IAS 28: Associates and the equity method
Significant influence, the equity method one line, and preparing a consolidated statement of financial position with a subsidiary and an associate.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: An associate is a company you have significant influence over (usually 20–50% of the votes), but don’t control.
The key idea: you don’t add its assets line by line. Instead you show one line, “Investment in associate”, at cost plus your share of its profits since you bought it, less dividends received and impairment. That’s the equity method.
Example. A buys 40% of B for 500. B makes a profit of 200. A’s investment becomes 500 + 40% × 200 = 580, and A shows 80 as profit from associate.
Key words
- Associate
- An entity over which the investor has significant influence, but not control or joint control.Example: A company owning 30% of another and sitting on its board.
- Significant influence
- The power to participate in financial and operating policy decisions, but not to control them. Presumed at 20% or more of the votes.Example: Board representation, taking part in policy-making, swapping managers.
- Equity method
- The investment is recorded at cost, then adjusted for the investor’s share of the associate’s profit or loss and OCI, less dividends and impairment.Example: Cost 25,000 + share of profit 3,000 − dividend 1,500 = 26,500.
- One line
- The associate appears as a single line in the SoFP (investment) and a single line in P/L (share of profit), not added line by line.Example: “Share of profit of associate 80” above profit before tax.
- Joint venture
- An arrangement where parties with joint control have rights to the net assets. Also equity accounted under IAS 28 (see IFRS 11).Example: Two companies each owning 50% of a new venture.
Learn
Is it an associate?
| Holding | Usually | Accounting |
|---|---|---|
| More than 50% (control) | Subsidiary | Consolidate line by line (IFRS 10) |
| 20% to 50% (significant influence) | Associate | Equity method (IAS 28) |
| Below 20% | Simple investment | IFRS 9 (fair value) |
20% is only a presumption. Below 20%, there can still be significant influence if it is clearly shown, for example by:
- representation on the board of directors
- participation in policy-making
- material transactions between investor and investee
- interchange of managerial personnel
- provision of essential technical information
The equity method
| Investment in associate | Note |
|---|---|
| Cost of investment | Initial recognition at cost |
| + share of post-acquisition profit (and OCI) | Investor % × associate’s profit since acquisition |
| − dividends received from the associate | Dividends reduce the investment, they are not income |
| − impairment | Charged to profit or loss |
| = Carrying amount | Shown in non-current assets |
- Goodwill is not calculated separately: it is included in the cost of the investment and not amortised.
- In profit or loss, the share of the associate’s profit is a single line, “share of profit of associate”, before profit before tax. (Under IFRS 18 it sits in the investing category.)
- A dividend received: Dr Cash, Cr Investment in associate.
Exemptions: don’t use the equity method if the investment is held for sale (IFRS 5), or if the parent is exempt from preparing consolidated accounts under IFRS 10.
A group with a subsidiary and an associate
Do the subsidiary workings as normal (net assets, goodwill, NCI), then add two more:
| Working | Content |
|---|---|
| Group retained earnings | Parent’s RE + share of subsidiary’s post-acquisition profits + share of associate’s post-acquisition profits − impairment of associate |
| Investment in associate | Cost + share of associate’s post-acquisition profits − impairment |
The associate’s assets and liabilities are never added in.
Watch it explained
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Worked example
From the workshop. Parent owns 60,000 of Subsidiary’s 75,000 shares (80%), bought 3 years ago when Subsidiary’s retained earnings were 15,000. Subsidiary’s non-current assets were worth 5,000 more than book value (10 years’ life left). Full goodwill: NCI fair value at acquisition 24,000. Parent also owns 12,000 of Associate’s 40,000 shares (30%), bought 1 year ago for 30,000; Associate’s profit for the year is 26,000 and the investment is impaired by 1,700. Figures in £000.
| Net assets of Subsidiary | At acquisition | At year end |
|---|---|---|
| Share capital | 75 | 75 |
| Retained earnings | 15 | 51 |
| Fair value adjustment | 5 | 5 |
| Extra depreciation (5 ÷ 10 × 3 years) | — | (1.5) |
| Total | 95 | 129.5 |
Post-acquisition profits = 129.5 − 95 = 34.5.
| Working | £000 |
|---|---|
| Goodwill: 92 + 24 − 95 | 21.0 |
| NCI: 24 + 20% × 34.5 | 30.9 |
| Investment in associate: 30 + 30% × 26 − 1.7 | 36.1 |
| Group retained earnings: 114 + 80% × 34.5 + 30% × 26 − 1.7 | 147.7 |
| Consolidated SoFP of Parent group | £000 |
|---|---|
| Goodwill | 21.0 |
| PPE (90 + 80 + 5 − 1.5) | 173.5 |
| Investment in associate | 36.1 |
| Current assets (88 + 50) | 138.0 |
| Total assets | 368.6 |
| Share capital | 175.0 |
| Retained earnings | 147.7 |
| Non-controlling interest | 30.9 |
| Liabilities (11 + 4) | 15.0 |
| Total equity and liabilities | 368.6 |
The associate’s PPE of 60 and current assets of 10 are not added: only the one-line investment appears. (The associate was bought a year ago, so its profit for the year is all post-acquisition.)
Practice questions
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