Equity Method — Recognition, Measurement & Post-Acquisition Adjustments

The equity method translates an investor’s ownership interest into a single-line asset whose carrying amount mirrors the investor’s proportionate stake in the investee’s post-acquisition net assets.

At initial recognition the investment is recorded at cost, and thereafter it is updated for the investor’s share of earnings, other comprehensive income, dividends, and amortization of any fair-value step-ups or step-downs identified at acquisition.

1. Initial recognition and basis determination

Cost measurement

The investment is first recorded at the purchase price plus directly attributable incremental costs such as commissions, legal fees, and transfer taxes. Internal administrative costs are expensed when incurred.

Identifying basis differences

Compare the purchase price with the investor’s share of the fair value of the investee’s identifiable net assets on the acquisition date. Any excess or deficit is allocated in the following order:

• Fair-value adjustments to specific identifiable assets and liabilities (inventory, property, equipment, intangibles, contingencies).

• Equity-method goodwill, representing the residual unallocated excess.

• Bargain-purchase gain, recognized immediately in profit or loss if the purchase price is less than the fair-value share (subject to corroborative evidence under IFRS).

2. Post-acquisition adjustments — core components

Investor’s share of net income or lossEach reporting period, the investor increases or decreases the carrying amount by its proportional share of the investee’s earnings after adjusting for extraordinary or non-recurring items consistent with the investor’s accounting policies.

Other comprehensive income (OCI)

Elements such as foreign-currency translation differences, cash-flow-hedge reserves, remeasurement of defined-benefit plans, and fair-value changes recorded in OCI flow through to the investor on a line-by-line basis and adjust the carrying amount correspondingly.

Dividends and other distributions

Cash or non-cash dividends reduce the investment’s carrying value because they represent a return of part of the net assets previously recognized. Liquidating distributions in excess of the investor’s cumulative share of earnings trigger gain recognition.

Amortization or depreciation of basis step-ups and step-downs

Fair-value adjustments assigned to depreciable or amortizable assets are expensed over their remaining useful lives. Inventory and other current assets typically reverse through cost of goods sold when sold by the investee.

Impairment losses

If indicators of impairment exist, the investment is tested by comparing its recoverable amount (or fair value) to its carrying value, including goodwill. Any shortfall is recognized immediately in profit or loss and cannot be reversed under US GAAP.

Changes in ownership interest that do not alter significant influence

Additional purchases or partial disposals are accounted for prospectively: the carrying amount is adjusted to reflect the new ownership percentage, and any difference between consideration paid or received and the corresponding change in carrying value is recognized in equity (IFRS) or earnings (US GAAP) according to jurisdictional rules.

Share of investee equity transactions

When the investee issues or repurchases its own shares and the investor’s percentage changes, the investor records the proportional effect directly in its equity, preserving the single-line-item presentation.

3. Carrying-amount reconciliation sequence

• Opening carrying amount

• Plus investor’s share of investee net income (or minus share of loss)

• Plus or minus investor’s share of investee OCI items

• Minus dividends or returns of capital received

• Minus amortization or depreciation of fair-value basis adjustments

• Minus impairment losses, if any

• Equals closing carrying amount

4. Detailed guidance on basis differences

• Finite-lived intangibles are amortized using the investee’s estimated useful life and presented in the investor’s income statement consistent with its own classification policy.

• Indefinite-lived intangibles and goodwill are not amortized but are included in impairment testing whenever there is an indicator of decline in value.

• Inventory step-ups are expensed through the investor’s share of cost of sales as the inventory is sold, often requiring adjustments to align reporting periods.

• Contingent liabilities assumed at fair value are unwound when the contingency is resolved, with the investor’s share flowing through earnings.

5. Other comprehensive income items in depth

• Foreign currency translation affects investments in foreign operations; cumulative translation adjustments pass through to the parent in proportion to ownership.

• Cash-flow hedges and FVOCI financial assets held by the investee create OCI that the investor must mirror, potentially affecting its own hedge-accounting disclosures.

• Remeasurement of defined-benefit plans can introduce actuarial gains and losses that must be recorded in the investor’s OCI and tracked for subsequent reclassification where applicable.

6. Impairment testing methodology

Perform an indicator-based assessment each reporting date. If impairment is indicated:

1. Determine the recoverable amount of the investment as a whole, including embedded goodwill.

2. Compare recoverable amount to the carrying amount.

3. Recognize any excess carrying amount as an impairment loss.

4. For equity-method goodwill, recognize impairment against the investment balance; separate goodwill carrying amount is not presented.

7. Required disclosures

Investors must disclose:

• The nature and extent of significant influence, including percentage ownership and voting rights.

• Summarized financial information of the investee, reconciling it to the carrying amount.

• The investor’s share of profit or loss, OCI, and dividends received.

• Basis-difference amounts, amortization schedules, and unamortized balances.

• Impairment losses recognized and the key assumptions supporting recoverable-amount calculations.

8. Emerging issues and standard-setting developments

• Recent amendments extend proportional amortization to additional tax-credit structures, reinforcing the need to separate equity-method recognition from specialized measurement alternatives.

• Proposed IASB guidance may require a notional purchase-price allocation every time the investor acquires an additional stake that confers significant influence, potentially changing the amortization profile of basis differences.

• Ongoing FASB discussions on segment reporting could compel more granular disclosure of equity-method results, particularly for upstream and downstream transactions.

Key take-aways

• Record the investment at cost and immediately identify any fair-value basis differences.

• Update the carrying amount each period for the investor’s share of income, OCI, dividends, amortization of basis differences, and impairments.

• Maintain detailed schedules of basis differences to ensure correct amortization and transparent disclosures.

• Monitor ownership changes, investee equity transactions, and impairment indicators continuously to keep the carrying amount accurate and compliant.