Advanced Accounting · AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

Equity Method of Accounting under AS 23

Updated 4 October 2026 · Fact-checked

Under the equity method in AS 23, you record the investment in an associate at cost, which includes goodwill or capital reserve. Each year you add your share of the associate's profit, deduct your share of losses and deduct dividends received. The result is the carrying amount in consolidated financial statements.

Understand Equity Method of Accounting under AS 23

An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture. Significant influence is the power to take part in the financial and operating policy decisions of the investee, without controlling them. Holding 20% or more of the voting power, directly or indirectly, is presumed to give significant influence unless shown otherwise.

The equity method is used in consolidated financial statements. You first record the investment at cost. Then you adjust the carrying amount for the change in the investor's share of the associate's net assets after the date of acquisition. The statement of profit and loss shows the investor's share of the associate's results.

Why is this logical? The investor owns a share of the associate's net assets. When the associate earns profit, that share grows, so the investment grows. When the associate pays a dividend, assets leave the associate and come to you as cash, so the investment falls. That is why dividends are not income in consolidated accounts under this method.

Cost usually includes goodwill or capital reserve. Compare the cost of the investment with your share of the equity of the associate at the date of acquisition. If cost is higher, the difference is goodwill. If cost is lower, the difference is capital reserve. Both stay inside the carrying amount of the investment. You do not show them separately.

Compare with the cost method, which keeps the investment at cost and takes dividends to income. This is how the investment appears in the investor's separate financial statements. The equity method gives a truer picture of the investor's stake in the associate.

Key rules to remember

Goodwill / Capital reserve at acquisition: Cost of investment − Investor's share in equity of associate at acquisition date; Positive result is goodwill. Negative result is capital reserve. Equity means share capital plus reserves and surplus at that date.
Carrying amount at year end: Cost + Share of post-acquisition profit − Share of post-acquisition loss − Dividends received; Cost includes goodwill or capital reserve. Dividends reduce the carrying amount.
Share of profit: Associate's profit after tax (and preference dividend) × Investor's % holding; Use profit after the date of acquisition only. Adjust for the pro-rata period if acquired mid-year.
Share of dividend received: Dividend declared and paid on equity shares × Investor's % holding; Shown as a reduction of the investment, not as income.
Loss limit: Share of losses recognised only until the carrying amount is reduced to zero; Further losses are not recognised, unless the investor has obligations. Later profits are recognised only after the unrecognised losses are recovered.

How to solve Equity Method of Accounting under AS 23 questions

Use the same sequence for any equity method question. It also gives you step marks.

1Check that the investee is an associate: significant influence, not a subsidiary or joint venture. Note the holding percentage.
2Find the associate's equity at the date of acquisition: share capital plus reserves and profits at that date.
3Calculate your share of that equity and compare it with the cost. State the goodwill or capital reserve.
4Work out the associate's post-acquisition profit or loss for each year. Take your share. Adjust for any preference dividend and for a part-year if needed.
5Calculate the dividend you received and deduct it from the investment.
6Prepare the carrying amount: cost plus share of profit minus dividends, or minus losses.
7Check the loss limit. If the carrying amount reaches zero, stop recognising losses.
8Show your working in a table and state the final amount clearly.

Quickest way: Carrying amount in one line

When to use it: Use this for MCQs and for the final check in written answers.

Carrying amount = Cost + (% × post-acquisition profit) − (% × dividends paid). Goodwill is already inside cost.
For MCQs, find the post-acquisition profit first. Many wrong options use total reserves instead.
Look for traps: dividends added instead of deducted, or goodwill added a second time.
In written answers, use three headings: cost and goodwill, share of profit, and dividends and closing balance. Write the working note clearly because it earns step marks.

Common mistakes in Equity Method of Accounting under AS 23

Adding dividends received to the carrying amount or treating them as income.
Students remember the cost method, where dividend is income.
Fix: Under the equity method, dividends reduce the investment because they are a return of the associate's net assets.
Taking share of the associate's total profits instead of post-acquisition profits.
Students ignore the acquisition date.
Fix: Profits up to the acquisition date are already in the cost. Take your share only of profits earned after it.
Showing goodwill as a separate asset and also leaving it in the investment.
Students copy the AS 21 treatment of goodwill on consolidation.
Fix: Under AS 23, goodwill or capital reserve is included in the carrying amount of the investment. It is not shown as a separate line.
Using the wrong equity at acquisition, for example only share capital.
Students forget the reserves and surplus.
Fix: Take share capital plus all reserves and profit balance at the acquisition date.
Continuing to recognise losses when the investment has become nil.
Students apply the share mechanically.
Fix: Stop when the carrying amount is zero. Recognise later profits only after they make up for the unrecognised losses.

Worked examples

Example 1

On 1 April 2026, H Ltd bought 30% of the equity shares of A Ltd for ₹40,00,000. On that date, A Ltd had equity share capital of ₹50,00,000 and reserves of ₹30,00,000. For the year ended 31 March 2027, A Ltd earned a profit of ₹20,00,000 and paid a dividend of ₹10,00,000. Calculate the carrying amount of the investment in H Ltd's consolidated balance sheet on 31 March 2027, and the goodwill or capital reserve.

Show the solution

Equity of A Ltd at acquisition = ₹50,00,000 + ₹30,00,000 = ₹80,00,000.
H Ltd's share = 30% × ₹80,00,000 = ₹24,00,000.
Goodwill = ₹40,00,000 − ₹24,00,000 = ₹16,00,000. It is included in the investment.
Share of profit = 30% × ₹20,00,000 = ₹6,00,000.
Dividend received = 30% × ₹10,00,000 = ₹3,00,000.
Carrying amount = ₹40,00,000 + ₹6,00,000 − ₹3,00,000 = ₹43,00,000.

Answer: Goodwill is ₹16,00,000, included in the investment. The carrying amount on 31 March 2027 is ₹43,00,000.

Example 2

On 1 April 2026, P Ltd acquired 40% of the equity shares of B Ltd for ₹30,00,000. On that date, B Ltd's share capital was ₹40,00,000 and reserves were ₹45,00,000. In the year ended 31 March 2027, B Ltd made a loss of ₹10,00,000 and paid no dividend. Find the capital reserve or goodwill, and the carrying amount on 31 March 2027.

Show the solution

Equity of B Ltd at acquisition = ₹40,00,000 + ₹45,00,000 = ₹85,00,000.
P Ltd's share = 40% × ₹85,00,000 = ₹34,00,000.
Cost is ₹30,00,000, which is lower than ₹34,00,000. Capital reserve = ₹34,00,000 − ₹30,00,000 = ₹4,00,000.
Share of loss = 40% × ₹10,00,000 = ₹4,00,000.
Carrying amount = ₹30,00,000 − ₹4,00,000 = ₹26,00,000.
The capital reserve of ₹4,00,000 is part of the carrying amount, so it is not shown separately.

Answer: Capital reserve is ₹4,00,000, included in the investment. The carrying amount on 31 March 2027 is ₹26,00,000.

Exam tips

Always write a working note showing equity at acquisition, goodwill or capital reserve, share of profit and dividends. This earns step marks even if one number is wrong.
In MCQs, check the date of acquisition and the profit period first. Most traps use total profit.
When the question gives a preference dividend, deduct the associate's preference dividend before taking your share of the profit.
State the treatment in words as well as numbers: goodwill or capital reserve is included in the carrying amount of the investment.
If the question asks for a comparison, say that the cost method keeps cost and takes dividends to income, while the equity method adjusts for share of profit and treats dividends as a reduction.

Practice questions from AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

Equity Method of Accounting under AS 23: frequently asked questions

What is the difference between the cost method and the equity method?

Under the cost method, the investment stays at cost and dividends are taken as income. Under the equity method, the investment is adjusted for your share of post-acquisition profits or losses, and dividends reduce the carrying amount. AS 23 requires the equity method in consolidated financial statements.

How do I calculate goodwill or capital reserve under AS 23?

Take your percentage of the associate's equity at the date of acquisition. Compare it with the cost of the investment. Excess cost is goodwill and a shortfall is capital reserve. Both stay inside the carrying amount.

Are dividends from an associate income in consolidated accounts?

No. Under the equity method, the share of the associate's profit is the income. The dividend you receive reduces the carrying amount of the investment, otherwise the same profit would be counted twice.

What happens when the associate's losses exceed the investment?

You stop recognising your share of losses once the carrying amount reaches zero. You recognise later profits only after they recover the losses you did not recognise.