Strategic Business Reporting (International) · Associates and joint arrangements

Equity Method Accounting for Associates in ACCA SBR

Updated 11 October 2026 · Fact-checked

The equity method (IAS 28) records an associate as one line in the group statement of financial position. You start at cost, add your share of post-acquisition profit and OCI, and deduct dividends received and impairment. The group profit or loss shows one line for your share of the associate's profit.

Understand Equity Method Accounting for Associates

An associate is an entity over which the investor has significant influence. Significant influence is the power to take part in financial and operating policy decisions, without control. It is normally presumed when you hold 20% or more of the voting power. This is a presumption, not a fixed rule. Board seats, policy-making role and material transactions can also show it.

You do not add the associate's assets and liabilities line by line, as you do for a subsidiary. You do not control them. Instead, you show your investment as a single asset, Investment in associate, and your share of its results as a single line in profit or loss.

The investment starts at cost. Each year it grows by your share of the associate's profit and your share of its other comprehensive income (OCI). It falls when the associate pays a dividend, because the dividend is a return of value you have already recognised. It also falls if the investment is impaired.

Goodwill on acquisition is calculated like subsidiary goodwill, using fair values of the associate's net assets at the acquisition date. It is not shown separately. It stays inside the carrying amount of the investment. It is not amortised. There is no separate goodwill impairment test. The whole investment is tested under IAS 36 when there is an indication of impairment. Any excess of your share of fair value of net assets over cost is a gain, included as income in determining your share of profit in the period of acquisition.

In the exam, you must also explain why the equity method applies. Use the scenario facts to argue that significant influence exists or does not exist.

Key rules to remember

Carrying amount of associate at year end: Cost + share of post-acquisition profit + share of post-acquisition OCI − dividends received − impairment losses; Use the associate's post-acquisition movement in net assets, then take your percentage share. Adjust for fair value depreciation and unrealised profits.
Goodwill within the investment: Cost of investment − (% × fair value of associate's identifiable net assets at acquisition); A positive figure is goodwill and stays inside the investment. A negative figure is a gain recognised in profit or loss.
Share of profit of associate in group P&L: % × associate's profit after tax for the period (adjusted); Shown as a single line. Adjust for fair value uplifts, accounting policy differences and unrealised profit. Time-apportion if acquired mid-year.
Share of OCI of associate: % × associate's OCI for the period; Shown in group OCI as a separate item. It is not included in the group profit for the year.
Significant influence presumption: Holding of 20% or more of voting power is presumed to give significant influence; The presumption can be rebutted by evidence. Influence can exist below 20%.

How to solve Equity Method Accounting for Associates questions

Use the same sequence for any associate question. Work in a clear schedule so you earn method marks even if a figure is wrong.

1Confirm the classification. Check the percentage of votes, board representation and other signs of influence. State why it is an associate and not a subsidiary or simple investment.
2Fix the acquisition date and calculate the net assets at that date at fair value. Include any fair value adjustments to the associate's assets.
3Calculate goodwill or gain: cost less your share of fair value of net assets at acquisition. Keep it inside the investment.
4Calculate the post-acquisition movement in the associate's net assets. Use closing reserves less reserves at acquisition, adjusted for extra depreciation on fair value uplifts.
5Take your share of the post-acquisition profit and OCI. Time-apportion the profit for the year if acquisition was mid-year.
6Build the investment line: cost, add share of profit, add share of OCI, deduct dividends received, deduct any impairment.
7Show the single line for share of profit in the P&L and the share of OCI in group OCI. Remove dividend income from the investor's own profit if already included.
8Add a short explanation of treatment and any judgement. This earns professional skills marks.

Quickest way: Net asset working for the investment

When to use it: Use when the question gives the associate's net assets at the reporting date and at acquisition, with no complex dividends or impairment.

Write the associate's net assets at the year end and at acquisition, both at fair value.
Take the difference. This is the post-acquisition movement after fair value adjustments.
Multiply by your percentage.
Add the result to your share of net assets at acquisition plus goodwill. This equals cost plus the share of post-acquisition movement.
Deduct any impairment, then check the answer against the cost-plus-share-less-dividends build-up.

Common mistakes in Equity Method Accounting for Associates

Consolidating the associate line by line.
Students treat the associate like a subsidiary because the workings look similar.
Fix: Show one line for the investment and one line for the share of profit. Do not add assets, liabilities, revenue or costs.
Leaving dividends received in group profit as well as share of profit.
The investor's own ledger already shows dividend income, and students forget to remove it.
Fix: Remove the dividend income from group profit and deduct it from the investment, because the share of profit already captures the value.
Amortising goodwill or testing it on its own.
Students mix up old practice and subsidiary goodwill testing.
Fix: Keep goodwill inside the investment. Test the whole carrying amount under IAS 36 only when there is an impairment indicator.
Using the share of the whole year's profit when the associate was acquired mid-year.
The acquisition date is missed in the scenario.
Fix: Only the post-acquisition portion counts. Time-apportion the profit and use net assets at the acquisition date.
Ignoring fair value adjustments and the extra depreciation they create.
Students use book values for net assets.
Fix: Use fair values at acquisition. Deduct extra depreciation on uplifts from the associate's profit before taking your share.
Asserting significant influence from 20% alone without using the facts.
Students memorise the number and skip the application.
Fix: Say 20% is a presumption, then cite board seats, policy input and other evidence from the scenario.

Worked examples

Example 1

On 1 April 20X1, Alpha bought 30% of Beta's equity shares for $5,400,000 and gained significant influence. Beta's net assets at that date had a fair value of $16,000,000. For the year ended 31 March 20X3, Beta's net assets at the year end were $21,000,000. During the two years Beta paid dividends of $1,000,000 in total, and these are already deducted from Beta's net assets. There was no impairment and no other equity movement. Calculate the carrying amount of the investment in Beta at 31 March 20X3.

Show the solution

Share of fair value of net assets at acquisition: 30% × $16,000,000 = $4,800,000.
Goodwill within the investment: $5,400,000 − $4,800,000 = $600,000.
Post-acquisition movement in Beta's net assets: $21,000,000 − $16,000,000 = $5,000,000.
Share of the movement: 30% × $5,000,000 = $1,500,000. Because net assets are already after dividends, this movement is net of the dividends paid.
Carrying amount: share of net assets at year end plus goodwill = 30% × $21,000,000 + $600,000 = $6,300,000 + $600,000 = $6,900,000.
Check by build-up: cost $5,400,000 + $1,500,000 = $6,900,000.

Answer: The investment in associate is $6,900,000 at 31 March 20X3. It includes $600,000 of goodwill, which is not shown separately.

Example 2

Gamma holds 25% of Delta, bought on 1 October 20X1 for $3,000,000, giving significant influence. At that date Delta's net assets had a carrying amount of $10,000,000 and fair value of $11,000,000. The uplift relates to equipment with a remaining life of 5 years, and depreciation is straight line. Delta's profit after tax for the year ended 31 December 20X1 was $2,400,000, earned evenly. Its OCI for the year was a revaluation gain of $400,000, all arising after 1 October. Delta paid no dividend. Calculate the share of profit and OCI for Gamma's year ended 31 December 20X1, and the closing carrying amount of the investment.

Show the solution

Goodwill: 25% × $11,000,000 = $2,750,000. Cost $3,000,000 − $2,750,000 = $250,000 goodwill.
Post-acquisition profit for 3 months: $2,400,000 × 3/12 = $600,000.
Extra depreciation on the uplift: $1,000,000 ÷ 5 years × 3/12 = $50,000.
Adjusted post-acquisition profit: $600,000 − $50,000 = $550,000.
Gamma's share of profit: 25% × $550,000 = $137,500.
Share of OCI: 25% × $400,000 = $100,000.
Closing carrying amount: $3,000,000 + $137,500 + $100,000 = $3,237,500.

Answer: Gamma shows share of profit of associate of $137,500 in profit or loss and share of OCI of $100,000 in OCI. The investment in associate is $3,237,500.

Exam tips

Always give a one-sentence reason why the entity is an associate. Quote scenario evidence. This supports the technical and the professional skills marks.
Set out a short working for goodwill, post-acquisition movement and the investment line. Markers award marks for each working even if the final number is wrong.
Watch the dates. Mid-year acquisitions and part-year profit are common traps.
Check whether the question asks for the P&L figure, the OCI figure or the statement of financial position figure, and present each in the right place.
If the scenario hints at impairment, explain that the whole investment is tested under IAS 36 and name the indicator.

Practice questions from Associates and joint arrangements

Equity Method 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 Accounting for Associates: frequently asked questions

How is an associate shown in the consolidated statement of financial position?

It is shown as one non-current asset line called investment in associate. The amount is cost plus your share of post-acquisition profit and OCI, less dividends received and any impairment. Goodwill stays inside this figure.

Is goodwill on an associate tested for impairment separately?

No. Goodwill is not recognised separately, so it is not tested on its own. The entire carrying amount of the investment is tested under IAS 36 when there is an indicator of impairment.

What happens to dividends received from an associate?

They are not income in group profit. They reduce the carrying amount of the investment, because your share of the associate's profit has already been recognised.

Does 20% ownership always mean an associate?

No. 20% or more of voting power is only a presumption of significant influence. Evidence such as board seats and involvement in policy decisions can support or rebut it, and influence can exist below 20%.