Lecture 01: Investment in Associate. Investment Accounting. [Intermediate Accounting]

Significant influence is defined as the power to participate in the financial and operating policy decisions of the investee. This participation can be demonstrated through various factors such as representation on the board, participation in policy-making, material transactions between the investor and investee, interchange of managerial personnel, and provision of essential technical information.

A presumption exists that if an investor holds directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, the investor has significant influence. This presumption holds unless it can be clearly demonstrated otherwise. Conversely, holding less than 20% generally presumes no significant influence, but this can be rebutted.

The 20% rule is a presumption, not an absolute. An investor holding more than 20% might not have significant influence if factors clearly demonstrate a lack of influence. Similarly, an investor with less than 20% can still demonstrate significant influence through active participation and other means if they can provide clear evidence.

When an investor has significant influence, the investment is initially measured at cost. This includes the acquisition cost and any directly attributable transaction costs. Subsequently, the equity method of accounting is used for these investments.

The equity method reflects the economic relationship between the investor and the investee. Under this method, the investment account is adjusted for the investor's share of the investee's profit or loss and dividends received. The investment income increases the investment balance, while dividends decrease it.

Investments in associates are subject to impairment testing. Impairment loss is recognized if the carrying amount of the investment exceeds its recoverable amount. The recoverable amount is the higher of fair value less costs to dispose or value in use. If impaired, an expense is recognized, and the investment balance is reduced.

An investment can be recovered through two primary options: selling the investment or benefiting from the future cash flows generated by the investee through dividends.