Equity Method – FAQ | IFRS

Equity method

Last update

Equity method is used to account for investments in associates and joint-ventures. Simply put, the equity method is a simplified form of consolidation (IAS 28 27), with one major difference: items are not added line-by-line, but a single asset (investment in associate or joint-venture) is recognised in the statement of financial position and single lines are presented in P/L and OCI.

The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets.

The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income. Equity method for associates and joint ventures


The equity method of accounting should generally be used when an investment results in a 20% to 50% stake in another company, unless it can be clearly shown that the investment doesn’t result in a significant amount of influence or control. If, however, the investor has less than 20% of the investee’s shares but still has significant influence in its operations, then the investor must still use the equity method and not the cost method.

In this case, the terminology of “parent” and “subsidiary” are not used, unlike in the consolidation method where the investor exerts full control over its investee. Instead, in instances where it’s appropriate to use the equity method of accounting, the investee is often referred to as an “associate” or “affiliate”. Equity method for associates and joint ventures

The equity method either increases or decreases the investment account based on income earnings and dividend payments. It is best illustrated through an example.

Example: simple illustration of application of equity method

Entity A acquired 25% interest in Entity B on 1 January 20X1 for a total consideration of $50m and accounts for it using the equity method. Entity B’s net assets as per its financial statements amounted to $150m. Entity B’s assets include a real estate with a carrying amount of $20m and fair value of $35m and remaining useful life of 15 years. For other assets and liabilities, the carrying amount approximates fair value. Deferred tax is ignored in this example. Equity method for associates and joint ventures

At the date of acquisition, Entity A recognises an investment in Entity B at cost, that is at $50m. This amount can be broken down as follows:

EUR millions

25% share in B’s net assets as per its financial statements

37.50

25% share in fair value adjustment relating to real estate

3.75

Goodwill (not presented separately and not amortised) – remainder

8.75

Investment in Entity B at cost

50.00

Calculations: Equity method for associates and joint ventures

Net assets at carrying values as per the financial statements amount to EUR 150m, 25% thereof is EUR 150m * 25% = EUR 37.50m.

Real estate fair value EUR 35m less its carrying value of EUR 20m is EUR 15m, 25% thereof is EUR 15m * 25% = EUR 3.75m.

Goodwill is calculated as the difference between the total consideration of the 25% interest and the assets acquired at fair value (as per above, the net assets at carrying values acquired as per the financial statements plus the fair value of some of the assets acquired).

The journal entry at payment of the consideration is as follows:

DT

CR

Investments in associates

50.00

Cash

50.00

During the year ended 31 December 20X1, Entity B generated net income of $10m and paid dividends of $7m. Additionally, when applying equity method, Entity A needs to account for the $0.25m of additional depreciation charge on the fair value adjustment on real estate. This is calculated as fair value adjustment on real estate / 15 years of remaining useful life *25% share of Entity A (i.e. $15m/15 years * 25% interest).

Entries made by Entity A at 31 December 20X1 are as follows:

DT

CR

Investments in associates

(net income accounting less depreciation)

0.50

Share of profit of associates – Dividend 25% of EUR 7m

1.75

Share of profit of associates – Depreciation fair value adjustment

0.25

Share of profit of associates – Net income accounting

25% of (net income EUR 10m -/- dividend EUR 7M)

0.75

Cash (receipt dividend)

1.75


Equity method

Equity method for associates and joint ventures

Equity method

Equity method Equity method Equity method Equity method Equity method Equity method Equity method Equity method Equity method 

Leave a comment