IAS 28 Equity Method: Associates, Joint Ventures and Impairment of Investment

IAS 28 Equity Method: Associates, Joint Ventures and Impairment of Investment

By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)

Lead Instructor, Global Fin X | www.globalfinx.in/manikanta

---

The equity method sits in an odd middle ground. It is not consolidation: you do not combine the associate's assets and liabilities line by line onto your own balance sheet. It is not a passive financial investment either: you do not simply mark it to fair value and forget about it. It is something in between, a single-line adjustment mechanism that tracks your share of an entity you influence but do not control.

That middle-ground position is precisely why IAS 28 has generated more application questions and inconsistent practice than almost any other IFRS standard of comparable length. The IASB itself acknowledged this by issuing a substantial Exposure Draft in September 2024 to rewrite significant portions of the standard, an unusually direct admission that the existing rules have not worked as cleanly as intended. This post covers the current standard: what significant influence means, how the equity method actually operates period by period, how impairment of an equity-accounted investment is tested, and where the 2024 proposals are headed.

---

Significant Influence: The Gateway Test

An associate is an entity over which the investor has significant influence, defined as the power to participate in the financial and operating policy decisions of the investee, without amounting to control or joint control of those policies.

The word "participate" matters. Significant influence is not about directing decisions; it is about having a genuine seat at the table when financial and operating policy decisions are made, without holding the power to unilaterally impose those decisions.

The 20% Presumption

If an investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, significant influence is presumed, unless it can be clearly demonstrated that this is not the case. Conversely, holding less than 20% creates a presumption of no significant influence, again rebuttable by clear evidence to the contrary.

This is a rebuttable presumption in both directions, not a bright-line rule. An investor holding 25% of a company where a single other shareholder holds the remaining 75% and has, by shareholder agreement, exclusive rights to appoint the entire board and make every operating decision, may be able to demonstrate that no significant influence exists despite crossing the 20% threshold. Equally, an investor holding only 12% but with a guaranteed board seat, regular participation in strategic decisions, and material ongoing transactions with the investee may be able to demonstrate significant influence despite falling below 20%.

Indicators Beyond the Shareholding Percentage

IAS 28 identifies several ways significant influence can be evidenced, independent of or alongside the voting percentage: 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 the investee, interchange of managerial personnel, and provision of essential technical information.

None of these individually is decisive; the assessment considers all relevant facts and circumstances together. A 15% shareholder with a permanent board seat, regular access to the investee's financial planning, and a long-term technology licensing arrangement that is essential to the investee's operations likely has significant influence, notwithstanding the sub-20% stake.

Potential Voting Rights

Where an investor holds instruments that are currently exercisable or convertible (options, warrants, convertible debt or preference shares), these potential voting rights are considered when assessing whether significant influence exists, provided they are substantive. An option that is so far out of the money that exercising it would be irrational is not substantive and does not affect the assessment.

---

Applying the Equity Method: The Mechanics

Under the equity method, an investment in an associate or joint venture is initially recognised at cost. The carrying amount is then adjusted, period by period, to recognise the investor's share of the investee's post-acquisition profit or loss, other comprehensive income, and any distributions received, which reduce the carrying amount.

Initial Recognition and Goodwill

At acquisition, the investor compares the cost of the investment to its share of the fair value of the investee's identifiable net assets. Where cost exceeds this share, the difference is goodwill, which is included within, and not separately presented from, the overall carrying amount of the investment. Where the investee's share of identifiable net assets exceeds cost, the excess (effectively a bargain purchase gain) is recognised as income in the period the investment is acquired, after first reassessing the fair values used, exactly mirroring the IFRS 3 approach for subsidiaries covered in Posts 46 and 47.

Because goodwill embedded within an equity-accounted investment is not separately recognised on the investor's balance sheet, it is never separately tested for impairment under IAS 36's mandatory annual goodwill testing regime. Instead, the entire investment is tested as a single unit of account under IAS 28's own impairment approach, discussed below.

Post-Acquisition Adjustments

Each period, the investor recognises its share of the associate's profit or loss for the period as a single line in its own income statement (commonly labelled "share of profit of associates" or similar), with a corresponding increase to the carrying amount of the investment. Its share of the associate's other comprehensive income is recognised in the investor's own OCI, with a corresponding adjustment to the investment's carrying amount. Dividends or other distributions received from the associate reduce the carrying amount of the investment; they are not recognised as investment income in the investor's profit or loss under the equity method (this is one of the clearest distinctions from simply holding the investment as an FVTPL or FVOCI financial asset under IFRS 9, where dividends would instead be recognised directly in profit or loss).

Adjustments are also required to eliminate the effect of using different accounting policies, if the associate's financial statements are prepared using policies that differ from the investor's, and to align reporting periods if the associate's year-end differs from the investor's by more than a specified short period, using the associate's most recent available financial statements adjusted for significant transactions in the intervening period.

Fair Value Adjustments Continue Through the Life of the Investment

Just as with a subsidiary under IFRS 3, any difference between the fair value and carrying amount of the associate's identifiable assets and liabilities at acquisition (a fair-valued building with a longer remaining life than its book-value depreciation schedule implies, for example) continues to affect the investor's share of profit in subsequent periods, through additional depreciation, amortisation, or other adjustments that a full consolidation would also make, even though only a single net investment line appears on the investor's balance sheet.

Losses Exceeding the Carrying Amount

Where the investor's share of the associate's losses equals or exceeds its interest in the associate, the investor discontinues recognising its share of further losses, unless it has incurred legal or constructive obligations, or made payments, on behalf of the associate. The investor's "interest in the associate" for this purpose is not limited to the equity-accounted investment balance alone; it includes any other long-term interests that, in substance, form part of the investor's net investment, such as long-term loans or preference shares that carry equity-like risk exposure.

Where the investor holds multiple layered interests (ordinary equity-accounted shares, preference shares, and a long-term loan, for example), losses are allocated across these interests in order of seniority, absorbing the most subordinated interests first before reaching more senior ones, broadly mirroring how losses would be absorbed in a genuine liquidation waterfall. If the associate subsequently returns to profit, that profit is allocated back through the same interests in the same order, but only up to the amount of losses previously allocated to each specific interest; profits beyond that point are recognised as ordinary equity-method income.

The Cross-Holding Complication

A specific complication arises where two entities each hold an equity-accounted interest in the other (cross-holdings), a structure that does occur in Indian conglomerate and joint venture arrangements. A literal reading of the standard could result in each entity's equity-accounted profit being partly double-counted, since each entity's reported profit already includes its share of the other's profit, which itself already includes a share of the first entity's profit, recursively. Indian practice, following the guidance issued through the ICAI's Expert Advisory Committee process on this exact fact pattern, has settled on a net approach: each entity recognises only its direct share of the other's profit excluding the recursive equity-accounted component, avoiding the double-counting that a strict gross reading of the standard would otherwise produce.

---

Exemptions from Applying the Equity Method

IAS 28 provides specific, narrow exemptions from the general requirement to equity account for associates and joint ventures.

Venture capital organisations, mutual funds, unit trusts, and similar entities may elect to measure their investments in associates at fair value through profit or loss under IFRS 9 instead of applying the equity method, reflecting the same underlying rationale as the investment entity exception in IFRS 10: for these vehicles, fair value information about the investment is more useful to their own investors than equity-accounted figures would be. Where an investment in an associate is held partly directly and partly indirectly through such a venture capital organisation, the entity may elect fair value treatment only for the portion held through the venture capital organisation, continuing to equity account for the remaining direct portion.

Investments classified as held for sale under IFRS 5 are carved out of equity accounting and measured under IFRS 5's own held-for-sale rules instead, for the portion (or all) of the investment meeting the IFRS 5 classification criteria.

Certain parents preparing separate financial statements, and certain intermediate entities meeting specific exemption conditions comparable to those available for consolidated financial statements under IFRS 10, are also permitted relief from applying the equity method in specific circumstances set out in the standard.

---

Impairment of Equity-Accounted Investments

Because goodwill within an equity-accounted investment is not separately recognised or separately tested, the entire investment is treated as a single asset for impairment purposes under IAS 28, applying IAS 36's principles but with an important adaptation.

At each reporting date, the investor assesses whether there is objective evidence that the investment may be impaired. Under the current (pre-amendment) version of IAS 28, this historically included a reference to a significant or prolonged decline in the fair value of the investment below its cost, language that has generated considerable diversity in practice: how much decline counts as "significant," how long counts as "prolonged," and how this concept should interact with IAS 36's own impairment indicators framework at all.

If there is objective evidence of impairment, the entire carrying amount of the investment is tested by comparing it to its recoverable amount, the higher of value in use and fair value less costs of disposal, following IAS 36's general recoverable amount framework, but critically not IAS 36's specific goodwill impairment provisions (since there is no separately identifiable goodwill component to test on its own within an equity-accounted investment; the whole investment is the unit of account). Value in use for an equity-accounted investment can be estimated either using the investor's share of the associate's own estimated future cash flows, or the cash flows expected from dividends to be received and the ultimate disposal of the investment; both approaches, applied with consistent assumptions, are intended to produce the same result.

Any impairment loss recognised reduces the carrying amount of the investment through profit or loss. Unlike goodwill impairment under IFRS 3, impairment losses on equity-accounted investments can be reversed in a later period if the recoverable amount subsequently increases, since there is no separately identifiable goodwill component subject to the absolute non-reversal rule that applies specifically to consolidated goodwill under IAS 36.

---

The 2024 Exposure Draft: A Significant Rewrite in Progress

In September 2024, the IASB published Exposure Draft ED/2024/7, Equity Method of Accounting, proposing the most substantial changes to IAS 28 since its last major revision. The comment period closed in January 2025, and as of mid-2026 the IASB is finalising its response to stakeholder feedback, with a final amended standard expected in the near term.

The key proposals, several of which have attracted broad support from national standard-setters and regulators including EFRAG and ESMA:

Explicit guidance on the cost of an equity-accounted investment at initial recognition, something the current standard notably does not specify in detail. The proposed cost includes the fair value of consideration transferred, any contingent consideration measured at fair value, the fair value of any previously held interest (mirroring the IFRS 3 step-acquisition treatment covered in Post 47), and deferred tax effects related to the investor's share of the fair value of the associate's identifiable assets and liabilities.

A layered approach for acquiring additional interests while retaining significant influence, treating each additional tranche of acquisition broadly as its own separate transaction for measurement purposes, an approach EFRAG has specifically pushed back on as unnecessarily costly, preferring a more simplified alternative.

Recognising the previously held interest at fair value when significant influence is first obtained (mirroring, again, the step-acquisition logic already established for subsidiaries), with the resulting gain or loss recognised in profit or loss.

Requiring full recognition of gains and losses from all upstream and downstream transactions with associates and joint ventures, removing the long-standing partial elimination approach and bringing the equity method into closer alignment with how such transactions are treated between a parent and a subsidiary under IFRS 10.

Replacing the "significant or prolonged decline below cost" impairment trigger with "decline below carrying amount", aligning the equity method impairment indicator language directly with IAS 36's own indicator framework and removing the specific "significant or prolonged" qualifier that has caused so much diversity in practice. This proposal has drawn some mixed stakeholder reaction on removing the qualifier entirely, but broad support for the underlying alignment with IAS 36.

Enhanced disclosure requirements, including a full reconciliation of the carrying amount of equity-accounted investments showing the share of profit or loss and OCI, distributions received, impairment losses, and the effects of ownership changes, together with clearer disclosure of gains or losses from ownership changes and downstream transactions, and clearer disclosure of contingent consideration arrangements.

For Indian companies with significant equity-accounted portfolios, particularly conglomerates with extensive associate and joint venture networks, these proposals, once finalised and adopted into Ind AS 28, will require both a one-time transition exercise and, in several areas, a genuinely different ongoing measurement approach rather than a purely cosmetic change.

---

Worked Example: A Straightforward Associate

Titan Company (illustrative) holds a 26% stake in a smaller jewellery retail chain, with a board seat and material ongoing supply arrangements, clearly meeting the significant influence threshold.

Cost of investment on 1 April 2025: Rs. 180 crore

Investor's share of the investee's identifiable net assets at fair value on that date: Rs. 150 crore

Goodwill embedded in the investment: Rs. 30 crore (not separately shown; included within the single investment line)

For the year ended 31 March 2026, the investee reports profit of Rs. 40 crore and pays a dividend of Rs. 10 crore.

Titan's share of profit: 26% × Rs. 40 crore = Rs. 10.40 crore, recognised as "share of profit of associate" in Titan's income statement, increasing the investment's carrying amount.

Titan's share of the dividend: 26% × Rs. 10 crore = Rs. 2.60 crore, received in cash and reducing the investment's carrying amount (not recognised as dividend income).

Movement in carrying amount for the year:

No impairment indicators exist at year end, so no further adjustment is required.

---

Ind AS 28 vs IAS 28: Key Differences

---

What Big 4 Auditors Focus On

Significant influence assessment beyond the shareholding percentage. Auditors test whether entities near the 20% threshold (either just above or just below) have properly documented all the qualitative indicators, board representation, participation in policy decisions, material transactions, rather than relying on the shareholding percentage alone to reach a conclusion.

Consistency of accounting policies between investor and associate. Auditors verify that adjustments have been made to align the associate's accounting policies with the investor's own group policies before applying the equity method, particularly where the associate is a smaller, less sophisticated entity that may not apply IFRS or Ind AS in its own standalone books.

Loss allocation across layered interests. Where an investor holds ordinary equity, preference shares, and loans in the same associate, auditors test whether losses have been allocated in the correct order of seniority and whether subsequent profits have been correctly allocated back only up to previously absorbed losses on each specific interest.

Impairment indicator identification and testing methodology. Auditors test whether impairment indicators have been properly identified (market value decline, adverse changes in the associate's business environment, deteriorating financial performance) and whether the recoverable amount calculation has been performed at the level of the whole investment, not attempting to separately test an embedded goodwill component that does not exist as a distinct asset under IAS 28.

Dividend versus equity-method profit classification. Auditors verify that dividends received from associates have been correctly treated as a reduction in the investment's carrying amount rather than incorrectly recognised as investment income in profit or loss, a classification error that overstates both profit and, paradoxically, understates the investment balance.

---

Dip IFRS Exam Angle

IAS 28 questions in Dip IFRS combine conceptual assessment (does significant influence exist) with calculation (the equity-accounted carrying amount movement).

Most tested areas:

Significant influence assessment: given a shareholding percentage and additional qualitative facts, conclude whether significant influence exists, particularly in scenarios deliberately set just above or below 20%.

Equity method carrying amount roll-forward: calculate the movement in the investment balance for a period, incorporating cost, share of profit, share of OCI, and dividends received, in the correct sequence.

Losses exceeding the investment balance: know that the investor stops recognising further losses once its interest is reduced to zero, unless it has constructive obligations, and know the order-of-seniority allocation across layered interests.

Impairment: know that the whole investment (including any embedded goodwill) is tested as a single unit of account under IAS 36 principles, not IAS 36's separate goodwill-specific rules, and that impairment losses on equity-accounted investments, unlike consolidated goodwill, can be reversed.

Common traps:

Recognising dividends received from an associate as income in profit or loss. Under the equity method, dividends reduce the carrying amount; they are not investment income.

Continuing to recognise a full share of losses once the investment balance has reached zero, without checking whether the investor has any other long-term interests or constructive obligations that would extend further loss recognition.

Attempting to separately test embedded goodwill for impairment using IAS 36's mandatory annual goodwill-specific testing regime. The whole investment is the unit of account under IAS 28.

Assuming the 20% threshold is an absolute bright line rather than a rebuttable presumption in both directions.

---

FAQ

Can an investor lose significant influence while still holding the same percentage of shares?

Yes. Significant influence depends on the ability to participate in financial and operating policy decisions, not solely on the shareholding percentage. If board representation is lost, material transactions cease, or the investee undergoes a governance restructuring that removes the investor's practical ability to participate in policy decisions, significant influence can be lost even without any change in the shareholding itself, triggering a reclassification of the investment (typically to a financial asset under IFRS 9).

What happens to accumulated OCI relating to an associate if significant influence is lost?

The treatment mirrors what would happen on a full disposal of the underlying items: amounts previously recognised in OCI that would be reclassified to profit or loss on disposal of the related assets or liabilities (cash flow hedge reserves, for example) are reclassified to profit or loss at the point significant influence is lost, while amounts that would not be reclassified (certain FVOCI equity reserves) are transferred directly within equity instead.

Does IAS 28 apply to potential associates a company is only negotiating to invest in?

No. IAS 28 applies once significant influence actually exists, which requires either an existing shareholding meeting the threshold or otherwise-established influence through the qualitative indicators. A signed but not yet completed agreement to acquire a stake does not itself create significant influence.

How does an investor account for its share of an associate's discontinued operations?

The investor's share of the associate's profit or loss is presented as a single line in the investor's own income statement regardless of how the associate itself presents continuing versus discontinued operations internally; the equity method does not require the investor to separately disaggregate its single share-of-profit line to mirror the associate's own IFRS 5 presentation, though additional disclosure of the composition may be provided in the notes.

If two entities in the same group each hold a stake in the same associate, how is significant influence assessed?

Significant influence is assessed at the level of the reporting entity presenting the financial statements. For consolidated financial statements, the combined shareholding of the parent and all its subsidiaries in the associate is considered together when assessing whether the 20% presumption is met, since IAS 28's threshold explicitly refers to voting power held directly or indirectly through subsidiaries.

Will the 2024 Exposure Draft, once finalised, require retrospective restatement of existing equity-accounted investments?

The final transition requirements will be confirmed once the IASB completes its redeliberations, but exposure draft proposals of this nature typically include specific transition relief provisions (as seen with earlier IAS 28 amendments), rather than requiring a full retrospective recalculation of every historical equity-accounted investment back to its original acquisition date. Entities with material equity-accounted portfolios should monitor the final standard closely once issued.

---

Enroll with Global Fin X

The equity method sits at the centre of the group accounting portion of the Dip IFRS syllabus, connecting directly to IFRS 10, IFRS 11, IFRS 3, and IAS 36. Understanding both the current mechanics and the direction the IASB is taking through the 2024 Exposure Draft prepares candidates for exam questions now and for the standard as it will look in the near future. Our programme covers IAS 28 with detailed lectures, full worked examples including layered-interest loss allocation, exam-style MCQs, and a dedicated LMS for working professionals.

Enroll Now: Dip IFRS Programme

Faculty profile: www.globalfinx.in/manikanta

---

This is Post 52 of the Global Fin X IFRS Series. Previous: IFRS 11: Joint Operations vs Joint Ventures and Why It Matters. Next: Post 53: IAS 27 Separate Financial Statements: When and Why They Are Prepared.