ACC2100 · Financial Accounting
Investments in Associates (AASB 128)
Investments in Associates (Week 12, AASB 128) deals with investor-investee relationships that fall short of control. Significant influence (typically a 20–50% holding) triggers the equity method: the investment starts at cost and is then adjusted up for the investor's share of the associate's post-acquisition profit and down for dividends received. This sits between a passive investment and a controlled subsidiary on the influence spectrum.
This is a heavyweight for the MCQ pool — about half the ten MCQs come from Weeks 7 and 12. Expect conceptual and short-calculation questions on the influence bands, the equity-method mechanics, and how it differs from consolidation.
What this chapter covers
- 01Three investor-investee regimes: passive investment, significant influence (associate), control (subsidiary)
- 02Significant influence (AASB 128): typically a 20–50% holding, not control
- 03The influence spectrum: passive → associate (equity method) → subsidiary (consolidation)
- 04Equity method: record the investment at cost on acquisition
- 05Add the investor's share of the associate's post-acquisition profit (Dr Investment / Cr Share of profit of associate)
- 06Reduce the investment by dividends received from the associate (Dr Cash / Cr Investment)
- 07Why dividends reduce (not increase) the investment carrying amount under the equity method
- 08Distinguishing the equity method from full consolidation (one line vs line-by-line)
Equity method: carrying amount of an investment in an associate
- 1 markConfirm the method: a 30% holding gives significant influence (not control), so Crest is an associate accounted for by the equity method, starting at cost of $300,000.
- 2 marksAdd the investor's share of post-acquisition profit: 30% × 200,000 = $60,000 (Dr Investment in associate 60,000 / Cr Share of profit of associate 60,000).
- 1 markDeduct the dividend received: 30% × 50,000 = $15,000 (Dr Cash 15,000 / Cr Investment in associate 15,000) — the dividend is a return of the share of profit already recognised.
- 1 markCarrying amount = cost + share of profit − dividend = 300,000 + 60,000 − 15,000 = $345,000.
Key terms
- Significant influence
- The power to participate in the financial and operating policy decisions of an investee without controlling them — presumed (rebuttable) at a holding of 20% to 50% of voting power. It triggers equity-method accounting under AASB 128.
- Associate
- An entity over which the investor has significant influence (but not control or joint control). It is accounted for using the equity method, not by consolidation.
- Equity method
- A one-line accounting method: the investment is recorded at cost, then increased by the investor's share of the associate's post-acquisition profit (and decreased by its share of losses) and decreased by dividends received.
- Influence spectrum
- The continuum of investor-investee relationships: a passive investment (no influence, held as a financial asset), an associate (significant influence, equity method), and a subsidiary (control, full consolidation).
- Share of profit of associate
- The investor's percentage of the associate's post-acquisition profit, recognised as income and added to the investment's carrying amount under the equity method.
Investments in Associates (AASB 128) FAQ
What's the difference between an associate and a subsidiary?
It comes down to the level of influence. A subsidiary is controlled (usually more than 50% of votes, satisfying the three control elements) and is fully consolidated line by line. An associate is only significantly influenced (typically a 20–50% holding) — the investor can participate in policy decisions but not control them — and is accounted for by the equity method as a single line on the balance sheet, not consolidated.
Why do dividends reduce the investment under the equity method?
Because you have already recognised your share of the associate's profit as income (which increased the investment). A dividend is the associate distributing some of that profit to you in cash, so it converts part of your recognised share into cash — a return OF investment rather than new income. If you also counted the dividend as revenue you would double-count, so it reduces the carrying amount instead.
What holding gives significant influence?
AASB 128 presumes significant influence when the investor holds 20% or more (but not more than 50%, which would usually indicate control). The presumption is rebuttable — significant influence can exist below 20% (for example through board representation) or be absent above 20% — but for exam purposes the 20–50% band is the working rule.
How is the equity method recorded step by step?
Start the investment at cost. Each period add your share of the associate's post-acquisition profit (Dr Investment / Cr Share of profit of associate) — or subtract your share of any loss. Then subtract dividends received (Dr Cash / Cr Investment). The running carrying amount is therefore cost + cumulative share of profit − cumulative dividends received.
Exam move
Because Weeks 7 and 12 supply about half the ten MCQs, make associates a definitional and one-calculation win. Fix the influence spectrum in your head — passive (financial asset) → associate (20–50%, significant influence, equity method) → subsidiary (control, consolidation) — and be ready to place any scenario on it. Memorise the equity-method recipe as a single line: carrying amount = cost + share of post-acquisition profit − dividends received, and drill the two journals (profit increases the investment as income; dividends reduce it, not as revenue). The most-tested trap is treating the dividend as revenue, so rehearse that distinction until it is automatic. Keep the associate-versus-subsidiary contrast sharp (one line vs full consolidation) for the conceptual MCQs. A handful of cleanly memorised rules here, combined with the sustainability definitions from Week 7, can deliver almost the entire 20-mark MCQ section.
