How to Apply the Equity Method for Associates and Joint Ventures Under IAS 28

Significant influence: the IAS 28.5–6 rebuttable presumption

IAS 28 applies when the investor has significant influence. IAS 28.5 creates a rebuttable presumption: if the investor holds 20% or more of the voting power, significant influence exists unless it can be clearly demonstrated that this is not the case. Below 20%, significant influence is presumed absent unless it can be clearly demonstrated.

The presumption is rebuttable in both directions. A 25% stake doesn’t automatically give significant influence if the remaining 75% is held by a single shareholder who controls the board, blocks the investor from participation in policy decisions, and makes all operating decisions unilaterally. Conversely, a 15% stake can confer significant influence if the investor has board representation, participates in policy-making, provides essential technical information, or engages in material intercompany transactions (IAS 28.6).

IAS 28.6 lists the indicators. Board representation is the strongest single indicator. Participation in policy-making processes (including dividend decisions) is the second. Material transactions between the investor and investee, interchange of managerial personnel, and provision of essential technical information round out the list. The standard doesn’t prescribe how many indicators you need. One strong indicator (board seat plus policy influence) can be sufficient.

For the audit file, the question isn’t just “does significant influence exist?” but “is it documented?” If the client holds exactly 20% and claims significant influence, the file should contain evidence: board minutes showing the investor’s representative participating, correspondence on policy matters, or a shareholders’ agreement granting specific rights. If the client holds 35% and the file assumes significant influence without any corroboration, that assumption is probably correct but not documented. IAS 28.5 creates the presumption; the file should show that the presumption hasn’t been rebutted.

The equity method mechanics that files get wrong

The equity method starts with cost. IAS 28.10 states: the investment is initially recognised at cost and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. Distributions received from the investee reduce the carrying amount.

The full roll-forward has five components, and most files only capture two of them.

Component 1: Share of profit or loss. The investor recognises its share of the investee’s profit or loss in its own profit or loss. If the associate reports profit of €800K and the investor holds 30%, the investor recognises €240K. This one, everyone gets right.

Component 2: Distributions. Dividends received from the associate reduce the carrying amount of the investment (IAS 28.10). They are not income. If the associate declares a dividend of €200K and the investor’s share is €60K, the investment carrying amount decreases by €60K. The first error typically appears at this step. Files that recognise the dividend as income (instead of reducing the investment) double-count: once through the share of profit, once through dividend income. IAS 28.10 is explicit. Distributions reduce carrying amount.

Component 3: Share of OCI. IAS 28.10 requires the investor to recognise its share of the associate’s other comprehensive income in the investor’s OCI. If the associate revalues property upward by €500K through OCI, the investor recognises €150K (at 30%) in its own OCI, with a corresponding increase in the carrying amount of the investment. Files frequently miss this, particularly for associates that revalue property under IAS 16 or IAS 40, or that have defined benefit plan remeasurements under IAS 19.

Component 4: Elimination of unrealised profits. Covered in the next section. Almost always missed.

Component 5: Uniform accounting policies. IAS 28.35 requires the investor to adjust the associate’s financial statements if the associate uses accounting policies different from the investor’s. If the investor uses the cost model for PPE and the associate uses the revaluation model, the investor must adjust the associate’s results to reflect what they would have been under the investor’s policies before recognising its share. This is frequently impracticable for non-Big 4 auditors because the information isn’t available from the associate. IAS 28.36A permits use of the most recent available financial statements if the associate’s reporting date differs, but the accounting policy alignment requirement in IAS 28.35 has no similar relief.

The reporting date difference issue

IAS 28.33 requires the investor and associate to have the same reporting date. Where reporting dates differ, IAS 28.34 permits a maximum gap of three months between the end of the reporting period of the associate and that of the investor. If the investor’s year-end is 31 December and the associate’s is 30 September, IAS 28.34 permits use of the September financial statements as the basis for equity accounting, but the investor must adjust for the effects of significant transactions or events between 30 September and 31 December (IAS 28.34).

This adjustment requirement is not optional. If the associate declares a significant dividend, reports a material loss, or undergoes a restructuring between its reporting date and the investor’s reporting date, the investor’s equity method calculation must reflect it.

Eliminating unrealised profits under IAS 28.28

IAS 28.28 requires elimination of unrealised profits and losses on transactions between the investor and associate, to the extent of the investor’s interest in the associate. The elimination applies regardless of which direction the transaction flows.

Downstream transactions (investor sells to associate): the investor sold goods to the associate for €300K with a margin of 40%. Cost to investor: €180K. At year-end, the associate still holds €100K of those goods in inventory (at the transfer price). Unrealised profit: €100K × 40% = €40K. For downstream transactions, the full unrealised profit of €40K is in the investor’s financial statements. IAS 28.28 requires elimination to the extent of the investor’s interest: €40K × 30% = €12K against the carrying amount of the investment.

Upstream transactions (associate sells to investor): the associate sold goods to the investor for €200K with a margin of 35%. The investor still holds €80K of those goods. Unrealised profit in the associate’s books: €80K × 35% = €28K. The investor’s share of that unrealised profit: 30% × €28K = €8.4K. This amount is eliminated from the investor’s share of the associate’s profit and from the carrying amount of the investment.

The distinction matters for the working paper because the accounting entry differs. Downstream: reduce revenue and reduce the investment. Upstream: reduce share of associate’s profit and reduce the investment.

Files miss this entirely when the intercompany transactions aren’t large enough to seem material in isolation. But if the investor and associate trade regularly, the cumulative unrealised profit can be material even when individual transactions aren’t. Check the intercompany sales ledger, not just the individual invoice amounts.

When the investee reports losses exceeding the investment

IAS 28.38–39 deal with an associate that keeps losing money. The investor recognises its share of losses until the carrying amount of the investment reaches zero. After that, the investor stops recognising further losses unless the investor has incurred legal or constructive obligations or made payments on behalf of the associate.

The carrying amount for this test includes not just the equity-accounted investment line, but also long-term receivables that in substance form part of the investor’s net investment in the associate (IAS 28.38). A long-term loan to the associate that has no planned repayment date, no security, and functions as permanent capital is part of the net investment. Trade receivables with normal credit terms are not.

When the associate returns to profitability, the investor only resumes recognising its share of profits after its share of profits equals the share of losses not recognised during the suspension period (IAS 28.39).

Document the components of the net investment (equity-accounted balance, long-term loans, other items) separately. If losses have reduced the investment to nil and there’s a €300K long-term loan, the losses continue to be absorbed against the loan balance before recognition stops. Files that ignore the loan component stop recognising losses too early.

Practical documentation for loss-making associates

When an associate reports losses, the equity method roll-forward becomes more complex because you need to track the cumulative unrecognised losses. The working paper should show a running total: opening carrying amount, share of current-year loss, closing carrying amount (floored at zero unless net investment items exist), and the cumulative loss not recognised. This cumulative figure carries forward each year and determines when profit recognition resumes.

For audit purposes, the most common error is recognising the share of losses against the investment line without checking whether long-term receivables form part of the net investment. IAS 28.38 doesn’t give a bright-line test for when a receivable “in substance” forms part of the net investment. The indicators are: no fixed repayment schedule, subordination to other creditors, no security, and settlement is neither planned nor likely in the foreseeable future. A shareholder loan with these characteristics is part of the net investment. A trade receivable on standard 30-day terms is not, even if the amounts are large.

If your client has both an equity-accounted investment and a long-term receivable from the same associate, and the associate is loss-making, you need to document the classification of that receivable as either part of the net investment (losses absorbed after equity reaches nil) or a separate financial asset (tested for impairment under IFRS 9 independently). Getting this classification wrong changes both the income statement and the balance sheet.

Impairment of equity-accounted investments

IAS 28.40 requires the investor to apply IAS 39/IFRS 9 impairment requirements to interests in associates after the equity method has been applied. In practice, this means applying IAS 36. The entire carrying amount of the investment (including any goodwill embedded in it from the original acquisition) is tested as a single asset.

IAS 28.41A states that impairment indicators include any factors from IAS 36.12 plus two additional indicators specific to associates: a distribution from the associate that exceeds total comprehensive income in the period (suggesting the investment’s value may have reduced), and the carrying amount exceeding the investee’s book value of net assets including associated goodwill.

The impairment test compares the carrying amount to the recoverable amount (higher of fair value less costs of disposal and value in use). Value in use for an equity-accounted investment is typically the present value of estimated future cash flows expected from dividends and the ultimate disposal. If the associate is unlisted and the investor’s interest is not readily marketable, fair value less costs of disposal may require a Level 3 fair value measurement.

One practical problem: goodwill is not separately identifiable in an equity-accounted investment. It’s embedded in the single carrying amount. You cannot test goodwill for impairment separately. The entire investment is the unit of account. If the investment is impaired, the loss is allocated first to any goodwill (IAS 28.42), then to the remaining carrying amount. But since the goodwill isn’t separated on the balance sheet, the impairment loss appears as a single amount against the investment line.

Worked example: De Vries Transport B.V.

Scenario: Bakker Distributie N.V. is a Dutch distribution company with €62M revenue. Bakker holds 35% of De Vries Transport B.V. (an associate). Both have a 31 December 2024 year-end. The investment was acquired in 2021 for €2.8M when De Vries’s identifiable net assets had a fair value of €6.4M (Bakker’s share: €2.24M). Embedded goodwill at acquisition: €2.8M − €2.24M = €560K. Carrying amount at 1 January 2024: €3,020K.

Step 1: Share of profit

De Vries reports profit after tax of €920K for 2024. Bakker’s share: 35% × €920K = €322K.

Step 2: Dividend

De Vries declared a dividend of €300K in November 2024, paid December 2024. Bakker’s share: 35% × €300K = €105K.

Step 3: Share of OCI

De Vries revalued its main warehouse upward by €400K through OCI under IAS 16. Bakker’s share: 35% × €400K = €140K.

Step 4: Unrealised profit elimination

Bakker sold fuel supplies to De Vries during 2024 for €180K at a margin of 25%. At 31 December 2024, De Vries held €48K of these supplies in inventory. Unrealised profit: €48K × 25% = €12K. This is a downstream transaction; Bakker eliminates to the extent of its interest: €12K × 35% = €4.2K.

Step 5: Carrying amount roll-forward

Impairment assessment: De Vries’s net assets at 31 December 2024 (post-revaluation): €7.9M. Bakker’s share: €2,765K. Carrying amount including embedded goodwill: €3,372.8K. Carrying amount exceeds share of net assets by €607.8K, attributable to embedded goodwill of €560K and fair value adjustments. No indicators of impairment under IAS 28.41A beyond the excess, which is explained by goodwill. De Vries is profitable with growing revenue. No impairment loss recognised.

Your documentation checklist

1. Document the basis for concluding that significant influence exists (or doesn’t). For holdings of 20–50%, confirm the IAS 28.5 presumption applies and note the specific indicators from IAS 28.6 that support it. For holdings below 20% where significant influence is claimed, provide explicit evidence
2. Prepare a full equity method roll-forward showing all five components: share of profit or loss, distributions received, share of OCI, unrealised profit elimination, and any other adjustments (policy alignment, foreign currency translation). Cross-reference each component to the associate’s audited or reviewed financial statements
3. Review the intercompany sales ledger between the investor and associate for unrealised profits at year-end. Check both upstream and downstream transactions. Document the margin on intercompany sales and the inventory held at the reporting date
4. If the associate’s reporting date differs from the investor’s, document the adjustment for significant transactions or events occurring between the two dates (IAS 28.34). Confirm the gap is no more than three months
5. Perform the IAS 28.41A impairment indicator assessment at each reporting date. Compare carrying amount to share of investee’s net assets. Document whether any excess is attributable to goodwill or fair value adjustments still supported by current evidence
6. Where the associate’s accounting policies differ from the investor’s, document the adjustments made under IAS 28.35, or document why the adjustment is impracticable with the specific policy differences identified

Common mistakes regulators flag

• Recognising dividends as income: The FRC’s 2021–22 inspection cycle found equity method files where the investor recognised dividends from associates as income in profit or loss rather than as a reduction in the investment carrying amount. IAS 28.10 is explicit on this point. The error overstates both investment income and the carrying amount of the investment.
• Missing unrealised profit elimination: The AFM has flagged files where the unrealised profit elimination under IAS 28.28 was not performed despite material intercompany trading between the investor and associate. The most common omission: downstream sales where the associate holds the investor’s goods in inventory at year-end, with no assessment of the margin or inventory balance.

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Further reading and source references

• IAS 28, Investments in Associates and Joint Ventures: the source standard governing equity method accounting, significant influence, and impairment of equity-accounted investments.
• IAS 36, Impairment of Assets: applies to equity-accounted investments when impairment indicators are identified under IAS 28.41A.
• IAS 27, Separate Financial Statements: governs the policy election that determines whether the equity method applies in an entity’s separate financial statements.
• IFRS 9, Financial Instruments: applies to long-term receivables from associates classified as separate financial assets rather than part of the net investment.