Associates: the IAS 28 Equity Method, Group Reserves and Unrealised Profit

Between owning nothing worth reporting and controlling a company lies a large middle ground: a stake big enough to have a say in the investee’s policies, but not big enough to run it. Such an investee is not consolidated line by line, because the investor does not control its assets.

Nor is it left as a share at cost, because the investor’s wealth rises and falls with the investee’s results. International Accounting Standard (IAS) 28 Investments in Associates and Joint Ventures requires the equity method: one line in the statement of financial position that grows with the investor’s share of the investee’s retained profits.

This topic covers what an associate is, how significant influence is judged, the equity method for the investment, the group reserves, impairment, dividends, balances between the group and the associate, and unrealised profit on trading with it. The next topic covers the profit or loss effects and joint arrangements.

The equity method appears in the group questions on the consolidated statement of financial position and is a regular source of marks for the investment line and the group reserves. Read the complications in the consolidated profit or loss first.

What an associate is

An associate is an entity over which the investor has significant influence: the power to participate in the financial and operating policy decisions of the investee, but not control or joint control of them. If an entity holds 20% or more of the voting power of another, significant influence is presumed to exist unless it can be clearly shown otherwise. Below 20% the presumption is that it does not.

A holding between 20% and 50% therefore usually gives significant influence but not control, so the investment is an associate (unless it is a joint venture). The 20% rule is only a guide, and significant influence is usually evidenced by one or more of these:

• representation on the board of directors;
• participation in policy-making processes, including decisions about dividends;
• material transactions between the investor and the investee;
• interchange of management personnel; or
• provision of essential technical information.

A holding of less than 20% with no influence is a financial asset under International Financial Reporting Standard (IFRS) 9, at fair value, with dividends in profit or loss.

The equity method

Under the equity method the investment is recognised initially at cost and adjusted afterwards for the investor’s share of the change in the investee’s net assets since acquisition. The investor’s profit or loss includes its share of the investee’s profit or loss, and its other comprehensive income includes its share of the investee’s. In the statement of financial position:

• Cost of the investment
• plus the investor’s share of the associate’s post-acquisition profits (or minus losses)
• plus the investor’s share of the associate’s post-acquisition other comprehensive income
• minus any impairment of the investment
• = investment in associate, as a single line in non-current assets.

Any goodwill is included in the carrying amount of the investment, the excess of cost over the investor’s share of the fair value of the associate’s net assets, and is not shown separately or amortised. The whole carrying amount is tested for impairment. The associate’s assets and liabilities are not added line by line, because the investor does not control them.

Post-acquisition profit is the change in the associate’s net assets since the investor acquired its shares, adjusted for any fair value differences (for example, extra depreciation on an uplift at acquisition).

For example, P bought 30% of A for ₦180,000 when A’s net assets had a fair value of ₦450,000. P’s share was ₦135,000, so the implicit goodwill is ₦45,000. At the year end A’s net assets are ₦700,000, an increase of ₦250,000 since acquisition, and P’s share is 30% × ₦250,000 = ₦75,000. The investment is ₦180,000 + ₦75,000 = ₦255,000. As a check, 30% × ₦700,000 + the goodwill of ₦45,000 = ₦255,000.

Impairment

If there is an indication that the investment is impaired, the whole carrying amount is tested under IAS 36. Any loss reduces the investment and is recognised in profit or loss. P bought 40% of A for ₦128,000 when A’s net assets were ₦250,000. At the year end A’s net assets are ₦400,000, A’s profit for the year was ₦50,000, and the investment has been impaired by ₦8,000. The investment is ₦128,000 + 40% × (₦400,000 − ₦250,000) − ₦8,000 = ₦128,000 + ₦60,000 − ₦8,000 = ₦180,000.

Dividends and group reserves

A dividend received from an associate is not income under the equity method. It is a return of part of the investment, so it reduces the carrying amount: Dr Cash, Cr Investment in associate. The associate’s retained earnings were already reduced by the dividend, so the investor’s share of the post-acquisition profit is net of it.

If A pays a dividend of ₦20,000 and P owns 30%, P receives ₦6,000 and the investment falls by ₦6,000.

The group retained earnings include the investor’s share of the post-acquisition retained earnings of the associate (less impairment). Other group reserves include the share of the associate’s post-acquisition movement in its reserves.

For example, if P’s retained earnings are ₦600 million, its share of a subsidiary’s post-acquisition profit is ₦80 million and its share of the associate’s is ₦75 million, the consolidated retained earnings are ₦600m + ₦80m + ₦75m = ₦755 million. No non-controlling interest arises on an associate, because its figures are not consolidated.

Balances and unrealised profit

Balances. A subsidiary is part of the group, so balances with it are cancelled. An associate is not part of the group but an investment, so amounts owed to or by it are real amounts owed to or by an outsider. They are not cancelled and appear as receivables and payables.

Unrealised profit. Profit on goods sold between the group and an associate that are still held is unrealised, but only the investor’s share is eliminated, equal to its percentage interest. The double entry depends on who sold:

• Investor sells to the associate. The goods are in the associate’s inventory. Dr Cost of sales (so reducing group profit) and Cr Investment in associate, by the investor’s share of the unrealised profit.
• Associate sells to the investor. The goods are in the investor’s inventory. Reduce the inventory by the investor’s share of the unrealised profit, and reduce the investor’s share of the associate’s profit by the same amount.

In both cases the group’s retained earnings fall by the investor’s share. For example, P (40% holder) sold goods to A for ₦120,000 at cost plus 50%, and A holds 25% of them. Unrealised profit is ₦120,000 × 25% × 50/150 = ₦10,000, and P’s share is 40% × ₦10,000 = ₦4,000. Dr Cost of sales ₦4,000, Cr Investment in associate ₦4,000.

The ideas in more depth

Why one line and not line by line

An investor with 30% does not control the associate’s assets, so adding them line by line would overstate the group’s resources. The equity method shows the investor’s economic interest in the associate’s net assets in one place.

Why only the investor’s share of unrealised profit

The associate is not part of the group, so only the part of the profit that belongs to the investor, through its holding, is regarded as having been made with itself. The rest is a sale to outside owners.

Sources and references

• IAS 28 Investments in Associates and Joint Ventures: significant influence, the equity method, impairment, and transactions between an investor and its associate; IAS 36 Impairment of Assets.

These points are stated as at 5 November 2026.

Worked examples

1. Post-acquisition increase.
   ₦700,000 − ₦450,000 = ₦250,000
   share 30% = ₦75,000.
2. Investment.
   ₦180,000 + ₦75,000 = ₦255,000.

1. Investment.
   ₦128,000 + 40% × ₦150,000 − ₦8,000 = ₦180,000.
2. Share of profit.
   40% × ₦50,000 = ₦20,000.

1. Unrealised profit.
   ₦120,000 × 25% × 50/150 = ₦10,000; P’s share ₦4,000.
2. Entry. Dr Cost of sales ₦4,000; Cr Investment in associate ₦4,000.

How to answer in the exam

• Decide the status from the percentage and the evidence of influence.
• Work out the associate’s post-acquisition change in net assets and take the investor’s share; add to cost; deduct impairment.
• Add the share of post-acquisition profit to group reserves, less any unrealised profit.
• Do not cancel balances with the associate and do not show it line by line.

Common mistakes in the exam

• Consolidating an associate line by line.
• Showing goodwill on an associate as a separate asset.
• Treating a dividend from the associate as income in the group.
• Eliminating 100% of the unrealised profit instead of the investor’s share.
• Cancelling balances with the associate.
• Using the associate’s total reserves instead of the post-acquisition movement.

Quick revision

• Associate: significant influence, 20% or more presumed; equity method.
• Investment = cost + share of post-acquisition profit and other comprehensive income − impairment; one line; no separate goodwill.
• Dividends reduce the investment. Balances not cancelled. Unrealised profit: investor’s share only.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

Spotted a mistake? Tell us and we will check it.