Financial Reporting · Preparation of consolidated financial statements for a simple group

Accounting for Associates Using the Equity Method

Updated 11 October 2026

An associate is an entity over which the investor has significant influence but not control, usually a holding of 20% to 50% of votes. You do not line-by-line consolidate it. You show one line, investment in associate, starting at cost and adding your share of post-acquisition profits, less unrealised profit.

Understand Accounting for Associates: Equity Method

An associate is an entity where the investor has significant influence. This is the power to take part in financial and operating policy decisions, without control or joint control. IAS 28 says a holding of 20% or more of the voting power presumes significant influence, unless you can clearly show otherwise. Other signs include board representation, taking part in policy decisions, material transactions between the two entities, and sharing of managers or technical information.

The key contrast with a subsidiary is control. A subsidiary is controlled under IFRS 10, so you add 100% of its assets, liabilities, income and expenses line by line, and show a non-controlling interest. An associate is not controlled, so you do none of that. Instead you use the equity method.

Under the equity method, the investment starts at cost. Each year you add your share of the associate's profit after tax, and your share of its other comprehensive income. Dividends received reduce the carrying amount, because they are a return of value already recognised. The result is one line in non-current assets and one line in profit or loss for the share of profit.

The associate's profit is brought in because you have influence over it, even though you do not hold its cash or assets. Only the post-acquisition profit counts. Profit earned before you bought in is already paid for in the cost.

Intra-group trading needs care. Associate trades are not eliminated in full, because the associate is not part of the group. You remove only the investor's share of any unrealised profit left in inventory. In the consolidated statement of profit or loss, the share of associate profit is shown after tax as a single line, and no income or expenses of the associate are added.

Key rules to remember

Significant influence presumption: Holding of 20% or more of voting power → presumed significant influence; A presumption only. Check for other evidence, and also for control (over 50%) which would make it a subsidiary.
Investment in associate (statement of financial position): Cost + share of post-acquisition profit (and OCI) − dividends received − share of unrealised profit on sales by the investor to the associate − impairment; Shown as a single non-current asset line. Unrealised profit on sales by the associate to the investor is taken off group inventory, not off the investment.
Alternative working: Share of associate's net assets at reporting date + notional goodwill (not impaired); The two methods agree when unrealised profit on sales by the investor to the associate is deducted from net assets and impairment of goodwill is deducted.
Share of associate profit in P/L: Investor % × associate profit after tax for the year (time-apportioned from acquisition) − share of unrealised profit on sales by the associate to the investor − impairment; This is the investor's share of the associate's profit after tax. Show it as one line after finance costs and before group profit before tax. Associate tax is not included in group tax.
Unrealised profit: associate sells to investor (upstream): Unrealised profit = profit margin (or mark-up ÷ (100 + mark-up)) × inventory still held × investor %; In ACCA FR practice, debit the share of associate profit (and reserves) and credit group inventory, because the investor holds the goods. Do not credit the investment in associate.
Unrealised profit: investor sells to associate (downstream): Same calculation, using investor % of the profit in unsold inventory; In ACCA FR practice, debit the investor's (parent's) profit or retained earnings and credit the investment in associate. The goods are held by the associate, so group inventory is not adjusted.
Dividend from associate: Dividend received × investor % reduces (is credited to) the investment in associate and is excluded from group income; In the investor's own books it is income. In the group accounts, remove it from investment income because the share of profit already includes it. Credit the investment for it if you build the investment from cost plus share of profit.

How to solve Accounting for Associates: Equity Method questions

Use this order for any associate question, whether it asks for the statement of financial position, the statement of profit or loss, or both.

1Decide the status. Check the holding and any other evidence. Over 50% with control means subsidiary. Between 20% and 50% with influence means associate.
2Write down the investor's percentage, the cost of the investment, and the associate's retained earnings (or profit) at acquisition and at the reporting date.
3Calculate the share of post-acquisition profit: investor % × (associate retained earnings now − at acquisition). For the profit or loss, use the profit for the year, time-apportioned if acquired part-way through.
4Calculate any unrealised profit in inventory held at the year end from intra-group trading, and take the investor's % of it. Note who sold the goods: the associate (upstream) or the investor (downstream).
5Build the investment in associate: cost + share of post-acquisition profit − unrealised profit on downstream sales (and any impairment). Unrealised profit on upstream sales is credited to group inventory instead, not to the investment. If you use the movement in the associate's closing retained earnings, the dividend has already reduced it, so do not deduct it again. Deduct dividends received only when you build the investment from the profit for the year.
6Adjust group retained earnings: parent's own retained earnings + parent % of subsidiary post-acquisition profit + share of associate post-acquisition profit (after unrealised profit and impairment).
7Show the associate's profit as one line in the consolidated profit or loss. It is the investor's share of the associate's profit after tax. Place it after group operating profit and finance costs and before group profit before tax. Do not include associate tax in group tax.
8Check the balance: every debit has a matching credit, whether to the investment or to group inventory.

Quickest way: Net assets method check

When to use it: Use when you need the investment in associate quickly, and as a cross-check of the cost plus profit working.

Take the associate's net assets at the reporting date, adjusted for the investor's share of any unrealised profit on downstream sales.
Multiply by the investor %.
Add the notional goodwill: cost − investor % × net assets at acquisition. Deduct any impairment of it.
The total is the investment in associate. Compare it with cost + share of post-acquisition profit − downstream unrealised profit. They should match.
Put the share of post-acquisition profit (net of unrealised profit and impairment) into group retained earnings.

Common mistakes in Accounting for Associates: Equity Method

Crediting the wrong balance for unrealised profit on trading with an associate
Students copy the subsidiary adjustment against inventory without checking who holds the goods.
Fix: In a sale by the investor to the associate, the inventory belongs to the associate and is not in the group statement, so do not adjust inventory. Debit the investor's (parent's) profit or retained earnings and credit the investment in associate. If the associate sells to the investor instead, the goods are in group inventory. Debit the share of associate profit and credit group inventory, not the investment.
Consolidating the associate line by line
Students copy the subsidiary method because the layout is familiar.
Fix: Associates appear as one line only. No assets, liabilities, income or expenses of the associate are added, and there is no non-controlling interest.
Eliminating the whole intra-group sale to an associate
Students apply the subsidiary rule that removes all of the trading.
Fix: Remove only the investor's share of the unrealised profit. Revenue and cost of sales stay in full.
Including pre-acquisition profit in the share of reserves
Students multiply the closing retained earnings by the percentage.
Fix: Use only the increase since acquisition. Pre-acquisition profit is already covered by the cost.
Treating the dividend from the associate as group income
It is income in the investor's own books and students leave it there.
Fix: Remove it from investment income in the group accounts, since the share of profit already includes it. Credit the investment for the cash received if you start from cost plus share of profit.
Time-apportioning wrongly or ignoring part-year ownership
Students take a full year of associate profit when the shares were bought mid-year.
Fix: Take profit only from the date significant influence began, for example 6/12 if bought half-way through the year.

Worked examples

Example 1

Pearl acquired 30% of the ordinary shares of Opal on 1 January 20X1 for $90,000, gaining significant influence. At that date Opal's retained earnings were $100,000. At 31 December 20X3 Opal's retained earnings were $220,000. Opal has not paid dividends. Calculate the investment in associate at 31 December 20X3 and the amount added to group retained earnings.

Show the solution

Share of post-acquisition profit = 30% × ($220,000 − $100,000) = 30% × $120,000.
This equals $36,000.
Investment in associate = cost + share of post-acquisition profit = $90,000 + $36,000.
This equals $126,000.
The $36,000 is the amount added to group retained earnings.

Answer: Investment in associate is $126,000 and $36,000 is added to group retained earnings.

Example 2

Ruby owns 40% of Garnet, acquired several years ago for $200,000 when Garnet's retained earnings were $150,000. At 31 December 20X5 Garnet's retained earnings are $350,000. During the year Garnet sold goods to Ruby for $120,000 at a mark-up of 25% on cost. Half of these goods are still in Ruby's inventory at the year end. Garnet's profit for the year was $60,000. There was no opening unrealised profit in inventory. Garnet's retained earnings and profit for the year are stated before any adjustment for unrealised profit. Calculate the investment in associate at 31 December 20X5 and the share of associate profit in the consolidated statement of profit or loss.

Show the solution

Share of post-acquisition profit before adjustment = 40% × ($350,000 − $150,000) = 40% × $200,000 = $80,000.
Goods still held at selling price = 50% × $120,000 = $60,000.
Profit in those goods = $60,000 × 25 ÷ 125 = $12,000.
Ruby's share of the unrealised profit = 40% × $12,000 = $4,800. There is no opening unrealised profit, so the whole $4,800 relates to this year.
This is a sale by the associate to the investor, so the unrealised profit is not deducted from the investment. Investment in associate = $200,000 + $80,000 = $280,000.
Share of associate profit in P/L = 40% × $60,000 − $4,800 = $24,000 − $4,800 = $19,200.
The goods are held by Ruby, so they are in group inventory. Under ACCA's approach, debit the share of associate profit $4,800 and credit group inventory $4,800.
Group retained earnings include Ruby's share of Garnet's post-acquisition profit after the adjustment: $80,000 − $4,800 = $75,200.

Answer: Investment in associate is $280,000 and the share of associate profit in the consolidated statement of profit or loss is $19,200. Group inventory is reduced by $4,800.

Exam tips

Look at the percentage first. A holding of 20% to 50% usually signals an associate, but read the question for facts about control, such as board majority or contractual rights.
In objective test questions, the trap is often the unrealised profit. Work out the margin correctly from mark-up (mark-up ÷ (100 + mark-up)) before multiplying by the investor's share.
Show the working for the investment in associate in constructed response answers. Cost, share of post-acquisition profit and unrealised profit as separate lines earn method marks.
Only the profit on goods still unsold at the year end counts. If the question says the goods were all sold on, there is no adjustment.
In the statement of profit or loss, show the associate as one line after group operating profit and finance costs. Do not add its revenue or expenses.

Practice questions from Preparation of consolidated financial statements for a simple group

Accounting for Associates: Equity Method: frequently asked questions

What is the difference between a subsidiary and an associate?

A subsidiary is controlled, so its assets, liabilities, income and expenses are added line by line and a non-controlling interest is shown. An associate is only under significant influence, so it appears as one line using the equity method.

Is 20% ownership always an associate?

No. IAS 28 presumes significant influence at 20% or more of voting power, but this can be rebutted with clear evidence. Likewise, influence can exist below 20% if other indicators are present, such as board representation.

How do I calculate the investment in associate?

Start with cost. Add your percentage of the associate's post-acquisition profit, and any other comprehensive income. Deduct your share of unrealised profit on sales by the investor to the associate, any impairment, and dividends received if you started from cost plus profit.

How do I treat unrealised profit with an associate?

Calculate the profit in unsold inventory, then take only the investor's percentage of it. If the associate sold to the investor, deduct it from the share of associate profit and credit group inventory. If the investor sold to the associate, deduct it from the investor's profit and credit the investment in associate. Revenue and cost of sales are not eliminated.