International Accounting Standard 28: Applying the Equity Method

Under the IAS 28 equity method, you record an investment in an associate or joint venture at cost, then adjust its carrying amount each reporting period for your share of the investee’s profits, losses, other comprehensive income, and dividends paid. The investment sits on your balance sheet as a single line, but that line moves continuously to reflect what is happening inside the investee. Your income statement picks up your proportionate share of the investee’s results, with certain adjustments for fair value differences identified at acquisition and for transactions between you and the investee.

When IAS 28 Applies

IAS 28 governs investments where you have significant influence or joint control, but not outright control. An associate is an entity over which you have significant influence. A joint venture is a joint arrangement where the parties with joint control have rights to the net assets of the arrangement, as distinct from a joint operation, where parties hold direct rights to specific assets and obligations for specific liabilities.¹

If you control the investee, IAS 28 does not apply. Control triggers full consolidation under IFRS 10.² Significant influence, by contrast, means you can participate in the investee’s financial and operating policy decisions without directing them unilaterally.

Significant influence is presumed at 20 percent or more of the voting power, unless clearly demonstrated otherwise. The presumption is rebuttable in both directions: a 25 percent holder can lack significant influence where another shareholder holds an outright majority and decides everything alone, and a holder of less than 20 percent can have significant influence if practical indicators support it. IAS 28 identifies five common indicators:¹

A seat on the investee’s board of directors or equivalent governing body.
Participation in policy-making decisions, including decisions about dividends, budgets, or strategic direction.
Material transactions between the investor and the investee.
Interchange of managerial personnel between the two entities.
Provision of essential technical information the investee depends on.

Any one of these can establish significant influence on its own. In practice the auditor looks at the totality of the relationship rather than checking boxes mechanically.

A few narrow exceptions exist. Venture capital organizations, mutual funds, and similar entities may measure qualifying investments at fair value through profit or loss instead of using the equity method, and an investment classified as held for sale under IFRS 5 drops out of the equity method entirely.¹

Initial Recognition at Cost

You record the investment at cost on the date it qualifies as an associate or joint venture. Cost means the purchase price plus any directly attributable transaction costs, such as legal and due diligence fees.¹ Nothing hits the income statement at this stage. The income statement effects begin only once the equity method adjustments start rolling through in later periods.

The Ongoing Equity Method Adjustments

After initial recognition, three adjustments drive most of the ongoing work.

Your Share of Profits, Losses, and OCI

When the investee reports a profit, you recognize your proportionate share as income and increase the investment’s carrying amount by the same figure. A 25 percent stake in an associate that earns $1,000,000 produces $250,000 of income and a $250,000 increase to the carrying amount. Losses work the same way in reverse.

You also pick up your share of the investee’s other comprehensive income. Foreign currency translation differences, revaluation surpluses, and similar items flowing through the investee’s OCI get recognized in your own OCI and adjust the carrying amount accordingly.¹

Dividends Reduce the Investment, Not Income

Dividends from the investee are not income under the equity method. You already recognized your share of the earnings that generated those dividends, so treating dividends as income on top of that would double-count. Instead, dividends reduce the investment’s carrying amount, and you receive the cash.¹

Fair Value Differences and Goodwill at Acquisition

When you pay more for the investment than your share of the investee’s identifiable net assets at fair value, that excess sits inside the investment’s carrying amount. Part of it may relate to identifiable assets the investee holds that are undervalued on its own books, and the remainder is goodwill.

Goodwill embedded in an equity method investment is not amortized. IAS 28 explicitly prohibits it.³ The portion of the premium attributable to undervalued depreciable or amortizable assets does need to be consumed over the remaining useful lives of those assets. If part of the excess relates to equipment carried at $2 million but worth $3 million with five years of life left, you reduce your share of the investee’s reported profit by an additional charge equal to your share of the $1 million uplift depreciated over five years. Without this adjustment, your reported share of earnings would be overstated because the investee’s own depreciation is calculated on the lower book value.

The mirror case is a bargain purchase, where your share of the investee’s net fair value exceeds the acquisition cost. That excess is included in your share of the investee’s profit or loss in the acquisition period.

When Losses Push the Balance to Zero

The equity method continues reducing the carrying amount as the investee incurs losses, but it stops once the balance reaches zero. You do not create a negative investment asset under normal circumstances.⁴

If you hold other long-term interests that are effectively part of your net investment, such as long-term loans or preference shares where repayment is neither planned nor likely in the foreseeable future, losses continue against those interests once the equity balance is exhausted. They are absorbed in reverse order of seniority in liquidation, with the lowest-priority instrument absorbed first. Only after all of those are reduced to zero do you recognize a liability for further losses, and only then if you have a legal or constructive obligation or have made payments on the investee’s behalf.⁴

When the investee returns to profit, you do not immediately resume recognizing your share. Recognition resumes only after your cumulative share of subsequent profits equals the cumulative losses you previously did not recognize.

Conforming the Investee’s Numbers Before You Book Them

Uniform Accounting Policies

Your financial statements must use uniform accounting policies for similar transactions. If the investee uses a different inventory valuation method or a different revenue recognition approach, you must adjust the investee’s results to conform to your own policies before calculating your share.¹ That requires enough detail from the investee to recalculate affected line items.

Eliminating Unrealized Profit on Intra-Group Trades

When you and the investee trade with each other, any unrealized profit on goods still in inventory at period-end must be partially eliminated. The economic result is similar in both directions, though the mechanics differ:⁴

Upstream (associate sells to you): the associate recorded the profit. You eliminate your ownership share of the unrealized profit from your equity pickup and reduce the carrying amount. If you hold 30 percent and the associate has $100,000 of unrealized profit on goods still in your inventory, you eliminate $30,000.
Downstream (you sell to the associate): you recorded the full profit. You eliminate your ownership share of the unrealized gain from your own profit and reduce the investment’s carrying amount by the same amount. The portion attributable to unrelated investors in the associate stays.

In both directions, gains and losses are recognized only to the extent of unrelated investors’ interests. Your proportionate share of unrealized profit stays out until the underlying asset leaves the economic group.

Different Reporting Dates

Where the investee’s reporting period ends on a different date from yours, you may use its most recent financial statements as long as the gap is no more than three months.¹ Adjust for any significant transactions or events in the intervening period, and apply the approach consistently.

Testing for Impairment

At each reporting date, assess whether there is objective evidence that the investment may be impaired. Indicators include significant financial difficulty at the investee, a breach of contract, deterioration in market conditions, or a sustained decline in the investee’s share price. If indicators exist, you test the investment under IAS 36.⁵

The test compares the investment’s carrying amount to its recoverable amount, which is the higher of fair value less costs of disposal and value in use. If the carrying amount exceeds the recoverable amount, you recognize an impairment loss in profit or loss. The goodwill embedded in the investment balance is not tested separately; it is part of the overall carrying amount being compared to the recoverable amount.³

Unlike impairment losses on standalone goodwill, which can never be reversed under IFRS, an impairment loss on an equity method investment can be reversed in a subsequent period if conditions improve. The reversal is capped so the carrying amount does not exceed what it would have been had no impairment been recognized in the first place.

Deferred Tax on the Investment

Equity method accounting creates temporary differences between the investment’s carrying amount and its tax base. Your share of the investee’s undistributed earnings increases the carrying amount each period, but those earnings are often not taxable until received as dividends or realized through sale. IAS 12 requires a deferred tax liability on those temporary differences, with one exception: you need not recognize the liability if you can control the timing of the reversal and it is probable the temporary difference will not reverse in the foreseeable future.⁶

Both conditions must be met. Investors in associates often cannot control the timing of dividend distributions because they lack outright control, which makes the exemption harder to claim than it is for subsidiaries. The analysis is fact-specific and typically turns on the investee’s dividend policy and your ability to influence it.

When You Stop Applying the Method

You stop using the equity method when you lose significant influence or joint control. This commonly happens when you sell part of your stake, another party acquires control of the investee, or the investee enters administration or similar proceedings.

On discontinuation, you measure any retained interest at fair value. That fair value becomes the starting point for accounting for the remaining investment as a financial asset under IFRS 9.¹ The difference between the fair value of the retained interest plus any disposal proceeds and the investment’s carrying amount at the discontinuation date is recognized in profit or loss.

Amounts previously sitting in OCI that relate to the investee get reclassified on the same basis as if the investee had disposed of the related assets directly. Cumulative foreign currency translation differences, for example, move from OCI to profit or loss at that point.¹

Separate Financial Statements Are Different

IAS 28 prescribes the equity method for consolidated or individual financial statements where the investor has associates or joint ventures. Separate (unconsolidated) financial statements sit under IAS 27, which allows a choice of three approaches: cost, IFRS 9 fair value, or the equity method as described in IAS 28.⁷ The same method must apply to all investments within a given category, meaning all associates or all joint ventures.

Disclosures

The measurement rules live in IAS 28, but the detailed disclosure requirements for interests in associates and joint ventures sit primarily in IFRS 12. For each material associate or joint venture, disclose the name, nature of the relationship, principal place of business, ownership percentage, and whether the investment is measured using the equity method or at fair value.⁸

For material equity method investments, provide summarized financial information covering the investee’s aggregate assets, liabilities, revenues, and profit or loss. Disclose any significant restrictions on the investee’s ability to transfer funds, such as loan covenants or regulatory requirements. If the investee’s financial statements used in applying the equity method are prepared as of a different date, disclose the fact and the reason. Individually immaterial associates and joint ventures can be disclosed in aggregate.⁸

1
IFRS Foundation. IAS 28 Investments in Associates and Joint Ventures
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IFRS Foundation. IFRS 10 Consolidated Financial Statements
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IFRS Foundation. IAS 28 Investments in Associates and Joint Ventures
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IFRS Foundation. IAS 28 Investments in Associates and Joint Ventures
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IFRS. IAS 36 Impairment of Assets
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IFRS Foundation. Equity Method – Initial Recognition of an Investment in an Associate – Deferred Taxes
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IFRS Foundation. IAS 27 Separate Financial Statements
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IFRS Foundation. IFRS 12 Disclosure of Interests in Other Entities