IAS 28
Active
Investments in Associates and Joint Ventures
Prescribes the accounting for investments in associates and joint ventures using the equity method, including recognition, measurement and disclosure.
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Conceptual Framework Linkage
Why the equity method sits between cost and consolidation
The Conceptual Framework recognises different degrees of INVOLVEMENT justify different accounting treatments. Full control (consolidation) treats the investee as part of the same economic entity; NO influence (a passive investment) uses fair value or cost. Significant influence – real but not controlling power – calls for something in between: the equity method.
HOW IAS 28 MAPS TO THE FRAMEWORK
Substance over form – the equity method recognises the investor's SHARE of the investee's net assets and performance changes each period, reflecting genuine economic involvement without claiming full control Relevance – a single "cost" figure for a significant-influence investment would badly understate how the investor's wealth actually changes as the investee performs One-line consolidation – the equity method is sometimes called this because it captures the ECONOMIC effect of the investee's performance within a SINGLE line item on the investor's SOFP and SOPL, without the line-by-line combination of full consolidation
The equity method is a genuinely unique measurement basis in IFRS – neither pure historical cost nor pure fair value, but a "one-line consolidation" reflecting the investor's proportionate economic interest in the investee's changing net assets.
Measurement principles applied
The equity method continuously updates the investment's carrying amount to reflect the investor's SHARE of the investee's underlying changes – a dynamic measurement basis distinct from historical cost.
CORE EQUITY METHOD FORMULA
Carrying amount = Cost + Investor's share of post-acquisition profit/loss + Investor's share of post-acquisition OCI − Dividends received − Impairment
Qualitative characteristics in action: the equity method's continuous share-of-profit updates preserve relevance – the carrying amount genuinely tracks the investor's changing stake in the investee's net assets, unlike a static cost figure.
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Scope & Applicability
What IAS 28 covers
IAS 28 shall be applied by all entities that are investors with joint control of, or significant influence over, an investee – prescribing the application of the equity method when accounting for investments in associates and joint ventures.
EXEMPTIONS FROM APPLYING THE EQUITY METHOD
Venture capital organisations, mutual funds, unit trusts, and similar entities MAY elect to measure investments in associates/joint ventures at FVTPL under IFRS 9, if this election is made at initial recognition, measured for each investment separately An entity NOT required to present consolidated financial statements (e.g. a wholly owned subsidiary meeting specific conditions) may be exempt, similar to the IFRS 10 consolidation exemption When an investment is classified as held for sale under IFRS 5, it is accounted for under IFRS 5 instead
Key definitions you must know
Associate
An entity over which the investor has SIGNIFICANT INFLUENCE.
Joint venture
A joint arrangement whereby the parties that have JOINT CONTROL of the arrangement have rights to the NET ASSETS of the arrangement (per IFRS 11).
Significant influence
The power to participate in the financial and operating policy decisions of the investee, but is NOT control or joint control over those policies.
Equity method
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 net assets of the investee.
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Significant Influence – Identifying It
The rebuttable 20% presumption and other indicators
If an investor holds, directly or indirectly (e.g. through subsidiaries), 20% or more of the voting power of the investee, it is PRESUMED to have significant influence, UNLESS it can be clearly demonstrated otherwise. Conversely, if the investor holds LESS than 20%, it is presumed NOT to have significant influence, unless such influence can be clearly demonstrated.
OTHER INDICATORS OF SIGNIFICANT INFLUENCE (BEYOND SHAREHOLDING %)
Representation on the board of directors or equivalent governing body Participation in policy-making processes, including participation in decisions about dividends or other distributions Material transactions between the investor and investee Interchange of managerial personnel Provision of essential technical information
Worked example – rebutting the 20% presumption
Example 1: 25% shareholding with no genuine influence
An investor holds 25% of the voting shares in a company but has NO board representation, no participation in policy decisions, and the remaining 75% is held by a single dominant shareholder who exercises unilateral control over all operating and financial decisions, actively excluding the minority investor from any meaningful input.
Despite exceeding the 20% threshold, the PRESUMPTION of significant influence is REBUTTED by clear evidence the investor has no genuine ability to participate in policy decisions – the investment is instead accounted for as a financial asset under IFRS 9, NOT using the equity method.
This rebuttable presumption cuts both ways – a sub-20% holding CAN still qualify for equity accounting if genuine influence (e.g. via board representation) is demonstrated.
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The Equity Method – Full Worked Mechanics
Complete worked example – from acquisition to year-end carrying amount
Example 2: Associate acquired mid-year, with fair value adjustment and dividend
On 1 January, an investor acquires 30% of an associate for $900,000 cash. At acquisition, the associate's identifiable net assets had a fair value of $2,700,000 (30% share = $810,000), giving rise to $90,000 of goodwill embedded within the investment. During the year, the associate reports profit after tax of $400,000 and other comprehensive income (revaluation gain) of $60,000, and pays a total dividend of $150,000 to all shareholders.
Investment at acquisition = $900,000 (embedded goodwill of $90,000 not separately tested under IAS 36's goodwill rules – the WHOLE investment is tested for impairment as a single asset instead, see Section 7)
+ Share of profit = 400,000 × 30% = +$120,000 (SOPL)
+ Share of OCI = 60,000 × 30% = +$18,000 (OCI)
− Dividend received = 150,000 × 30% = −$45,000 (reduces the investment; NOT recognised as separate dividend income under the equity method)
Closing carrying amount = 900,000 + 120,000 + 18,000 − 45,000 = $993,000
+ Share of profit = 400,000 × 30% = +$120,000 (SOPL)
+ Share of OCI = 60,000 × 30% = +$18,000 (OCI)
− Dividend received = 150,000 × 30% = −$45,000 (reduces the investment; NOT recognised as separate dividend income under the equity method)
Closing carrying amount = 900,000 + 120,000 + 18,000 − 45,000 = $993,000
Dr
Investment in associate $120,000
SOFP
Cr
Share of profit of associate $120,000
SOPL
Dr
Cash (dividend received) $45,000
SOFP
Cr
Investment in associate $45,000
SOFP
CRITICAL: dividends received from an associate REDUCE the investment's carrying amount under the equity method – they are NOT recognised as investment income in profit or loss (unlike the cost method under IAS 27).
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Upstream & Downstream Transactions – Unrealised Profit Elimination
The elimination principle
Profits/losses from "upstream" transactions (associate to investor) and "downstream" transactions (investor to associate) are recognised in the investor's financial statements ONLY to the extent of UNRELATED investors' interests in the associate – the investor's OWN share of unrealised profit still sitting in inventory/assets held by the counterparty is ELIMINATED.
Unrealised profit eliminated = Investor's ownership % × Profit margin embedded in the year-end unsold inventory/asset
Worked example – downstream sale with unsold inventory
Example 3: Investor sells goods to its 40%-owned associate
An investor sells goods to its associate (40% owned) for $500,000, at a 20% gross margin. At year end, the associate still holds $150,000 (at selling price) of these goods, unsold, in its inventory.
Unrealised profit in year-end inventory = 150,000 × 20% = $30,000
Investor's share to eliminate = 30,000 × 40% = $12,000
The investor's share of the associate's profit (used in the equity method calculation) is REDUCED by $12,000 to eliminate its own unrealised profit share – this adjustment is made TO THE INVESTOR'S share of profit, not to the associate's own reported figures.
Investor's share to eliminate = 30,000 × 40% = $12,000
The investor's share of the associate's profit (used in the equity method calculation) is REDUCED by $12,000 to eliminate its own unrealised profit share – this adjustment is made TO THE INVESTOR'S share of profit, not to the associate's own reported figures.
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Losses Exceeding the Investment – The Zero Floor
Stopping equity accounting at zero – with worked example
If the investor's share of losses of an associate/joint venture EQUALS OR EXCEEDS its interest in the associate/joint venture, the investor DISCONTINUES recognising its share of further losses – the investment (including any long-term interests that, in substance, form part of the net investment) is reduced to ZERO. Additional losses are recognised, and a liability is recognised, ONLY to the extent the investor has incurred LEGAL or CONSTRUCTIVE obligations, or made payments on behalf of the associate.
Example 4: Associate losses wiping out the investment
An investor's 35%-owned associate carrying amount is $80,000 at the start of the year. The associate incurs a loss of $300,000 for the year (investor's 35% share = $105,000). The investor has provided no guarantees and made no further payments on the associate's behalf.
Loss recognised = capped at $80,000 (reducing the investment to NIL), NOT the full $105,000 share
Unrecognised excess = 105,000 − 80,000 = $25,000, tracked in memorandum only, and recognised in FUTURE periods only once the associate returns to profit and the investor's share of those future profits exceeds the unrecognised losses
Unrecognised excess = 105,000 − 80,000 = $25,000, tracked in memorandum only, and recognised in FUTURE periods only once the associate returns to profit and the investor's share of those future profits exceeds the unrecognised losses
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Impairment of Equity-Accounted Investments
The investment is tested as a SINGLE asset – not goodwill separately
After application of the equity method (including recognising the associate's/JV's losses per Section 6), the entity applies IAS 36 to determine whether it is necessary to recognise any ADDITIONAL impairment loss with respect to its net investment in the associate/joint venture. Because any goodwill relating to an associate/JV is included in the carrying amount of the investment (and NOT separately recognised), it is NOT tested for impairment separately in accordance with IAS 36's goodwill requirements – the WHOLE investment is tested as a single asset by comparing its recoverable amount with its carrying amount.
A common exam trap: students sometimes try to isolate and impairment-test the "goodwill" embedded within an equity-accounted investment separately, as if it were IFRS 3 goodwill within a subsidiary – this is INCORRECT. The entire investment is tested as one unit.
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Cessation of Significant Influence or Joint Control
Discontinuing the equity method
An entity discontinues use of the equity method from the date its investment CEASES to be an associate or joint venture. Any RETAINED interest is measured at FAIR VALUE at that date, and this fair value is regarded as the retained investment's fair value on initial recognition as a financial asset under IFRS 9.
Reclassification of gains/losses previously in OCI
The entity RECLASSIFIES to profit or loss the gain/loss previously recognised in OCI relating to the associate/JV, on the SAME basis as if the associate/JV had directly disposed of the related assets/liabilities itself – i.e. amounts that would be reclassified to SOPL on disposal (e.g. FX translation differences) ARE reclassified; amounts that would NOT be reclassified (e.g. revaluation surplus-type OCI) are transferred DIRECTLY to retained earnings instead.
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Disclosure Requirements
Required disclosures (summary – full detail also required by IFRS 12)
GENERAL DISCLOSURES
The fact that the equity method is used, and the measurement basis for investments where the FVTPL election has been made Summarised financial information of associates/joint ventures (assets, liabilities, revenues, profit/loss) The nature and extent of any significant restrictions on the ability of associates/joint ventures to transfer funds to the investor
SPECIFIC DISCLOSURES
Unrecognised share of losses of an associate/joint venture, both for the period and cumulatively, if the investor has discontinued recognising its share of losses The investor's share of contingent liabilities of associates/joint ventures incurred jointly with other investors
Most detailed related-entity disclosures now sit primarily within IFRS 12, with IAS 28 focused on the equity method accounting mechanics themselves.
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Critical Judgments & Estimates
Where management judgement matters most
SIGNIFICANT JUDGEMENTS
Whether the 20% presumption of significant influence should be rebutted, either upward or downward, based on the qualitative indicators Whether long-term interests (e.g. preference shares, long-term loans) form, in substance, part of the net investment for purposes of the loss-absorption floor Identifying impairment indicators specific to an equity-accounted investment
SIGNIFICANT ESTIMATES
Fair value of identifiable net assets at acquisition, to determine embedded goodwill within the investment Recoverable amount of the investment as a single asset under IAS 36 Unrealised profit calculations on upstream/downstream transactions where margin data must be estimated
Unlike a subsidiary, an associate's/joint venture's OWN financial statements are not directly consolidated line-by-line – errors or aggressive accounting policies within the associate's OWN statements flow through only via the single "share of profit" line, which can obscure underlying issues from a surface-level review.
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IFRS vs US GAAP – Key Differences
Comparison – IAS 28 vs US GAAP (ASC 323)
FeatureIFRS (IAS 28)US GAAP
Significant influence threshold20% presumption, rebuttable both waysAlso a 20% presumption, broadly converged
Goodwill embedded in the investmentNOT separately tested; whole investment tested as one asset under IAS 36Similarly not separately tested – the investment as a whole is assessed for other-than-temporary impairment
Impairment reversalPermitted, subject to IAS 36's general reversal rules for the investment as a single assetGenerally NOT reversed once an other-than-temporary impairment is recognised
Uniform accounting policiesAdjustments made if the associate's accounting policies differ from the investor'sSimilar requirement to conform accounting policies, broadly converged
FVTPL election for venture capital-type entitiesExplicit election available under IAS 28Similar fair value option available under specific US GAAP guidance for certain qualifying entities
IAS 28 and its US GAAP counterpart are substantially converged on the core equity method mechanics – the clearest divergence is impairment REVERSAL, which IFRS permits (subject to IAS 36) but US GAAP generally prohibits once an other-than-temporary impairment has been recognised.
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Statement Mapping – Where Every Equity-Accounted Event Lands
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Initial acquisition of an associate/JV interestSOFPRecognised at cost (including embedded goodwill)
Investor's share of the investee's profitSOPL SOFPSingle-line "share of profit of associates/JVs"; investment carrying amount increases
Investor's share of the investee's OCIOCI SOFPFollows the investee's own OCI classification (recycling or not)
Dividend received from the associate/JVSOFPREDUCES the investment; not recognised as SOPL income
Unrealised profit on upstream/downstream transactionsSOPL SOFPEliminated to the extent of the investor's own interest
Losses reducing the investment to nilSOPL SOFPCapped at the investment's carrying amount; excess tracked off-balance-sheet
Impairment of the equity-accounted investmentSOPL SOFPInvestment tested as a single asset per IAS 36; goodwill not isolated
Cessation of significant influence / joint controlSOPL OCI SOFPRetained interest remeasured to fair value; reclassification of prior OCI per disposal-basis logic
Dividends received (cash)Cash Flow StatementInvesting activities inflow, per IAS 7
Share of profit/loss (non-cash)Cash Flow StatementDeducted/added back within operating activities under the indirect method
Summarised investee financial informationNotesMandatory disclosure per IAS 28/IFRS 12
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Related Standards – Cross-Reference Map
How IAS 28 connects across the IFRS body of literature
StandardNature of the connection
IFRS 10Supplies the "control" boundary – an investee that IS controlled falls out of IAS 28's scope entirely and into IFRS 10 consolidation instead
IFRS 11Supplies the "joint control" definition and distinguishes joint ventures (equity method, IAS 28) from joint operations (each party accounts for its own share of assets/liabilities directly)
IFRS 3Supplies acquisition accounting concepts (fair value of identifiable net assets, goodwill calculation) used at initial recognition of the investment
IAS 36Governs impairment testing of the equity-accounted investment as a SINGLE asset, since embedded goodwill is not separately tested
IFRS 5Investments classified as held for sale are reclassified out of equity method accounting and into IFRS 5's measurement rules
IFRS 9Governs measurement once the equity method ceases (retained interest reclassified as a financial asset), and the FVTPL election available to qualifying venture capital-type entities
IFRS 12Supplies the more extensive disclosure requirements about interests in associates/joint ventures that supplement IAS 28's accounting mechanics
IAS 27Offers the equity method as one of the three permitted measurement options for investments in a PARENT's own separate financial statements
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Quick-Reference Glossary
One-line consolidation
A colloquial description of the equity method, reflecting the fact that it captures the investee's economic performance within a single SOFP/SOPL line item rather than full line-by-line combination.
Joint control
The contractually agreed sharing of control of an arrangement, existing only when decisions about relevant activities require unanimous consent of the parties sharing control.
Upstream transaction
A transaction from the associate/joint venture TO the investor (e.g. the associate sells goods to the investor).
Downstream transaction
A transaction from the investor TO the associate/joint venture (e.g. the investor sells goods to the associate).
Net investment
The carrying amount of the investment under the equity method, together with any long-term interests that, in substance, form part of the investor's net investment in the associate/JV.
Venture capital organisation
An entity that may elect to measure investments in associates/JVs at fair value through profit or loss instead of applying the equity method, per IAS 28's specific exemption.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Jul-1986
Exposure Draft E28 Accounting for Investments in Associates and Joint Ventures
Apr-1989
IAS 28 Accounting for Investments in Associates issued
Effective 1 January 1990
1994
IAS 28 was reformatted
Dec-1998
Amended by IAS 39 Financial Instruments: Recognition and Measurement
Effective 1 January 2001
18-Dec-2003
IAS 28 Investments in Associates issued
Effective for annual periods beginning on or after 1 January 2005
10-Jan-2008
Amended by IFRS 3 Business Combinations (loss of significant influence)
Effective for annual periods beginning on or after 1 July 2009
22-May-2008
Amended by Improvements to IFRSs (impairment testing)
Effective for annual periods beginning on or after 1 January 2009
12-May-2011
Superseded by IAS 28 Investments in Associates and Joint Ventures (2011)
Effective for annual periods beginning on or after 1 January 2013