Key Points
- Significant influence is presumed when the investor holds 20% or more of the voting power, but the presumption can be rebutted.
- The investor recognises its share of the associate's profit or loss in its own income statement each period.
- Failing to identify an associate means the investment sits at cost or fair value, which understates the investor's reported earnings when the associate is profitable.
- The equity method carrying amount is tested for impairment under IAS 36 when indicators exist, not under IFRS 9.
What is Associate?
IAS 28.3 defines significant influence as the power to participate in the financial and operating policy decisions of the investee without controlling those decisions. The 20% voting power threshold at IAS 28.5 is a starting point, not a bright line. An investor holding 18% can still have significant influence if it has board representation, participates in policymaking, or engages in material transactions with the investee. Conversely, a 25% holding does not guarantee significant influence if another party controls the investee and the investor has no participation rights.
Once identified, the associate is accounted for under the equity method (IAS 28.16). The investor initially records the investment at cost, then adjusts the carrying amount each period for its share of the associate's profit or loss, other comprehensive income, and distributions received. The auditor's task under ISA 315.12(f) is to understand how the investor identifies its associates and whether the equity method mechanics (including elimination of unrealised profits on intercompany transactions) are applied correctly. Where the associate reports under a different framework, the investor must adjust for material differences before applying the equity method.
Impairment of the equity-accounted investment follows IAS 36, not IFRS 9. The recoverable amount is compared to the carrying amount of the investment as a whole, including any goodwill embedded in the original acquisition cost.
Worked example
Client: Danish maritime logistics company, FY2025, revenue EUR 140M, IFRS reporter. In January 2025, Henriksen acquires a 30% interest in Baltic Port Services OY (a Finnish port handling company) for EUR 9.6M. Baltic Port Services has identifiable net assets of EUR 24M at acquisition date. Baltic Port Services reports a profit of EUR 4.8M for FY2025 and pays dividends of EUR 1.2M. There is one intercompany transaction: Henriksen sells logistics services to Baltic Port Services during the year at a margin of EUR 200,000, and EUR 60,000 of that margin relates to services not yet consumed by Baltic Port Services at year-end.
Step 1 — Determine significant influence
Henriksen holds 30% of voting rights, exceeding the IAS 28.5 presumption threshold. Henriksen also has one seat on Baltic Port Services' five-member board. No other shareholder holds a controlling interest.
Documentation note: record the percentage held, the board representation, the absence of a controlling shareholder, and the conclusion that significant influence exists per IAS 28.5–6.
Step 2 — Calculate goodwill on acquisition
Henriksen's share of identifiable net assets is 30% of EUR 24M = EUR 7.2M. Purchase consideration is EUR 9.6M. Goodwill embedded in the investment is EUR 2.4M. Under IAS 28.32, this goodwill is not separately recognised but remains part of the carrying amount of the investment.
Documentation note: record the fair value of net assets at acquisition, the investor's share, and the implicit goodwill. Attach the purchase price allocation working paper.
Step 3 — Apply the equity method for the year
Henriksen's share of Baltic Port Services' profit is 30% of EUR 4.8M = EUR 1.44M. Henriksen's share of dividends received is 30% of EUR 1.2M = EUR 360,000. The unrealised profit on the downstream transaction that must be eliminated is 30% of EUR 60,000 = EUR 18,000. Carrying amount at year-end: EUR 9.6M + EUR 1.44M - EUR 360,000 - EUR 18,000 = EUR 10.662M.
Documentation note: record the share of profit, dividends received, unrealised profit elimination (per IAS 28.28), and the roll-forward of the investment carrying amount from opening to closing balance.
Step 4 — Assess impairment indicators
Baltic Port Services operates in a single Baltic port with stable throughput volumes. No impairment indicators exist at year-end. No IAS 36 test is required.
Documentation note: record the impairment indicator assessment per IAS 28.41A–42, including the factors considered and the conclusion that no indicators were present.
Conclusion: the equity-accounted carrying amount of EUR 10.662M is defensible because the significant influence assessment rests on both voting percentage and board representation, the goodwill calculation is supported by a purchase price allocation, and the unrealised profit elimination follows IAS 28.28.
Why it matters in practice
Teams frequently fail to eliminate unrealised profits on transactions between the investor and its associate. IAS 28.28 requires the investor to eliminate its share of unrealised gains on both upstream (associate to investor) and downstream (investor to associate) transactions. On smaller engagements, intercompany sales to associates are often excluded from the elimination schedule because the associate is not a subsidiary.
The impairment model is a common source of confusion. Practitioners sometimes apply IFRS 9 impairment (expected credit losses) to the equity-accounted investment, but IAS 28.40 and IAS 28.42 require IAS 36 impairment testing. The two models produce different results: IAS 36 compares carrying amount to recoverable amount, while IFRS 9 uses a forward-looking expected credit loss approach designed for financial instruments.
Associate vs. subsidiary
| Dimension | Associate (IAS 28) | Subsidiary (IFRS 10) |
|---|---|---|
| Degree of influence | Significant influence: power to participate in decisions without controlling them | Control: power over the investee, exposure to variable returns, and ability to use power to affect those returns |
| Voting power presumption | 20% or more of voting power (rebuttable) | Typically above 50%, but control can exist below that threshold through contractual arrangements |
| Accounting treatment | Equity method: one-line consolidation reflecting the investor's share of profit or loss and net assets | Full line-by-line consolidation of all assets, liabilities, income, and expenses |
| Financial statement presentation | Single line item in the statement of financial position; share of profit presented separately in profit or loss | Fully integrated into each line of the consolidated statements, with non-controlling interest shown separately |
| Impairment | IAS 36 applied to the carrying amount of the investment as a whole, including embedded goodwill | Goodwill tested separately under IAS 36; individual assets tested when indicators arise |
The distinction matters because reclassifying a subsidiary to an associate (or vice versa) changes every line of the consolidated financial statements. When an investor loses control but retains significant influence, IFRS 10.B98 requires derecognition of the subsidiary and recognition of the retained interest at fair value, which can produce a material gain or loss.
Related terms
Frequently asked questions
How do I audit the equity method in practice?
Obtain the associate's financial statements and verify the investor's share calculations. ISA 600.27 applies when the associate is significant: the group engagement team must evaluate whether sufficient appropriate audit evidence has been obtained over the associate's financial information. If the associate is audited by another firm, request that auditor's report and evaluate its adequacy.
Does an investor always use the equity method for an associate?
Not always. IAS 28.17 exempts an investor that qualifies as a parent from applying the equity method in its separate financial statements (the investment is carried at cost, IFRS 9 fair value, or equity method depending on the policy election). Venture capital organisations and similar entities can elect fair value through profit or loss under IAS 28.18 if they meet the criteria. In consolidated statements, however, the equity method is mandatory unless an exemption applies.
What happens when an associate reports under a different accounting framework?
IAS 28.35 requires the investor to make adjustments where the associate's accounting policies differ from the investor's. If the associate prepares HGB financial statements and the investor reports under IFRS, the investor adjusts for material measurement differences (such as different depreciation methods or lease accounting treatments) before recognising its share of profit or loss.