IAS 28 Investments in Associates and Joint Ventures: A Practical Guide

The equity method sounds straightforward in theory. In practice, IAS 28 generates some of the most complex accounting in group financial statements — particularly around losses exceeding the investment, impairment, and the interaction with IFRS 11.

What Is an Associate?

An associate is an entity over which the investor has significant influence — the power to participate in financial and operating policy decisions, without control. Holding 20% or more of voting rights creates a rebuttable presumption of significant influence. Representation on the board, participation in policy decisions, material intra-group transactions, and interchange of managerial personnel can all indicate significant influence below 20%.

The Equity Method in Practice

The investment is initially recognised at cost. Each period it is adjusted for the investor's share of the associate's profit or loss (recognised in the investor's P&L), share of OCI (recognised in the investor's OCI), and dividends received (which reduce the carrying amount). The carrying amount on the balance sheet represents cost plus post-acquisition earnings, less dividends and impairment.

Intra-Group Transactions

Profits and losses on transactions between the investor and associate are eliminated to the extent of the investor's interest — so a 30% associate requires 30% elimination of upstream and downstream profits. This differs from subsidiary consolidation where 100% is eliminated.

When Losses Exceed the Investment

Once the carrying amount reaches nil, the investor stops recognising further losses unless it has legal or constructive obligations, or has made payments on behalf of the associate. This "floor" at nil is frequently misapplied — particularly where there are long-term loans that form part of the net investment.

Impairment

The entire carrying amount (including any goodwill embedded in it) is tested as a single asset under IAS 36 when objective indicators exist. This differs from subsidiary goodwill, which is tested separately. The recoverable amount is the higher of value in use and fair value less costs to sell.

Further Reading

• IFRS 10 Consolidated Financial Statements
• Goodwill Impairment Testing (IAS 36)
• Accounting Standards CPD

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