IAS 28 Equity Method Procedures — Core Rule

Under IAS 28 equity method procedures, an investor recognises its investment in an associate or joint venture initially at cost, then adjusts the carrying amount each period to reflect the investor's share of the investee's post-acquisition profits, losses, and other comprehensive income.

How IAS 28 Equity Method Procedures Works

• Initial recognition at cost (IAS 28.10): The investment is recorded at cost on the date significant influence (typically 20–50% ownership) or joint control is established. Transaction costs are included in the initial carrying amount, unlike financial instruments under IFRS 9.

• Share of profit or loss (IAS 28.10–11): Each reporting period, the carrying amount is increased or decreased by the investor's proportionate share of the investee's profit or loss. This share is recognised in the investor's profit or loss. The investor must align the investee's accounting policies with its own before computing the share (IAS 28.35–36).

• Uniform accounting policies and reporting dates (IAS 28.34–35): If the investee uses different accounting policies for like transactions, the investor adjusts the investee's financial statements to conform before applying the equity method. Additionally, if the investee's reporting date differs by more than three months from the investor's, the investor prepares adjusted information using the most recent available financial statements (IAS 28.33).

• Upstream and downstream transactions (IAS 28.28–29): Unrealised profits on transactions between the investor and the associate are eliminated to the extent of the investor's interest. Upstream transactions (associate sells to investor) and downstream transactions (investor sells to associate) are both subject to elimination until the asset is sold to a third party.

• Losses exceeding carrying amount (IAS 28.38–39): If the investor's share of losses reduces the carrying amount to zero, the investor discontinues recognising further losses unless it has incurred legal or constructive obligations or made payments on behalf of the associate. Any long-term interests that form part of the net investment (e.g., unsecured receivables) are also reduced before suspending loss recognition (IFRS 9 applies to such balances first under IAS 28.38A).

• Impairment testing (IAS 28.40–43): The entire carrying amount (including any goodwill embedded within it) is tested as a single asset under IAS 36 when objective evidence of impairment exists. The recoverable amount is the higher of value in use and fair value less costs of disposal.

IAS 28 Equity Method Procedures — Practical Example

An investor holds a 30% stake in Associate A, acquired at €500,000. Associate A reports net profit of €200,000 and OCI of €40,000 (revaluation surplus) for the year.

Investor's share

• Share of profit: 30% × €200,000 = €60,000
• Share of OCI: 30% × €40,000 = €12,000

Journal entries — year-end equity method adjustment

Closing carrying amount: €500,000 + €60,000 + €12,000 = €572,000.

If Associate A also pays a dividend of €20,000 (investor's share: €6,000):

Dividends received reduce the carrying amount because they represent a return of capital already reflected in the investee's net assets.

IAS 28 Equity Method Procedures — Common Pitfalls

• Failing to eliminate intragroup-style profits: Practitioners sometimes overlook upstream transaction eliminations, particularly when an associate sells inventory to the investor that remains unsold at year-end. The unrealised profit equal to the investor's share (e.g., 30%) must be deducted from the investment carrying amount and from the investor's cost of goods sold — an audit trap frequently cited in findings.

• Impairment allocated to goodwill separately: Some preparers mistakenly allocate impairment first to goodwill embedded in the investment. IAS 28.42 explicitly states that any impairment loss is allocated to the investment as a whole; separately identifying and impairing the goodwill component is not permitted.

• Incorrect suspension of losses: Investors sometimes continue recognising losses after the carrying amount reaches zero without a valid obligation. Conversely, others suspend too early, forgetting that long-term interests (loan balances forming part of the net investment) must be drawn down before full suspension (IAS 28.38–39).

IAS 28 Equity Method Procedures — Key Paragraphs

• IAS 28.10 — initial recognition at cost and subsequent adjustment mechanism
• IAS 28.28–29 — elimination of unrealised gains on upstream and downstream transactions
• IAS 28.33–36 — uniform accounting policies and alignment of reporting dates
• IAS 28.38–39 — suspension of loss recognition when carrying amount reaches zero
• IAS 28.40–43 — impairment testing of the investment as a single asset under IAS 36