First identify the relationship, then choose the arithmetic
The IAS 28 overview treats 20% of voting power as a presumption of significant influence. This is not a universal control threshold and does not permit facts to be ignored when the holding is smaller. Board representation, agreements and other circumstances can change the conclusion. An investment outside the relevant perimeter may be considered under IFRS 9, while an investor’s separate financial statements involve IAS 27. A consolidated result cannot be mechanically transferred into separate statements.
One investment line, not a share of every sale
All amounts are fictional. An investor acquired 30% of an associate for 300. The purchase price equals the corresponding share of net assets, with no valuation differences. After acquisition, the associate earned 100 and declared and paid dividends of 40 to all owners. Taxes, other comprehensive income, impairment and intra-group sales are excluded for now.
The investor’s share of profit is 30 and its share of the dividend is 12. The initial investment of 300 increases by 30 and decreases by 12, leaving a closing carrying amount of 318. The illustrative entries are “Dr investment 30 — Cr share of profit 30,” then “Dr cash 12 — Cr investment 12.” The dividend is not new income on top of the profit share already recognised. IAS 28, About, describes this general movement by result and distributions.
Do not add 30% of the associate’s revenue to the investor’s revenue while also leaving its profit share unexplained. The equity method is not proportional line-by-line consolidation. If the associate earned revenue of 800, 240 does not automatically enter the investor’s revenue. Economic dependence on its sales exists, but presentation and analytical assessment are different tasks.
Why cash income may differ from recognised income
In the first example, 30 is recognised but 12 is received. The difference of 18 remains in the investment and does not become cash freely available to the investor. Even with a high profit share, distribution depends on the other company’s decisions and constraints. Therefore the parent’s debt service cannot unconditionally use the entire profit share as a cash receipt.
If the associate earns 20 in the next period but distributes 60, the recognised income is 6, the receipt is 18 and the investment decreases by 12 under the same simplifications. This is not automatically an accounting deterioration: prior accumulated amounts may be distributed. Reconcile opening amount, result, distributions and other movements continuously. Losses, acquisition-date valuation differences and impairment require the full IAS 28 analysis rather than extending this example into an arbitrary negative asset.
Cross-holdings: two values contain each other
Cross-holding means that companies hold interests in one another. In a separate analytical valuation, this creates a circular relationship. Suppose the value of A’s own operating business is 100 and B’s is 80; A owns 20% of B and B owns 10% of A. There is no debt or other asset, and the interests have proportional economic rights. This is a valuation model, not an IAS 28 journal-entry algorithm.
Let total equity values be A and B. Then A = 100 + 0.2 × B and B = 80 + 0.1 × A. Substitution gives A = 116 / 0.98 ≈ 118.37 and B ≈ 91.84. Simply adding these values gives about 210.20, although outside owners hold only 90% of A and 80% of B: 0.9 × A + 0.8 × B = 180. The internal interests explain the difference; they are not additional operating resources.
A carrying amount does not replace the value of a holding
Even without cross-holdings, an equity-method investment need not equal the quoted value of the interest. The share of accumulated results, market expectations and the value of the separate operating business answer different questions. In a sum-of-the-parts analysis, state explicitly whether the figure is a carrying amount, market price or independent model, and do not add again a flow already included in operating performance.
For a real group, draw an ownership graph, an economic-interest table and a separate control-rights table. Different voting rights, intermediate levels and agreements can break a simple proportional model. If rights are unknown, retain the uncertainty rather than solving the system with arbitrary percentages. Start with [consolidation perimeter](/guides/consolidated-separate-reports/) and [related parties](/guides/related-party-transactions-analysis/). Historical portfolios of known investors are not reproduced here; all structures are explanatory.