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Definition:
Investment in Associates are those equity investments where the investor hold more than 20% but less than 50% stake of the investee entity. Investment of more than 20% prima facie signifies significant influence in the operations unless proved otherwise. In the standalone financial statements, investments to be accounted at the cost or using equity method. In the equity method, own share of net income of investee company needs to be added to the cost of investments. Under the equity method of accounting, own share of net income is to be added to the value of investments. Any dividend received from associates is to be accounted by reducing the value of investment in associates.
Level of Ownership in an entity determines the status of the relationship,
(i) holding >50% (controlling stake - subsidiary),
(ii) holding >20% & <50% (significant influence - associate) and
(iii) holding <20% (investment at fair value).
Accounting Entries:
Accounting under Cost Method:
Payments made to Investment in Associates:
Investment in Associates A/c DR
Cash/Bank A/c CR
Amount: Payments made to acquire investment in associates.
Dividend received from Associates:
Cash/Bank A/c DR
Dividend Income A/c CR
Amount: Dividend amount received from Associate company
Disposal of Investment in Associates:
Cash/Bank A/c DR
Loss on Sale A/c DR
Investment in Associates A/c CR
Gain on Sale A/c CR
Amount: If the sale price > book value, then gain. If the sale price < book value, then loss.
Book value = Cost of investment in associates plus/minus share of net income in associates.
Accounting under Equity method:
Payments made to Investment in Associates:
Investment in Associates A/c DR
Cash/Bank A/c CR
Amount: Payments made to acquire investment in associates.
Recognition of share in net income for the period:
Investment in Associates A/c DR
Income from share in Associates A/c CR
Amount: Portion of net income pertaining to the investor's entity accounted.
Dividend received from Associates:
Cash/Bank A/c DR
Investment in Associates A/c CR
Amount: Dividend amount received from Associate company
Disposal of Investment in Associates:
Cash/Bank A/c DR
Loss on Sale A/c DR
Investment in Associates A/c CR
Gain on Sale A/c CR
Amount: If the sale price > book value, then gain. If the sale price < book value, then loss.
Book value = Cost of investment in associates plus/minus share of net income in associates.