# IAS 28 Equity Method: Profits, Dividends and Entries

> Apply the IAS 28 equity method with two SAR examples. Calculate profit shares, dividends, goodwill and acquisition adjustments, then reconcile your entries.

- Canonical page: https://accountery.app/learn/ias-28-equity-method
- Language: English (en)
- Category: financial-statements
- Estimated reading time: 13 minutes
- Published: 2026-09-23
- Updated: 2026-09-23

## What does the IAS 28 equity method measure?

The IAS 28 equity method connects an investment in an associate to what happens inside that business after acquisition. You begin with cost, recognise your share of its subsequent results, and reduce the investment for distributions. The cash dividend and the profit reported in your [income statement](/glossary#income-statement) therefore answer different questions.

Imagine reviewing a year-end file containing a share-purchase agreement, an associate's accounts and a dividend receipt. The bank statement confirms the receipt. It does not, by itself, explain the year's investment income or the remaining investment balance. Those figures need a separate calculation that brings the documents together.

An associate is a business over which the investor has **significant influence**. The [IFRS Foundation's IAS 28 overview](https://www.ifrs.org/issued-standards/list-of-standards/ias-28-investments-in-associates-and-joint-ventures/) explains the participation-in-policy test and the basic equity-method movements. Holding at least 20% of voting power creates a rebuttable presumption of influence; ownership percentage is evidence, not a complete assessment.

Read board rights, participation in decisions and other relevant arrangements. A small holding with meaningful participation can require further analysis, while a larger holding still needs its actual rights understood. Assess control first where the facts suggest it. The [IFRS 10 consolidation guide](/learn/consolidation-ifrs-10-basics) explains that separate question.

This guide uses fictional Saudi companies and SAR amounts. It focuses on straightforward associate investments, with unchanged ownership after purchase. All examples exclude investor-level tax effects, preference shares, transactions between investor and associate, long-term interests and impairment unless expressly introduced. These are teaching assumptions, not conclusions about any real company's reporting.

## How do you set up an IAS 28 equity method working paper?

Write the reporting basis at the top of the file. Are you preparing statements that apply the equity method, or separate statements using a different permitted policy? Under [IAS 27's separate-financial-statement framework](https://www.ifrs.org/issued-standards/list-of-standards/ias-27-separate-financial-statements/), investments may be accounted for at cost, under IFRS 9, or using the equity method. A dividend entry copied from one basis can be wrong on another.

Our entries describe the equity-method reporting basis. If a company's individual ledger uses cost, use the appropriate reporting adjustments to reach that basis rather than posting the same income twice. Label the ledger or worksheet receiving each entry and retain a reconciliation between them.

Collect five groups of evidence before opening the calculation:

- The acquisition agreement, completion date, ownership percentage and evidence supporting significant influence.
- The investee's financial information for the period after acquisition, with any necessary policy alignment.
- Acquisition-date values supporting the investor's share of identifiable net assets.
- Dividend approvals, entitlement records and bank receipts, keeping declaration and settlement dates distinguishable.
- Other comprehensive income information and evidence relevant to possible impairment.

Give every input a document reference. If a figure is an assumption for a classroom question, label it as such. In a real file, an absent valuation or missing half-year result is an information request, not permission to make a convenient estimate without support.

This article's cases assume 2026 reporting without early IFRS 18 adoption and that the equity method applies. The [June 2026 IAS 28 fair-value amendments](https://www.ifrs.org/news-and-events/news/2026/06/iasb-issues-amendments-clarifying-fair-value-option-ias-28/) take effect when a company first applies IFRS 18. Keep those issued amendments distinct from the broader [equity-method project](https://www.ifrs.org/projects/work-plan/equity-method/), whose proposals and tentative decisions are not automatically effective requirements.

## Which movements belong in the investment reconciliation?

Use a movement schedule with a separate row for each cause of change. For the simple cases below, closing investment equals cost plus the investor's share of adjusted post-acquisition profit, plus its share of other comprehensive income, less distributions. Losses and impairment can reduce the balance and need their own analysis.

Keep the associate's total figures in one column and the investor's percentage share in another. If the associate reports SAR 600,000 of profit and the investor owns 30%, the calculation starts with SAR 180,000. A later cash distribution changes the investment balance; it does not make that same profit available for a second recognition.

The [ACCA explanation of associate accounting](https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f3/technical-articles/preparing-simple-consolidated-financial-statements.html) illustrates the single investment figure and share-of-result approach. Do not add a percentage of every associate asset, liability, sale and expense into the investor's statements. Maintain detailed supporting schedules behind the reported investment figure.

**Work from the acquisition date.** When influence begins during the year, identify the actual subsequent results. Dividing annual profit by twelve is only a reasonable shortcut if the facts support even accrual. A seasonal business can earn most of its profit before or after the purchase date.

Acquisition differences also matter. If equipment had a higher value at acquisition than in the associate's books, the resulting extra depreciation affects the profit share. Prepare this adjustment before multiplying by the ownership percentage. Keep the acquisition calculation, subsequent expense and closing adjustment together so next year's reviewer can continue the schedule without rebuilding it.

## Worked example 1: Rimal records profit and receives a dividend

Rimal Trading in Riyadh buys 30% of Waha Supplies for SAR 900,000 on 1 January 2026. Its contractual rights establish significant influence, with no control or joint control. The fair value of Waha's identifiable net assets is SAR 3,000,000; carrying values equal fair values, so this case has no acquisition difference.

Waha earns SAR 600,000 during 2026 after its own applicable expenses and taxes. It declares and immediately pays total dividends of SAR 120,000 in December. There is no other comprehensive income or other adjustment. All tables in this example show SAR.

Record the purchase [journal entry](/glossary#journal-entry):

| Account | Debit | Credit |
|---|---|---|
| Investment in Waha | 900,000 | 0 |
| Cash | 0 | 900,000 |

Rimal's share of profit is SAR 600,000 multiplied by 30%, giving SAR 180,000. Record that share on the equity-method basis:

| Account | Debit | Credit |
|---|---|---|
| Investment in Waha | 180,000 | 0 |
| Share of associate profit | 0 | 180,000 |

Rimal receives SAR 36,000, calculated as total dividends of SAR 120,000 multiplied by 30%. The distribution reduces the investment:

| Account | Debit | Credit |
|---|---|---|
| Cash | 36,000 | 0 |
| Investment in Waha | 0 | 36,000 |

The closing investment is **SAR 1,044,000**: SAR 900,000 plus SAR 180,000 less SAR 36,000. Recognised profit is SAR 180,000; the dividend cash receipt is SAR 36,000. The investment has increased by SAR 144,000 because Waha retained part of the year's earnings.

Cross-check through net assets. Waha finishes with SAR 3,480,000: opening net assets of SAR 3,000,000 plus profit of SAR 600,000 less distributions of SAR 120,000. Rimal's 30% share is SAR 1,044,000, matching the movement schedule. This second route works cleanly because the example excludes acquisition differences and other adjustments.

If payment followed declaration later, an entitled dividend receivable could sit between the reduction in investment and the bank receipt. Our immediate-payment assumption combines that timing into one step. Do not read the combined entry as permission to ignore an outstanding entitlement at a real reporting date.

## Worked example 2: Nakhil adjusts a midyear acquisition

Nakhil Services in Jeddah acquires 25% of Sidr Packaging on 1 July 2026 for SAR 1,100,000 and obtains significant influence on that date. There is no control or joint control. Sidr's identifiable net assets have a carrying amount of SAR 3,800,000 and a fair value of SAR 4,000,000.

The SAR 200,000 difference relates entirely to equipment with five years of remaining useful life, zero residual value and straight-line depreciation. Treat the stated values and adjustment as complete exercise inputs, with deferred-tax effects excluded. The equipment remains in use throughout the half-year.

Nakhil's share of fair-value net assets is SAR 1,000,000: 25% of SAR 4,000,000. The SAR 100,000 excess of cost is [goodwill](/glossary#goodwill) included within the investment. IAS 28 paragraph 32 does not permit its amortisation. The [equivalent IAS 28 text published by XRB](https://standards.xrb.govt.nz/standards-navigator/nz-ias-28/) also addresses acquisition-related adjustments to subsequent results. Its New Zealand-specific provisions are outside this example.

Sidr's actual July-to-December profit is SAR 500,000, already after depreciation in its own books and its applicable expenses and taxes. Total dividends declared and immediately paid after acquisition are SAR 160,000. Sidr also reports SAR 80,000 of other comprehensive income after acquisition, unrelated to the equipment. There are no other changes.

Additional annual depreciation on the acquisition uplift is SAR 40,000: SAR 200,000 divided by five years. Six months require SAR 20,000. The adjusted half-year profit is therefore SAR 480,000, and Nakhil's share is SAR 120,000.

| Calculation | Amount in SAR |
|---|---|
| Investment cost | 1,100,000 |
| Share of adjusted profit | 120,000 |
| Share of other comprehensive income | 20,000 |
| Distribution received, deducted | 40,000 |
| Closing investment | 1,200,000 |

Record the purchase with a debit to investment and a credit to cash of SAR 1,100,000. Subsequent entries are:

| Account | Debit | Credit |
|---|---|---|
| Investment in Sidr: profit movement | 120,000 | 0 |
| Share of associate profit | 0 | 120,000 |
| Investment in Sidr: other comprehensive income movement | 20,000 | 0 |
| Share of associate other comprehensive income | 0 | 20,000 |
| Cash | 40,000 | 0 |
| Investment in Sidr: distribution | 0 | 40,000 |

Each adjacent pair is a separate balanced entry. The SAR 20,000 other-comprehensive-income share stays outside profit or loss. The SAR 100,000 goodwill already sits within purchase cost, so adding it again would overstate the investment.

For a second reconciliation, Sidr's closing book net assets are SAR 4,220,000. Add the unconsumed acquisition uplift of SAR 180,000 to get adjusted net assets of SAR 4,400,000. Nakhil's 25% share is SAR 1,100,000; add embedded goodwill of SAR 100,000 to reach the same SAR 1,200,000 closing investment.

## What changes when the associate reports losses?

A profitable example makes the movement schedule easy to read. A loss-making associate requires additional questions before carrying the same formula forward. First identify the share of adjusted losses, then assess the investment interest, obligations and impairment evidence in the required sequence.

IAS 28 paragraphs 38 and 39 limit further loss recognition once the relevant interest is exhausted, subject to obligations or payments on the associate's behalf. Qualifying long-term interests can matter. Keep an explicit record of unrecognised losses because later profits first absorb that shortfall before recognised profit resumes.

For a small independent illustration, assume an investor's entire interest is SAR 50,000, with no long-term interests, obligations or payments on the associate's behalf. Its share of loss is SAR 70,000. It recognises SAR 50,000 and tracks SAR 20,000 unrecognised. If its subsequent share of profit is SAR 30,000 and nothing else changes, SAR 20,000 absorbs that shortfall and SAR 10,000 is recognised.

Impairment is a separate review. IAS 28 paragraph 42 treats the investment, including embedded goodwill, as one asset for the relevant impairment test. Use the [IAS 36 impairment guide](/learn/impairment-of-assets-ias-36) for the recoverable-amount concepts, while retaining the associate-specific scope and sequence.

Your closing file should answer three practical questions: what result came from the associate's adjusted accounts, what additional measurement review was needed, and what amount remains unrecognised? Keep evidence for each conclusion. A zero carrying amount alone does not establish that all obligations have been accounted for, and a year of profit does not automatically remove earlier impairment concerns.

## Which common mistakes change the equity-method answer?

**Using percentage ownership as the entire classification test.** Record the rights and facts supporting influence. An apparently neat percentage range can hide control, joint control or a lack of meaningful participation. Revisit the classification when rights or arrangements change.

**Recognising dividends as another income stream.** In Rimal's example, SAR 180,000 is its profit share and SAR 36,000 is the cash distribution. Crediting both to income on the equity-method basis would count part of the return twice. Check the reporting policy before correcting a ledger that uses another basis.

**Applying the percentage before reviewing the profit.** Nakhil's share of reported profit would be SAR 125,000. After the additional half-year depreciation, the correct amount is SAR 120,000. The SAR 5,000 difference has an identifiable acquisition-related cause; it is not a rounding adjustment.

**Using the full year after a midyear purchase.** Sidr's July-to-December result is supplied separately. Do not replace it with half of an annual total unless that approximation is justified. Read acquisition dates and reporting periods before calculating.

**Adding goodwill twice or charging annual amortisation.** Nakhil paid SAR 1,100,000 in total. Embedded goodwill explains part of that cost; it does not create another SAR 100,000 purchase. Keep the initial analysis available without duplicating the asset.

**Putting other comprehensive income into the profit line.** Nakhil's investment increases for both profit and other comprehensive income, but their presentation remains separate. A matching closing balance can conceal a classification error between those two destinations.

**Treating matching totals as sufficient review.** Trace every movement to its source, recalculate the ownership share and check each entry's destination. Explain unexplained differences before carrying them into the following year's opening balance.

## How can you practise the entries and review your answer?

Rebuild both cases on a blank sheet. Start with the acquisition date and reporting basis, then write the associate's total figures, necessary adjustments, investor share and investment movement. Prepare the entries only after the schedule is complete. Finish by reconciling cash, profit, other comprehensive income and the closing asset separately.

For an independent Rimal variation, change total dividends to SAR 240,000 while keeping profit and every other fact unchanged. Rimal receives SAR 72,000 and closes with **SAR 1,008,000** invested. Its SAR 180,000 share of profit stays the same. Explain that result in a sentence before checking the arithmetic.

For a separate Nakhil variation, change the equipment's remaining life at acquisition to ten years. Extra depreciation for six months becomes SAR 10,000, adjusted profit becomes SAR 490,000 and Nakhil's share becomes SAR 122,500. The closing investment is **SAR 1,202,500**. This is an alternative set of acquisition facts, not an additional posting or a later estimate revision.

When reviewing an attempt, label the cause of each correction: classification, acquisition date, profit adjustment, distribution, presentation or reconciliation. Rework the mistaken step with a changed number, then return to the complete schedule. That gives you evidence of what you understood rather than just a familiar final answer.

Continue with [journal-entry practice in Accountery](/practice) to practise choosing accounts, recording movements and checking balances. Use the cases here as your own worksheet alongside the available exercises. Bring your completed reconciliation to an instructor or study partner and ask them to change one assumption; a clear explanation of the changed result is a useful next step.

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