investments
• Reclassification shall be made when and only when an entity changes its business
model for managing its financial assets.

1. when there is change in management intention;

2. upon temporary disappearance of a particular market; and

3. when transfers of assets are made between existing models.

• Reclassification shall be made prospectively from the date of reclassification. (example:
Reclassification date is September 17, 2021, then the journal entry of reclassification is
to be made at the beginning of the next accounting period January 1, 2022
In a reclassification to FVPL,
• From amortized cost, the new debt investment (FVPL) is recorded at fair value and the difference
between fair value and amortized cost is taken to profit or loss.
• From FVOCI, the new debt investment (FVPL) is recorded at fair value and the cumulative unrealized
gain/loss in OCI is transferred to profit or loss.

ln a reclassification to FVOCI,
• From .amortized cost, the new debt investment (FVOCI) is recorded at fair value and the difference
between fair value and amortized cost is taken to other comprehensive income. The effective interest
rate used as debt investment at amortized cost remains the same.
• From FVPL, the new debt investment (FVOCI) is recorded at fair value and an effective interest rate is
calculated based on the fair value on the date of reclassification.

In a reclassification to amortized cost,

• From FVPL, the new debt investment (at amortized cost) is recorded at fair value, that serves as the
initial cost and ah effective interest rate is calculated based on the fair value on the date of
reclassification.
• From FVOCI, the accumulated unrealized gain/loss and fair value adjustment balance (amounts are the
same), are eliminated in the accounts. The new debt investment (at amortized cost) is recorded at the
amount of the FVOCI, and the same effective interest rate is used, as if it had been designated at
amortized cost from the date of initial recognition.
Investment in Associate
An associate is an entity over which the investor has significant influence.

Significant Influence is the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control of those policies.

Identification of Associates

20% or more – presumed that the investor have significant influence

Less than 20% - presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated.

The existence of significant influence by an investor is usually evidenced in one or more the following ways:

a. representation on the board of directors or equivalent governing body

b. participation in policy-making processes, including participation in decisions about dividends or other

distributions;

c. material transactions between the investor and the investee;

d. interchange of managerial personnel; or

e. Provision of essential technical information

Equity Method
Under the equity method, the investment in an associate or joint venture is initially
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 profit or loss of the investee is recognized in the investor's
profit or loss. Distributions 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
equity that have not been recognized in the investee's profit or loss. 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
directly in equity of the investor.
Adjustment of Investee’s (Associate)
Operations
Upstream Transactions
• profits and losses resulting from 'upstream' and 'downstream' transactions between an investor (including its consolidated
subsidiaries) and an associate are recognized in the investor's financial statements only to the extent of unrelated
investors' interests in the associate. 'Upstream’ transactions are, for example, sales of assets from an associate to the
investor.

Downstream Transactions
• 'Downstream' transactions are, for example, sales of assets from the investor to an associate. The investor's share in the
associate’s profits and losses resulting from these transactions is eliminated.

When "downstream transactions provide evidence of a reduction in the net realizable value of the assets to be sold or
contributed, or of an impairment loss of those assets, those losses shall be recognized in full by the investor.

When upstream transactions provide evidence of a reduction in the net realizable value of the assets to be purchased or of
an impairment loss of those assets, the investor shall recognize its share in those losses.

The share in the profit or loss of an associate is recognized only to the extent of unrelated investors' interest in the associate.
If the transaction is:

a. Downstream sale - eliminate the entire unrealized profit. (i.e. 100%)

b. Upstream sale - eliminate the investor's share in unrealized profit. (percentage of ownership)
Comprehensive Problem – Equity
Investment

Microsoft Excel
Worksheet
Comprehensive Problem – Equity
Investment

Microsoft Excel
Worksheet
Comprehensive Problem – Debt
Investment
Microsoft Excel
Worksheet

Microsoft Excel
Worksheet
Comprehensive Problem – Investment in
Associate

Microsoft Excel
Worksheet
Comprehensive Problem – Investment in
Associate

Microsoft Excel
Worksheet

Microsoft Excel
Worksheet
Comprehensive Problem – Investment in
Microsoft Excel

Associate
Worksheet