IAS 28 governs investments in associates and joint ventures using the equity method. An associate is an entity over which the investor has significant influence — usually a 20% to 50% holding — without control. Under the equity method, the investment starts at cost and is adjusted for the investor’s share of the investee’s profits, losses, and other changes in equity.
Not every investment is a subsidiary to be consolidated, nor a passive holding to be fair-valued — many sit in between, and IAS 28 governs them. Associates and joint ventures, where the investor has significant influence or joint control but not full control, are accounted for using the equity method. This guide explains significant influence, the equity method mechanics, and how associates differ from subsidiaries and simple investments.
What is an associate?
An entity over which the investor has significant influence — the power to participate in financial and operating policy decisions without controlling them.
What is significant influence?
Presumed when the investor holds 20% to 50% of voting power, though it can exist with less or be absent with more, depending on circumstances.
What is the equity method?
The investment starts at cost and is adjusted for the investor’s share of the investee’s post-acquisition profits, losses, and other equity movements.
What is significant influence?
Significant influence is the power to participate in the financial and operating policy decisions of an investee, but not to control or jointly control those policies. IAS 28 presumes significant influence when an investor holds, directly or indirectly, 20% or more of the voting power, unless it can be clearly demonstrated otherwise. Below 20%, significant influence is presumed absent, again unless clearly demonstrated.
These are rebuttable presumptions, not bright lines. Significant influence can exist below 20% — through board representation, participation in policy-making, material transactions, or the interchange of management — and can be absent above 20% if another party controls the investee. Evidence of significant influence includes representation on the board, participation in decisions including dividends, and provision of essential technical information. Assessing it requires looking at the substance of the relationship, not just the shareholding.
How does the equity method work?
Under the equity method, the investment in an associate or joint venture is initially recognised at cost. Thereafter, the carrying amount is increased or decreased by the investor’s share of the investee’s profit or loss for the period, recognised in the investor’s profit or loss. Distributions received from the investee reduce the carrying amount, and adjustments are also made for the investor’s share of the investee’s other comprehensive income.
The equity method is sometimes described as one-line consolidation: rather than combining the investee’s assets and liabilities line by line, the investor reflects its interest as a single net investment, with its share of the investee’s results as a single line in profit. This captures the investor’s economic interest in the investee’s performance without bringing the investee’s individual assets and liabilities into the group balance sheet, distinguishing it clearly from the full consolidation of subsidiaries under IFRS 10.
How are joint arrangements classified?
Joint arrangements, governed by IFRS 11 and accounted for under IAS 28 where they are joint ventures, arise where two or more parties have joint control — the contractually agreed sharing of control requiring unanimous consent for the relevant decisions. IFRS 11 splits joint arrangements into joint operations, where the parties have rights to the assets and obligations for the liabilities and account for their share directly, and joint ventures, where the parties have rights to the net assets and apply the equity method.
The classification depends on the structure, legal form, contractual terms, and other facts and circumstances of the arrangement, not merely on what the parties call it. For groups that operate through partnerships and consortia — common in energy and infrastructure projects — correctly distinguishing a joint operation from a joint venture is essential, because the accounting differs fundamentally between proportionate recognition and the equity method.
How are losses and impairment handled under the equity method?
When an associate or joint venture incurs losses, the investor recognises its share until the carrying amount of the investment is reduced to zero. Beyond that point, the investor stops recognising further losses unless it has incurred legal or constructive obligations or made payments on behalf of the investee. If the investee subsequently returns to profit, the investor resumes recognising its share only after its share of profits equals the share of losses not previously recognised.
The equity-accounted investment is also tested for impairment. After applying the equity method, the investor assesses whether there is objective evidence that the investment is impaired and, if so, compares its carrying amount with its recoverable amount, recognising any impairment loss. Because the investment is a single net asset, the impairment test is applied to the investment as a whole rather than to the underlying assets, a distinction from the CGU-level testing within a consolidated subsidiary.
Why does the distinction between influence levels matter so much?
The level of influence an investor has over an investee determines the entire accounting treatment, and the boundaries between categories carry significant consequences. A passive investment below significant influence is measured at fair value under IFRS 9; an associate or joint venture with significant influence or joint control uses the equity method under IAS 28; and a controlled subsidiary is fully consolidated under IFRS 10. Each step brings more of the investee’s economics into the investor’s accounts.
Because these boundaries change how an investee appears in the group accounts — from a single fair-valued line, to a single equity-accounted line, to full line-by-line consolidation — assessing influence and control correctly is fundamental to faithful group reporting. A change in influence, such as gaining or losing significant influence or control, can trigger a remeasurement and a change in method. Understanding where each investment sits on this spectrum is central to the group reporting discipline explored across our IFRS hub.
How are transactions between an investor and its associate handled?
Transactions between an investor and its associate or joint venture require careful treatment under the equity method, because the investor effectively owns part of the counterparty. Gains and losses on transactions with an associate are eliminated to the extent of the investor’s interest in the associate. So if a company sells inventory to an associate at a profit and the associate still holds that inventory at period end, the investor eliminates its share of the unrealised profit.
This partial elimination reflects the principle that an entity cannot recognise profit on dealings with itself, and it applies to both upstream transactions (associate to investor) and downstream transactions (investor to associate). The mechanics are less extensive than the full elimination required in consolidation, but they are easy to overlook, particularly where there is a regular flow of trading between a group and its associates. Tracking these transactions and eliminating the appropriate share is part of accurate equity accounting.
When do you stop or start using the equity method?
The equity method begins when an investment first qualifies as an associate or joint venture — when significant influence or joint control is obtained — and ceases when that influence or joint control is lost. On gaining significant influence over a former simple investment, the investment is brought into the equity method. On losing significant influence, any retained interest is remeasured to fair value, with the difference recognised in profit, and subsequently accounted for under IFRS 9.
Transitions in the other direction matter too: if an investor gains control of a former associate, it stops using the equity method and begins full consolidation under IFRS 10, remeasuring its previously held interest to fair value as a step acquisition. These boundary events trigger remeasurement and a change in accounting method, with real effects on reported profit. Recognising when an investment crosses these thresholds is essential, and it connects the equity method to the consolidation and combination standards explored across our IFRS hub.
How is the equity-method investment presented and disclosed?
An investment accounted for using the equity method is presented as a single line within non-current assets on the statement of financial position, and the investor’s share of the associate’s or joint venture’s profit or loss is presented as a single line in the statement of profit or loss. The investor’s share of the investee’s other comprehensive income is similarly presented within the investor’s other comprehensive income. This one-line presentation is what distinguishes equity accounting from the line-by-line combination of consolidation.
IFRS 12 requires disclosures that help users evaluate the nature and risks of these interests, including summarised financial information for material associates and joint ventures, the nature of the investor’s relationship, and any significant restrictions. For groups with significant associates — common where local partners hold stakes in joint projects — these disclosures can be substantial, requiring the investee to supply information on a timeline and in a format that fit the group’s reporting, a coordination challenge that recurs across our IFRS hub.
Why does the equity method matter for understanding group performance?
The equity method can hide as much as it reveals, which is why understanding it matters for analysing group performance. Because an associate’s results appear as a single net line, the group’s reported revenue does not include the associate’s revenue, and the associate’s debt does not appear in the group’s liabilities. A group with significant associates can therefore have economic exposure and underlying activity well beyond what its consolidated revenue and balance sheet suggest at first glance.
Analysts looking at a group with material associates often examine the share of associate profit, the carrying amount of the investments, and the IFRS 12 disclosures to understand the scale of activity conducted through equity-accounted entities. For groups that operate significant parts of their business through joint ventures and associates — a common structure in energy and infrastructure — the equity-accounted line can represent a substantial portion of economic activity. Reading it in context is part of interpreting group accounts accurately, a recurring theme throughout our IFRS hub.
Frequently Asked Questions
What percentage makes an investment an associate?
Significant influence is presumed at 20% to 50% of voting power, but it is a rebuttable presumption — the actual relationship governs the conclusion.
How is the equity method different from consolidation?
The equity method reflects the investment as a single net line adjusted for the investor’s share of results; consolidation combines the investee’s assets and liabilities line by line.
Do you recognise losses below zero?
Generally no. Losses are recognised until the investment reaches zero, then stopped unless the investor has obligations or has made payments for the investee.
How are joint ventures accounted for?
Joint ventures under IFRS 11 are accounted for using the equity method under IAS 28; joint operations are accounted for by recognising the party’s share of assets, liabilities, income, and expenses.
