What is the Equity Method for Associates and Joint Ventures?
An associate is an entity over which the investor has significant influence, typically through 20–50% ownership, while a joint venture involves joint control. Both are accounted for using the equity method under IAS 28.
Under the equity method, an investment is initially recognized at cost and subsequently adjusted for the investor's share of the investee's profit or loss, less any dividends received.
- •Investment shown as a single line on the balance sheet
- •Share of profit/loss shown as a single line on the income statement
- •No line-by-line consolidation of assets/liabilities
- •Used for associates and most joint ventures
- •Assets and liabilities combined line by line
- •100% of revenue and expenses combined
- •NCI recognized for the non-owned portion
- •Used when the parent has control (usually >50%)
Try it: interactive calculator
Step-by-step worked examples
An investor buys 30% of Associate Co for $150,000. Associate's net income for the year is $60,000; no dividends are paid. What is the carrying value of the investment?
CV = C + (p × NI) − D CV = 150,000 + (30% × 60,000) − 0 = 150,000 + 18,000 = $168,000
An investor owns 25% of a joint venture, cost $400,000. The JV reports net income of $120,000 and pays total dividends of $80,000.
CV = 400,000 + (25% × 120,000) − (25% × 80,000) CV = 400,000 + 30,000 − 20,000 = $410,000
An investor owns 40% of an associate, cost $250,000. The associate incurs a net loss of $50,000 and pays no dividends.
CV = 250,000 + (40% × (−50,000)) − 0 CV = 250,000 − 20,000 = $230,000
Flashcards
Quick quiz
Q1.What ownership percentage typically indicates significant influence?
Q2.An investor owns 20% of an associate, cost $100,000. The associate's net income is $40,000, no dividends. What is the carrying value?
Q3.Under the equity method, dividends received:
Q4.Which standard governs equity accounting for associates and joint ventures?
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Common mistakes
Recognizing dividends received from an associate as income. — Correct: Dividends reduce the carrying amount of the investment under the equity method; they are not P&L income.
Assuming 20% ownership always means an associate. — Correct: Significant influence is assessed based on substance (board seats, policy involvement), not just the ownership percentage.
Fully consolidating an associate's assets and liabilities. — Correct: Associates use the single-line equity method, not line-by-line consolidation like subsidiaries.
Ignoring the investor's share of an associate's losses. — Correct: Losses reduce the carrying value just like profits increase it, potentially down to zero.
FAQ
What is the equity method for associates and joint ventures?
An IAS 28 accounting method where the investment starts at cost and is adjusted for the investor's share of the investee's profit or loss and any dividends received.
What is the formula for equity-accounted investments?
Carrying value = Cost + (ownership % × net income) − dividends received.
How do you calculate the carrying value of an associate step by step?
Add the investor's share of the associate's net income to the cost, then subtract dividends received — see the worked examples above.
What's the difference between an associate and a subsidiary?
An associate involves significant influence without control (equity method); a subsidiary involves control (full consolidation).