doi.org/10.52340/eab.2025.17.01.10

Financial statement preparers, auditors, and other stakeholders have expressed dissatisfaction with the fact that IAS 28 Investments in Associates and Joint Ventures does not provide clear guidance on how investments should be evaluated using the equity method in specific situations.
In response, the International Accounting Standards Board (IASB) initiated work on this issue, which culminated in the publication of an exposure draft on September 19, 2024: Equity Method of Accounting – IAS 28 Investments in Associates and Joint Ventures (Exposure Draft, IASB/ED/2024/7). This draft presents a revised and updated equity method for accounting for investments. The comment period for the draft closed on January 20, 2025. Currently, the IASB is reviewing feedback and recommendations received from respondents.
The Board has identified and analyzed key practical challenges associated with applying the equity method to investments in associates and joint ventures in specific circumstances. The current IAS 28 does not address these issues, leading to inconsistencies in the application of the equity method in practice. These inconsistencies, in turn, negatively affect the qualitative characteristics of financial information.
To address these practical challenges, the IASB has introduced new approaches, clarifications, and requirements in the form of an exposure draft, covering several key areas:

1. Initial Recognition of Investments in Associates and Joint Ventures
• The concept of the cost of an associate or joint venture has been introduced, which includes the fair value of any previously held interest.
• The draft provides clarification on the accounting treatment of contingent consideration and deferred tax effects.
2. Changes in Ownership Interests While Maintaining Significant Influence
• The Purchase of an additional ownership interest should be measured at the fair value of the consideration transferred.
• The sold ownership interest should be measured as a percentage of the carrying amount of the investment.
• Other increases or decreases in ownership interest should be accounted for as acquisitions or disposals.
3. Investor’s Share of Losses
• When acquiring an additional ownership interest, previously unrecognized losses are not recognized or offset.
• The carrying amount of the newly acquired investment is not reduced by unrecognized losses.
• Losses are recognized separately once the net investment is reduced to zero, distinguishing between the investor’s share in profit or loss and other comprehensive income.
4. Transactions Between an Investor and Its Associates or Joint Ventures
• Full recognition of gains and losses arising from all “upstream” and “downstream” transactions between an investor and its associates or joint ventures, including the sale of a subsidiary.
The revised equity method aims to address practical challenges and enhance the consistency and reliability of financial reporting, thereby improving the quality of financial information and ensuring compliance with international accounting standards.

Keywords: Equity Method of Accounting; Purchase of an additional ownership interest; changes in ownership; investor's share of losses.
JEL Codes: G34, M41, G32, G38

References:
• BDO. (2024). IASB PUBLISHES EXPOSURE DRAFT EQUITY METHOD OF ACCOUNTING IAS 28 INVESTMENTS IN ASSOCIATES AND JOINT VENTURES (REVISED 202X). International Financial Reporting Bulletin.
• IFRS. (2024, September). ifrs.org. Retrieved from https://www.ifrs.org/content/dam/ifrs/project/equity-method/exposure-draft/iasb-ed-2024-7-equity-method.pdf.
• IFRS. (2024, September). ifrs.org. Retrieved from https://www.ifrs.org/content/dam/ifrs/project/equity-method/exposure-draft/iasb-snapshot-equity-method.pdf.
• IFRS. (2025, January 20). ifrs.org. Retrieved from https://www.ifrs.org/content/dam/ifrs/project/equity-method/exposure-draft/iasb-ed-2024-7-bc-equity-method.pdf.
• IFRS. (2025, January 15). ifrs.org. Retrieved from https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2022/issued/part-a/ias-28-investments-in-associates-and-joint-ventures.pdf?bypass=on.