Under IAS 28 an investor with significant influence over an associate, or joint control of a joint venture, carries the investment at cost and then adjusts it each year for its share of the investee’s profits, losses and other comprehensive income, less dividends received. Losses stop being recognised once the net investment reaches nil, the whole carrying amount is tested for impairment as one asset, and profits on sales between investor and associate are eliminated to the extent of the investor’s own interest.
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Who has to use the equity method under IAS 28?
IAS 28 Investments in Associates and Joint Ventures applies to every entity that has joint control of, or significant influence over, an investee (paragraph 2). Significant influence is the power to participate in the financial and operating policy decisions of the investee without control or joint control. Holding 20 per cent or more of the voting power, directly or through subsidiaries, creates a presumption of significant influence, and holding less than 20 per cent creates the opposite presumption; either can be rebutted (paragraph 5). Board representation, participation in policy making, material transactions, interchange of managers and essential technical information are the usual evidence (paragraph 6).
The equity method is then compulsory (paragraph 16) unless an exemption in paragraphs 17 to 19 applies, such as a qualifying intermediate parent, or a venture capital organisation or fund electing fair value through profit or loss under IFRS 9. In the UK this standard is relevant to groups reporting under IFRS; see when UK companies use IFRS. Control itself is covered in IFRS 10.
How does the equity method work from year to year?
Paragraph 10 sets out the mechanics. The investment is first recognised at cost. Its carrying amount then rises or falls by the investor’s share of the investee’s profit or loss after acquisition, which is reported in the investor’s profit or loss. Distributions received reduce the carrying amount. The investor’s share of the investee’s other comprehensive income, such as revaluation surpluses or foreign exchange differences, goes to the investor’s own other comprehensive income.
On acquisition, any excess of cost over the investor’s share of the net fair value of the investee’s identifiable assets and liabilities is goodwill. It stays inside the carrying amount of the investment and may not be amortised (paragraph 32(a)). If the share of net fair value exceeds cost, the excess is income in the year of acquisition (paragraph 32(b)). Later results are adjusted for fair value uplifts, such as extra depreciation.
Where the associate’s reporting date differs, the gap may not exceed three months and significant events in it must be adjusted for (paragraphs 33 and 34). The associate’s figures must also be aligned to the investor’s accounting policies (paragraphs 35 and 36).
Worked example
Illustration only. An investor pays £300,000 for 30 per cent of a company whose identifiable net assets have a fair value of £800,000. The investor’s share is £240,000, so £60,000 of goodwill is embedded in the investment. One building in the associate is worth £100,000 more than its book value and has 20 years of life left, so the associate’s profit needs an extra £5,000 of depreciation a year.
| Item | £ |
|---|---|
| Cost of investment | 300,000 |
| Share of associate’s reported profit of £100,000 (30%) | 30,000 |
| Less share of extra depreciation (30% of £5,000) | (1,500) |
| Less dividend received (30% of £40,000) | (12,000) |
| Carrying amount at year end | 316,500 |
The income statement shows £28,500 as the share of profit of associates; the £12,000 dividend is not income a second time.
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What happens when the associate makes losses?
When the investor’s share of losses equals or exceeds its interest in the associate, it stops recognising further losses (paragraph 38). The interest includes not only the equity accounted carrying amount but also long term interests that in substance form part of the net investment, such as preference shares or loans for which settlement is neither planned nor likely in the foreseeable future. Trade balances and adequately secured loans are excluded. Losses beyond the ordinary share investment are applied to those other interests in reverse order of seniority in a liquidation. IFRS 9, including its impairment rules, is applied to the long term interests first, before the IAS 28 loss allocation (paragraph 14A).
Once the interest is reduced to nil, further losses are provided for, as a liability, only to the extent that the investor has incurred legal or constructive obligations or made payments on the associate’s behalf (paragraph 39). If the associate later returns to profit, the investor resumes recognising its share only after that share has covered the losses not recognised.
Illustration only. An investment carried at £50,000 and a long term loan of £20,000 to the associate face a share of losses of £90,000. The first £50,000 reduces the investment to nil, the next £20,000 is applied to the loan, and the remaining £20,000 is tracked off balance sheet unless the investor has guaranteed the associate’s debts.
How is an equity accounted investment tested for impairment?
After applying the equity method, including the loss rules, the investor looks for objective evidence that the net investment is impaired (paragraph 40). Paragraph 41A lists loss events such as significant financial difficulty of the associate, a breach of contract or probable insolvency. A credit rating downgrade or fall in fair value is not on its own evidence of impairment (paragraph 41B), but a significant or prolonged decline in fair value below cost is (paragraph 41C).
Because goodwill inside the investment is not separately recognised, it is not tested separately. Instead the entire carrying amount is tested under IAS 36 as a single asset, comparing it with recoverable amount, the higher of value in use and fair value less costs of disposal (paragraph 42). The impairment loss is not allocated to goodwill or any other asset within the investment, so it can be reversed if recoverable amount later increases. For the general IAS 36 approach to goodwill in subsidiaries, see the IAS 36 goodwill impairment test.
How are sales between the investor and the associate treated?
Gains and losses on upstream transactions (the associate selling to the investor) and downstream transactions (the investor selling or contributing assets to the associate) are recognised only to the extent of unrelated investors’ interests in the associate; the investor’s own share is eliminated (paragraph 28). In a January 2018 agenda decision the IFRS Interpretations Committee confirmed that unrelated investors means investors other than the entity and its consolidated subsidiaries.
Losses are treated differently. If a downstream sale shows a fall in net realisable value or an impairment of the assets, the investor recognises the loss in full; on an upstream sale it recognises its share (paragraph 29).
Illustration only. A 25 per cent investor sells stock to its associate at a profit of £40,000, and the associate still holds the stock at the year end. The investor eliminates its £10,000 share of the profit and recognises £30,000, the part attributable to the other investors.
Amendments issued in 2014 require a full gain or loss where the assets sold or contributed constitute a business (paragraph 31A). The IASB has deferred their effective date indefinitely; paragraph 45C says they apply from a date to be determined, although earlier application is permitted.
When does the equity method stop?
The equity method ends when the investment ceases to be an associate or joint venture (paragraph 22). If it becomes a subsidiary, IFRS 3 and IFRS 10 take over. If the retained interest is a financial asset, it is remeasured to fair value and the gain or loss goes to profit or loss, with cumulative exchange differences reclassified (paragraph 23). A move between associate and joint venture does not trigger remeasurement (paragraph 24), and an investment meeting the held for sale criteria moves to IFRS 5 (paragraph 20).
Does the investor use the equity method in its own separate accounts?
Not necessarily. Paragraph 44 of IAS 28 refers to IAS 27, and paragraph 10 of IAS 27 lets an entity preparing separate financial statements account for investments in subsidiaries, joint ventures and associates at cost, under IFRS 9, or using the equity method, applying the same accounting to each category. The UK GAAP position for parents is covered in investments in subsidiaries in parent accounts.
What is changing, and how does UK GAAP compare?
The IASB published an exposure draft, Equity Method of Accounting, IAS 28 (revised 202x), in September 2024. At its September 2026 meeting it completed redeliberations and agreed to start balloting. It covers initial cost, changes in ownership while influence is retained and transactions with associates. The IASB expects to issue it in the first half of 2027 with an effective date of 1 January 2029. Until then, the current text applies. Entities reporting under UK GAAP follow FRS 102 Section 14 instead; see FRS 102 associates.
What mistakes come up most often?
- Amortising goodwill embedded in the investment, or testing it separately from the rest of the carrying amount.
- Treating dividends as income on top of the share of profit, which double counts the result.
- Stopping losses at the share investment while ignoring long term loans that form part of the net investment.
- Forgetting to eliminate the investor’s share of unrealised profit on stock or assets sold to or bought from the associate.
- Booking an impairment simply because a listed associate’s share price dipped, without the evidence paragraphs 41A to 41C require.
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Sources
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.