Ind AS 28 Investments in Associates and Joint Ventures — Equity Method Mechanics and Impairment Testing
If you are preparing for CA Final Financial Reporting, Ind AS 28 is one of those standards that looks straightforward on the surface but hides real depth once you sit with the numbers. Let me walk you through the equity method and impairment testing the way I explain it in class — step by step, with logic at the centre.
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What Does Ind AS 28 Actually Cover?
Ind AS 28 prescribes how an investor accounts for:
- Associates — entities over which the investor has significant influence (but not control or joint control)
- Joint ventures — arrangements where two or more parties share joint control and have rights to the net assets of the arrangement
The standard requires both to be accounted for using the equity method, unless a specific exemption applies (verify exemption conditions in the latest ICAI study material).
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The Equity Method — Core Mechanics
Think of the equity method as a live mirror of your share in the investee. Here is the logic:
Step 1 — Initial Recognition
Record the investment at cost on the date of acquisition. Cost includes purchase price plus directly attributable transaction costs.
Step 2 — Adjust for Your Share of Post-Acquisition Changes
After acquisition, the carrying amount of the investment moves every period:
- Add: Your share of the associate's profit (from its statement of profit and loss)
- Add or Subtract: Your share of the associate's Other Comprehensive Income (OCI)
- Subtract: Dividends received from the associate (because the dividend reduces the investee's net assets, so your carrying amount also falls)
Step 3 — Understand What 'Share' Means
Your share is based on your effective ownership percentage. If you hold 30% of equity shares, you pick up 30% of every profit, loss and OCI item.
A worked logic example:
Suppose Company A acquires 25% of Company B for ₹50 lakh on 1 April. During the year, Company B reports a net profit of ₹20 lakh and pays a dividend of ₹4 lakh.
| Item | Calculation | Amount | |---|---|---| | Opening carrying amount | Cost | ₹50.00 lakh | | Add: Share of profit | 25% × ₹20 lakh | ₹5.00 lakh | | Less: Dividend received | 25% × ₹4 lakh | (₹1.00 lakh) | | Closing carrying amount | | ₹54.00 lakh |
The dividend is not income under the equity method — it is a return of your investment.
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Losses Exceeding Carrying Amount
Here is a point many students miss. If the associate reports heavy losses and your share of those losses exceeds the carrying amount of the investment, you stop recognising further losses once the carrying amount reaches zero. You do not create a negative asset on your balance sheet — unless you have legal or constructive obligations to fund further losses.
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Upstream and Downstream Transactions
When there are transactions between you and your associate, you must eliminate the unrealised profit to the extent of your ownership percentage.
- Downstream = You sell goods to the associate. Eliminate your % of unrealised profit still sitting in the associate's inventory.
- Upstream = The associate sells goods to you. Same principle — eliminate your % of unrealised profit in your own inventory.
This ensures you do not book profit simply by selling to an entity you significantly influence.
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Impairment Testing Under Ind AS 28
Once you have a carrying amount under the equity method, you need to check whether that amount is recoverable. Ind AS 28 requires you to apply Ind AS 36 (Impairment of Assets) to test the investment as a single asset — you do not test individual underlying assets of the associate separately.
When to Test?
Ind AS 36 requires impairment testing when there is an indication of impairment. Common indicators include:
- Significant decline in the associate's market value
- Adverse changes in the associate's operating environment
- Associate reporting sustained net losses
- Carrying amount of your investment exceeds your share of the associate's net assets by a material margin
How to Test?
Compare the carrying amount of the investment with its recoverable amount.
Recoverable amount = Higher of:
- Fair value less costs of disposal
- Value in use (present value of expected future cash flows from the investment, including dividends and disposal proceeds)
If carrying amount > recoverable amount → recognise an impairment loss in the income statement.
If circumstances later improve, Ind AS 36 allows reversal of the impairment loss — but only up to the original carrying amount (before impairment), adjusted for what amortisation would have been.
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Key Disclosures to Remember
The standard requires disclosures about:
- Nature and extent of significant restrictions on the associate transferring funds
- Summarised financial information of material associates
- Any unrecognised share of losses
- Reasons for rebutting the presumption of significant influence (if applicable)
Verify the exact disclosure checklist in the latest ICAI study material, as presentation requirements can be updated.
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Quick Revision Bullets
- Equity method = cost + share of post-acquisition changes − dividends
- Dividend received → reduces carrying amount, not income
- Losses stop at zero carrying amount (unless obligations exist)
- Unrealised profits on intercompany transactions → eliminate proportionately
- Impairment → tested as a single asset under Ind AS 36
- Reversal of impairment is permitted but capped
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FAQs
Q1: Is the equity method used for joint operations as well? No. Joint operations are accounted differently — the operator recognises its own share of assets, liabilities, revenues and expenses directly. The equity method applies only to joint ventures (where you have rights to net assets) and associates.
Q2: What if the associate prepares its financial statements on a different reporting date? Ind AS 28 permits using financial statements of the associate prepared up to three months before the investor's reporting date, provided adjustments are made for significant transactions in the intervening period. Verify the exact allowable gap in the latest ICAI study material.
Q3: If an investment's carrying amount becomes zero and the associate later becomes profitable, do we resume recognising our share of profits? Yes — but only after your unrecognised share of losses has been fully offset by the subsequent profits. Only the excess profit beyond that offset gets added back to the carrying amount.
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Mastering Ind AS 28 is really about understanding the economic logic behind the equity method — you are not just a passive investor; you are reflecting a slice of a real business in your books. Build that intuition and the numbers will follow naturally.
To organise your entire FR preparation around these standards, use the free day-by-day study planner at https://caparveensharma.com/free-planner?src=article — it maps topics like Ind AS 28 across your available study days so nothing gets left to the last moment. For applied case-scenario practice where you work through full equity method computations and impairment calculations, explore the structured CA Final FR courses at https://caparveensharma.com. Consistent practice on real scenarios is what separates a confident exam attempt from a stressful one.