Financial Reporting · The concepts and principles of groups and consolidated financial statements

Accounting for Associates Using the Equity Method (IAS 28)

Updated 11 October 2026 · Fact-checked

The equity method is how IAS 28 requires an investor to account for an associate, an entity where it has significant influence. You record the investment at cost, then add your share of the associate's post-acquisition profits, deduct impairment and any unrealised profit on trading, and show it as one line in the statement of financial position.

Understand Accounting for Associates: Equity Method

An associate is an entity over which the investor has significant influence but not control. Significant influence is the power to take part in financial and operating policy decisions. A holding of 20% or more of the voting power is presumed to give it, unless the facts show otherwise. Board seats, policy input and material transactions are other signs.

Because you do not control an associate, you do not add up its assets and liabilities line by line. That is full consolidation, used for subsidiaries. Instead you treat the associate as a single investment whose value moves with the associate's results. This is the equity method.

The investment starts at cost. Each year the carrying amount goes up by your share of the associate's profit after tax, and by your share of its other comprehensive income. It goes down by dividends received, because a dividend is a return of the value you have already recognised. It also goes down by any impairment.

In the consolidated statement of profit or loss you show share of profit of associate as one line, after tax, normally below group operating profit and above group profit before tax. Share of the associate's OCI goes in the group OCI. You do not include the associate's revenue or costs, and there is no non-controlling interest for an associate.

When the group and the associate trade with each other, any profit still sitting in inventory has not been earned from outsiders. You remove your share of that unrealised profit. This is the main adjustment examiners test.

Key rules to remember

Carrying amount of associate (SOFP): Cost + share of post-acquisition retained earnings (and OCI reserves) − impairment − unrealised profit adjustment (if the parent sells to the associate); Post-acquisition = associate's reserves at the reporting date − reserves at acquisition, multiplied by the group's %.
Share of associate's profit (P&L): Group % × associate's profit after tax for the year (adjusted for unrealised profit where relevant); Shown as one line. Pro-rate for the period of ownership if the associate was acquired part-way through the year.
Unrealised profit in inventory: Profit on the sale × proportion still in inventory at year end; Work out the margin first. Mark-up on cost of 25% is a margin of 20% on selling price.
Group's share of unrealised profit: Unrealised profit × group % holding; Only the group's share is eliminated for an associate, unlike a subsidiary where the whole profit is eliminated.
Investment roll-forward: Opening carrying amount + share of profit after tax (after deducting the group's share of unrealised profit) + share of OCI − dividends received − impairment = closing carrying amount; Useful when the question gives the opening balance rather than the cost. The unrealised profit is deducted within the share of profit, so do not deduct it a second time.
Significant influence presumption: Holding of 20% or more of voting power is presumed to give significant influence; It is a presumption, not an automatic rule. Facts can rebut it, and influence can exist below 20%.

How to solve Accounting for Associates: Equity Method questions

Use the same sequence for any equity method question. Write each step as a short working so you pick up method marks even if one number is wrong.

1Confirm the investee is an associate: significant influence, usually 20% or more but not control. Note the group % and the acquisition date.
2Calculate the associate's post-acquisition movement in reserves: reserves at the reporting date minus reserves at acquisition. Include OCI reserves if given.
3Calculate any unrealised profit. Find the profit in closing inventory, then take the group's % of it. Note who sold to whom.
4Build the investment in associate: cost + group % of post-acquisition reserves − impairment − unrealised profit if the parent was the seller.
5Build the P&L line: group % of the associate's profit after tax for the period owned, adjusted for unrealised profit. Add share of OCI to group OCI.
6Adjust consolidated retained earnings: parent's reserves + group share of the associate's post-acquisition profits − unrealised profit − impairment.
7Remove the parent's dividend income from the associate and do not add the associate's assets and liabilities line by line. Check the balance sheet still balances.

Quickest way: One-line investment shortcut

When to use it: Use it in Section A and OT case questions that ask for the carrying amount of an associate or the share of profit, where you only need one number.

Write the group % and the associate's profit or reserve movement after acquisition.
Multiply to get the share. Do this first, before any adjustments.
Subtract the group's share of unrealised profit, only if the sale was by the parent to the associate when you are calculating the investment. If the associate sold to the parent, the adjustment reduces the group inventory and retained earnings instead.
Subtract any impairment. Then add the result to cost, or to the opening balance, and take off dividends if you are rolling forward.
Check the answer is one figure and not a sum of line items from the associate's statements.

Common mistakes in Accounting for Associates: Equity Method

Adding 100% of the associate's assets, liabilities, revenue or costs into the group figures.
Students mix up the equity method with full consolidation, which is used for subsidiaries.
Fix: Remember that an associate gets one line in the SOFP and one line in P&L. No line-by-line addition, and no NCI.
Including the associate's whole retained earnings rather than only post-acquisition reserves.
Students forget that profits earned before acquisition are already paid for in the cost.
Fix: Always subtract reserves at acquisition from reserves now before applying the group %.
Treating the dividend received from the associate as group income.
The parent's own books show dividend income, so students leave it in.
Fix: Dividends reduce the investment in the roll-forward and are removed from group income. The share of profit already captures the associate's earnings.
Eliminating all of the unrealised profit instead of the group's share.
Students copy the subsidiary rule where the whole intra-group profit is removed.
Fix: For associates multiply the unrealised profit by the group % holding.
Using the wrong margin when the question gives a mark-up.
Mark-up on cost and margin on selling price look similar in the text.
Fix: Convert first. A 25% mark-up on cost means profit is 25 ÷ 125 = 20% of selling price. Then multiply by the inventory still held at selling price.
Putting the unrealised profit adjustment in the wrong place.
Students do not check the direction of the sale.
Fix: If the parent sold to the associate, reduce the share of associate's profit (and so group retained earnings) and reduce the investment in associate. If the associate sold to the parent, reduce group inventory and the share of associate's profit (and so group retained earnings).

Worked examples

Example 1

On 1 January 20X1 Pine bought 30% of the shares of Ash for $600,000 and gained significant influence. Ash's retained earnings were $800,000 at that date. At 31 December 20X4 Ash's retained earnings were $1,400,000. The investment in Ash was impaired by $20,000 in total by 31 December 20X4. There has been no trading between the companies. Calculate the carrying amount of the investment in Ash in Pine's consolidated statement of financial position at 31 December 20X4.

Show the solution

Check the status: 30% with significant influence, so Ash is an associate and the equity method applies.
Post-acquisition reserves of Ash = $1,400,000 − $800,000 = $600,000.
Group share = 30% × $600,000 = $180,000.
Carrying amount = cost $600,000 + share of post-acquisition reserves $180,000 − impairment $20,000 = $760,000.

Answer: $760,000

Example 2

On 1 April 20X4 Maple owned 25% of Oak, an associate. At 1 April 20X4 the carrying amount of the investment was $400,000. For the year ended 31 March 20X5 Oak made a profit after tax of $500,000 and paid a dividend of $100,000. During the year Maple sold goods to Oak for $200,000 at a margin of 25% on selling price. Half of these goods were still in Oak's inventory at 31 March 20X5. Calculate (a) the share of profit of associate included in Maple's consolidated profit or loss and (b) the carrying amount of the investment at 31 March 20X5.

Show the solution

Share of Oak's profit = 25% × $500,000 = $125,000.
Profit in goods still held by Oak = $200,000 × 50% × 25% = $25,000.
Group share of the unrealised profit = 25% × $25,000 = $6,250.
Because Maple (the parent) sold to the associate, the $6,250 is deducted within the share of profit of associate and from the investment. It is not taken from cost of sales.
Dividend received = 25% × $100,000 = $25,000. This reduces the investment and is not group income.
(a) Share of profit of associate in the consolidated P&L = $125,000 − $6,250 = $118,750.
(b) Closing carrying amount = $400,000 + $118,750 − $25,000 = $493,750.

Answer: (a) Share of profit of associate: $118,750. (b) Investment in associate: $493,750.

Exam tips

Read who sold to whom before you calculate anything. The direction decides which account the unrealised profit adjustment hits.
In Section A and OT cases, the answer is usually one figure. Write the working on the scratchpad: cost, group share of post-acquisition reserves, then adjustments.
In Section C, set out separate workings for the investment, the share of profit and group retained earnings. Marks are given for each working even if a later figure is wrong.
Check the dates. If the associate was acquired part-way through the year, include only profit after the acquisition date.
Learn a one-line contrast between methods: subsidiaries are consolidated line by line with NCI, associates appear as one line using the equity method.

Practice questions from The concepts and principles of groups and consolidated financial statements

Accounting for Associates: Equity Method in other exams

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

Accounting for Associates: Equity Method: frequently asked questions

What is the difference between the equity method and full consolidation?

Full consolidation adds 100% of a subsidiary's assets, liabilities, income and expenses line by line, and shows a non-controlling interest. The equity method shows an associate as one investment line, adjusted for the group's share of its profit. There is no NCI under the equity method.

How do I calculate the investment in an associate in the consolidated SOFP?

Start with cost. Add the group's share of the associate's post-acquisition reserves. Then deduct any impairment and, if the parent sold goods to the associate, the group's share of unrealised profit. If you are given the opening balance, add share of profit and OCI and deduct dividends instead.

How is unrealised profit on trading with an associate adjusted?

Work out the profit in the goods still held at the year end, then take only the group's percentage of it. If the parent sold to the associate, deduct it from the share of associate's profit (and so group retained earnings) and from the investment in associate. If the associate sold to the parent, deduct it from group inventory and from the share of associate's profit (and so group retained earnings).

Does 20% ownership always mean an associate?

No. A holding of 20% or more of the voting power is presumed to give significant influence, but the presumption can be rebutted by the facts. Influence can also exist below 20% if other evidence supports it.