How associates are accounted for using the equity method under IAS 28 and ASC 323

Graziano Stefanelli
Oct 26
4 min read

Investments in associates represent significant influence without full control. Such investments are neither subsidiaries nor joint ventures but entities where the investor participates actively in financial and operating policy decisions. IAS 28 (Investments in Associates and Joint Ventures) and ASC 323 (Investments—Equity Method and Joint Ventures) both prescribe the equity method of accounting for these investments, aligning the investor’s financial results with its share of the associate’s performance.

Both frameworks aim to reflect the investor’s ongoing economic interest rather than mere cost or market valuation.

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How significant influence is defined.

Significant influence is the power to participate in financial and operating policy decisions, but not control or joint control.Ownership of 20% or more of voting power is presumed to confer significant influence unless proven otherwise.

Indicators of significant influence include:

Representation on the board of directors.
Participation in policy-making processes.
Material transactions between investor and associate.
Interchange of managerial personnel.
Provision of essential technical information.

If the investor’s influence ceases (e.g., sale or dilution), equity accounting stops and the investment is measured at fair value under IFRS 9 or ASC 321.

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Measurement and recognition under IFRS (IAS 28).

1) Initial recognition.Record at cost, including directly attributable transaction costs.

Entry:

Debit: Investment in Associate xx
Credit: Cash xx

2) Subsequent measurement (equity method).

Increase carrying amount by investor’s share of profit or OCI.
Decrease by dividends received and share of losses.
Adjust for changes in other comprehensive income (OCI) of the associate.

Example (IFRS):Initial cost: 1,000,000Share of profit: 150,000Dividends: 40,000

Entries:

Debit: Investment in Associate 150,000
Credit: Share of Profit 150,000
Debit: Cash 40,000
Credit: Investment in Associate 40,000

Ending carrying amount = 1,110,000.

3) Loss recognition limit.Investor’s share of losses is recognized only up to the carrying amount of the investment, unless it has additional legal or constructive obligations to fund losses.

4) Unrealized profits and adjustments.Eliminate investor’s share of unrealized profits from transactions with associates (upstream or downstream) to the extent of the investor’s interest.

5) Impairment.If evidence of impairment exists, test under IAS 36 by comparing recoverable amount to carrying amount; losses are recognized in P&L.

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Measurement and recognition under US GAAP (ASC 323).

1) Initial recognition.Record at cost, excluding acquisition-related costs (expensed immediately).

2) Subsequent measurement (equity method).Adjust carrying amount for share of income or loss, dividends, and OCI of the investee.

Example (GAAP):Cost = 1,500,000Share of profit = 200,000Dividends received = 80,000

Entries:

Debit: Investment in Associate 200,000
Credit: Equity Method Income 200,000
Debit: Cash 80,000
Credit: Investment in Associate 80,000

Ending carrying amount = 1,620,000.

3) Basis differences.When purchase price exceeds the investor’s share of net assets, allocate excess to identifiable assets and goodwill. Amortize differences affecting profit (e.g., PPE fair value adjustment).

4) Loss limitation.Stop recognizing losses once investment is reduced to zero unless additional commitments exist.

5) Impairment.If decline in fair value is other than temporary, write down to fair value through income.

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Comparative table: IAS 28 vs ASC 323.

Aspect	IFRS (IAS 28)	US GAAP (ASC 323)
Influence threshold	Presumed ≥20%	Presumed ≥20%
Measurement	Equity method	Equity method
Transaction costs	Capitalized	Expensed
Unrealized profit elimination	Required	Required
OCI of associate	Recognized in investor’s OCI	Recognized in investor’s OCI
Loss limit	Stop at zero unless obligation exists	Stop at zero unless obligation exists
Impairment test	IAS 36 (recoverable amount)	Other-than-temporary decline test
Fair value option	IFRS 9 for venture capital entities	ASC 825 fair value option available
Disclosures	Summarized financial info, nature of relationship	Similar but more detailed under SEC rules

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Example — full equity method computation.

Investor acquires 30% of Beta Co. for 1,200,000.Beta Co. net income = 400,000; dividends = 100,000.

Step 1:Investor’s share of profit = 30% × 400,000 = 120,000Investor’s share of dividends = 30% × 100,000 = 30,000

Step 2:Entries:

Debit: Investment in Associate 120,000
Credit: Share of Profit 120,000
Debit: Cash 30,000
Credit: Investment in Associate 30,000

Step 3:Ending carrying amount = 1,290,000.Report “Share of profit of associate” as a single-line item in the income statement.

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Presentation and disclosures.

Balance sheet:Investment shown as a single line under non-current assets.

Income statement:Share of profit/loss shown as a single-line item after operating profit (IFRS) or within non-operating income (GAAP).

Disclosures (IFRS 12 / ASC 323):

Name and nature of associates.
Ownership percentage and voting power.
Method used and reporting date differences.
Summarized financial info of material associates.
Dividends received and fair value (if quoted).

Example disclosure:

Associate	Ownership	Carrying Amount (USD)	Share of Profit (USD)	Dividends (USD)
Beta Co.	30%	1,290,000	120,000	30,000
Nova Ltd.	25%	840,000	70,000	20,000

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Journal entries summary.

1) Initial investment:

Debit: Investment in Associate xx
Credit: Cash xx

2) Share of profit:

Debit: Investment in Associate xx
Credit: Income from Associate xx

3) Dividend received:

Debit: Cash xx
Credit: Investment in Associate xx

4) Share of loss:

Debit: Loss from Associate xx
Credit: Investment in Associate xx

5) Impairment (IFRS/GAAP):

Debit: Impairment Loss xx
Credit: Investment in Associate xx

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Impact on financial performance and ratios.

Equity method accounting smooths volatility by recognizing proportionate profit or loss rather than full consolidation. It impacts:

Net income — includes share of associate’s results.
Asset turnover — lower than full consolidation.
Leverage ratios — exclude associate’s liabilities.
Return on assets (ROA) — may appear higher due to off-balance-sheet leverage of associates.

Analysts adjust for equity-accounted earnings to assess underlying operating performance versus investment performance.

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Operational considerations.

Equity accounting requires:

Access to timely financial data from associates.
Adjustments for different reporting dates or accounting policies.
Monitoring for impairment indicators.
Coordination for intragroup transaction elimination and OCI tracking.

Consistent equity method application under IAS 28 and ASC 323 ensures accurate representation of collaborative investments and long-term strategic influence.

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DATA STUDIOS

.....[datastudios.org]