The equity method is an accounting technique required under IAS 28 *Investments in Associates and Joint Ventures* for investments where an investor has significant influence over an investee (an associate), or for interests in joint ventures. Significant influence is presumed when an investor holds 20% or more of voting power, unless clearly demonstrated otherwise (IAS 28.5–6).

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Initial Recognition

At acquisition, the investment is recorded at cost on the balance sheet. This cost includes the purchase price plus any directly attributable transaction costs. The investment appears as a single line item under non-current assets (IAS 28.10).

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Subsequent Measurement – How the Method Works

After initial recognition, the carrying amount is adjusted each period using the following mechanics:

• Share of profit or loss: The investor recognises its proportionate share of the associate's profit or loss in its own profit or loss. For example, a 30% stake means 30% of the associate's net income is recognised (IAS 28.10).
• Share of other comprehensive income (OCI): The investor similarly picks up its share of the associate's OCI items (e.g., revaluation surpluses, foreign currency translation differences) directly in its own OCI (IAS 28.10).
• Dividends received: When the associate declares a dividend, the investor does not recognise income. Instead, the carrying amount of the investment is reduced by the investor's share of the dividend, since the dividend represents a return of the investment (IAS 28.10).
• Upstream and downstream transactions: Unrealised profits and losses on transactions between the investor and associate must be eliminated to the extent of the investor's interest (IAS 28.28).

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Losses in Excess of Carrying Amount

If the investor's share of losses equals or exceeds the carrying amount of the investment (including any long-term interests that form part of the net investment), the investor discontinues recognising further losses. Additional losses are only recognised if the investor has incurred legal or constructive obligations on behalf of the associate (IAS 28.38–39).

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Goodwill and Fair Value Adjustments

Any excess of cost over the investor's share of the net fair value of identifiable assets and liabilities at acquisition date is treated as goodwill, included within the carrying amount of the investment and not separately amortised (IAS 28.32). Conversely, excess fair value over cost (a bargain purchase) is recognised immediately in profit or loss (IAS 28.32).

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Impairment Testing

The entire carrying amount of the investment is tested for impairment as a single asset under IAS 36, comparing its carrying amount to its recoverable amount (higher of fair value less costs of disposal and value in use), whenever impairment indicators exist (IAS 28.40–41).

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Disclosure Requirements

Key disclosures include the fair value of investments where published price quotations exist, summarised financial information of material associates, and the nature/extent of significant restrictions on the associate's ability to transfer funds (IAS 28.37).

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The equity method elegantly reflects the investor's economic stake by growing or shrinking the carrying amount in line with the associate's underlying performance, making it more informative than simply holding an investment at cost.