Financial Accounting · Associates

Equity Method of Accounting for Associates

Updated 11 October 2026 · Fact-checked

The equity method records an associate as one line, investment in associate, in the consolidated statement of financial position. You start at cost, add the group share of post-acquisition profit and other comprehensive income, and deduct dividends received and any impairment. Do not add the associate's assets and liabilities line by line.

Understand Equity Method of Accounting for Associates

An associate is an entity over which the investor has significant influence but not control. Significant influence is presumed when you hold 20% or more of the voting power, but it is not automatic. It is the power to take part in financial and operating policy decisions. IAS 28 sets out the equity method, and the Applied Knowledge FA exam tests it in a simple form.

Because you do not control an associate, you do not consolidate its assets and liabilities line by line. That is what you do for a subsidiary. Instead you show one number, the investment in associate, in non-current assets. The figure starts at cost and moves as the associate earns profit for its owners.

The logic is simple. If the associate makes a profit, the investor's share of the net assets rises. So the investment goes up by the group share of the profit. A dividend from the associate is a transfer of cash to the investor. It does not create new value, so it reduces the investment and is not income in the group accounts.

Only post-acquisition movements count. Profit earned before you bought the shares was already priced into the cost. In the statement of profit or loss, the group share of the associate's profit after tax is shown as one line. The group share of the associate's other comprehensive income goes in the group's OCI.

Key formulas to remember

Investment in associate at year end: Cost + share of post-acquisition profit (and OCI) − dividends received from the associate − impairment; Use the associate's profit after tax. Share = group % held.
Share of post-acquisition profit: Associate's profit after tax since acquisition × group %; For a full year after acquisition, use the whole year's profit. For a part year, time-apportion unless told otherwise.
Alternative proof: Group % × associate's net assets at year end + unimpaired goodwill, ignoring any unrealised profit adjustment; Use this only as a check. It assumes the associate's net assets are at fair value.
Associate in the statement of profit or loss: Group % × associate's profit after tax for the period of ownership; Shown as one line below group operating profit and finance costs. Dividends received are not shown as income.
Significant influence indicator: Holding of 20% or more of voting power is presumed to give significant influence; It is a presumption, not a rule. Other evidence such as board representation can rebut it.

How to solve Equity Method of Accounting for Associates questions

Use this method for any associate question that asks for the investment in associate or the associate's income.

1Confirm the investment is an associate: significant influence, usually 20% or more but no control. If it is more than 50% or gives control, it is a subsidiary.
2Write the cost of the investment as the opening line of the working.
3Find the associate's profit after tax for the period since acquisition. Time-apportion if the shares were bought part way through the year.
4Multiply that profit by the group percentage and add it to the working.
5Add the group share of any other comprehensive income, such as a revaluation gain.
6Deduct dividends received from the associate. Use the group share of dividends declared, as given in the question.
7Deduct any impairment of the investment and any unrealised profit adjustment if the question gives one.
8Show the total as investment in associate in non-current assets. Put the share of profit in the statement of profit or loss as one line.

Quickest way: Four-line investment in associate working

When to use it: Use this for number entry or multiple choice questions where you need only the closing balance.

Line 1: Cost.
Line 2: Plus % × post-acquisition profit (and OCI).
Line 3: Less dividends received by the group.
Line 4: Less impairment. Add the lines and stop.
Check that you used profit after tax, not profit before tax, and only profit since acquisition.

Common mistakes in Equity Method of Accounting for Associates

Adding the associate's assets and liabilities line by line
It is mixed up with subsidiary consolidation.
Fix: Remember an associate is one line only. Ask whether the investor has control. If not, use one line.
Using the whole of the associate's profit instead of the group share
Students forget the percentage is applied to profit, as in non-controlling interest.
Fix: Always multiply the associate's profit by the group percentage. There is no non-controlling interest for an associate.
Including profit earned before acquisition
Students use the year's profit rather than profit since acquisition.
Fix: Time-apportion or use only post-acquisition profit. Check the acquisition date in the question.
Treating the dividend from the associate as group income, or ignoring it in the investment
In the parent's own books the dividend is income.
Fix: In the group accounts, deduct the dividend received from the investment. Do not show it as group income.
Using profit before tax
The associate's figures may show several profit lines.
Fix: Use profit after tax, as the equity method takes the share of the associate's earnings for its owners.
Forgetting the group share of OCI
Students focus on profit only.
Fix: If the associate has a revaluation gain, add the group share to the investment and to group OCI.

Worked examples

Example 1

On 1 January Year 1 Alpha bought 30% of the equity shares of Beta for $240,000. For the year ended 31 December Year 1, Beta's profit after tax was $100,000. Beta paid a dividend of $40,000 in the year. Calculate the carrying amount of the investment in associate at 31 December Year 1.

Show the solution

Cost: $240,000.
Share of profit: 30% × $100,000 = $30,000.
Dividend received by Alpha: 30% × $40,000 = $12,000.
Investment = $240,000 + $30,000 − $12,000 = $258,000.

Answer: $258,000

Example 2

On 1 July Year 1 Gamma bought 40% of Delta for $500,000. Delta's profit after tax for the year to 31 December Year 1 was $200,000, earned evenly. Delta paid no dividend. Delta also recognised a revaluation gain of $50,000 in other comprehensive income after 1 July. Calculate the investment in associate at 31 December Year 1 and the share of profit shown in the group statement of profit or loss.

Show the solution

Post-acquisition profit: $200,000 × 6/12 = $100,000.
Group share of profit: 40% × $100,000 = $40,000.
Group share of OCI: 40% × $50,000 = $20,000.
Investment = $500,000 + $40,000 + $20,000 = $560,000.
The statement of profit or loss shows share of profit of associate of $40,000. The group OCI includes $20,000.

Answer: Investment in associate is $560,000. Share of profit of associate is $40,000.

Exam tips

In objective tests, check whether the question gives profit for the whole year or since acquisition before multiplying.
Write the four-line working on scrap paper even for a quick question. It prevents missed dividend or OCI adjustments.
For multiple response questions about associates, remember that the equity method does not include line-by-line consolidation or non-controlling interest.
If a question says the holding is 20% or more, do not assume an associate automatically. Look for control or evidence of significant influence.
In Section B, show the share of associate profit as a single line below group profit from operations, and check which year-end balance is asked for.

Practice questions from Associates

Equity Method of Accounting for Associates in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Equity Method of Accounting for Associates: frequently asked questions

What is the difference between equity accounting and acquisition accounting?

Acquisition accounting is used for subsidiaries and combines assets and liabilities line by line, with non-controlling interest. The equity method is used for associates and shows one investment line adjusted for the group share of post-acquisition results.

Why are dividends from an associate deducted from the investment?

The associate's profit has already increased the investment through the group share of profit. A dividend is cash paid out of that profit, so the investment falls by the amount received. Counting it as income as well would double count.

Is 20% ownership always an associate?

No. 20% or more of voting power creates a presumption of significant influence, but it can be rebutted. Likewise, under 20% can still be an associate if there is other evidence of significant influence.

Is there non-controlling interest for an associate?

No. The associate is not consolidated line by line, so no part of its net assets is attributed to other shareholders in the group accounts. Only the group share is brought in.