Ind AS 27: Cost Method vs Equity Method in Separate Financial Statements
If you are preparing for CA Final, Ind AS 27 is one of those standards that looks deceptively simple on the surface but hides several exam traps underneath. The standard deals with separate financial statements — statements prepared by a parent, investor, or venturer where investments in subsidiaries, associates, and joint ventures are shown at the entity level, not on a consolidated basis.
Let us walk through the key concepts clearly, and then flag the pitfalls that cost students marks every year.
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What Are Separate Financial Statements?
Separate financial statements are prepared in addition to — never instead of — consolidated financial statements (where required). Think of it this way: when a holding company publishes its own standalone balance sheet, that is its separate financial statement. Consolidated statements show the entire group as one economic unit. Separate statements show only the parent entity's own books.
The key question Ind AS 27 answers is: how should investments in subsidiaries, associates, and joint ventures be measured in these separate financial statements?
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The Two Permitted Methods
Ind AS 27 allows an entity to measure such investments using either:
- Cost Method — Record the investment at historical cost. Income is recognised only when dividends are declared. No adjustment for the investee's profits or losses.
- Equity Method — As described in Ind AS 28. The investment is initially recorded at cost, then adjusted for the investor's share of post-acquisition profits, losses, and other comprehensive income of the investee.
There is also a third option — measuring at fair value through profit or loss (FVTPL) or fair value through OCI (FVOCI) under Ind AS 109 — but for most exam scenarios, the examiner focuses on cost vs equity method. Verify the exact options permitted in the latest ICAI study material.
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When Do You Use Which Method?
Here is where students get confused. Ind AS 27 does not mandate one method over the other for all cases. The entity makes an accounting policy choice — but once chosen, it must be applied consistently to each category of investment (same policy for all subsidiaries, same for all associates, same for all joint ventures).
The Practical Logic
- Cost method is simpler and conservative. Income recognition happens only when dividends are declared. This means unrealised profits sitting inside the subsidiary do not flow into the parent's separate P&L.
- Equity method mirrors economic reality more closely. If the subsidiary earns profits, the investment carrying amount goes up. If it makes losses, it comes down. The parent's separate financial statements look closer to the consolidated picture.
A Quick Worked Example (Logic, Not a Copied Question)
Suppose Company A holds 80% in Company B. Company B earns ₹10 lakh profit in Year 1 and declares no dividend.
- Under Cost Method: Company A records zero income. Investment stays at original cost.
- Under Equity Method: Company A records ₹8 lakh (80% × ₹10 lakh) as income, and the investment carrying amount increases by ₹8 lakh.
Now if Company B declares a ₹5 lakh dividend:
- Cost Method: Company A records ₹4 lakh (80% × ₹5 lakh) dividend income.
- Equity Method: The dividend received reduces the investment carrying amount — it is not additional income, because the income was already recognised as the subsidiary earned it.
This distinction — dividend as income (cost) vs dividend reducing carrying amount (equity) — is a favourite exam trap.
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Common Exam Pitfalls
Pitfall 1: Treating Separate Statements as Optional
Students assume a parent can choose not to prepare separate financial statements. Under applicable Indian law and ICAI requirements, this is not always freely optional — verify the current requirements in the latest ICAI study material.
Pitfall 2: Mixing Methods Within a Category
An entity cannot use the cost method for some subsidiaries and the equity method for others. The policy must be uniform within each category. However, it can use different policies for different categories — say, cost method for subsidiaries and equity method for associates.
Pitfall 3: Impairment Under Cost Method
Under the cost method, the investment is tested for impairment under Ind AS 36. Students often forget this step entirely. If there is an indication of impairment, the carrying amount must be written down.
Pitfall 4: Dividends from Pre-Acquisition Profits
If dividends are paid out of pre-acquisition profits of the investee, they represent a return of investment, not a return on investment. Under the cost method, such dividends are not income — they reduce the cost of investment. This is a classic numerical trap in exams.
Pitfall 5: Forgetting OCI Adjustments Under Equity Method
Under the equity method, the investor's share of the investee's Other Comprehensive Income is also recognised in OCI of the investor. Students often account for only P&L share and miss the OCI component entirely.
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A Quick Revision Checklist
- ✅ Identify: are these separate statements or consolidated statements?
- ✅ Determine the accounting policy: cost or equity?
- ✅ Apply the same policy to all investments in the same category
- ✅ Under cost method: check for impairment, identify pre-acquisition dividends
- ✅ Under equity method: adjust for P&L share and OCI share; treat dividends as reduction in carrying amount
- ✅ Verify latest thresholds, exemptions, and disclosures in current ICAI study material
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FAQs
Q1. Can a company use the equity method in its separate financial statements even if it is a parent? Yes. Ind AS 27 explicitly permits this. The equity method is no longer restricted to consolidated statements alone. A parent can apply it in its own separate financial statements for investments in subsidiaries, associates, and joint ventures.
Q2. If an entity switches from cost method to equity method, how is it treated? A change in accounting policy is applied retrospectively in accordance with Ind AS 8. Always verify the specific transition provisions in the latest ICAI study material, as practical guidance may be updated.
Q3. Is impairment testing required under the equity method in separate statements? Yes. Even under the equity method, if there are indicators of impairment, the investment is tested for impairment. The recoverable amount is compared to the carrying amount as adjusted by the equity method.
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Mastering Ind AS 27 is really about understanding the logic behind each measurement choice — not memorising rules in isolation. If you want to practise real exam-style case scenarios on this topic (and many other Ind AS standards), head over to caparveensharma.com and explore the CA Final courses built around application-based learning. And if your study schedule feels scattered, use the completely free day-by-day study planner to bring structure to your preparation — it takes just two minutes to set up and keeps you on track all the way to exam day.