Equity method explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The equity method is a one-line way of consolidating. The investor records an associate or joint venture at cost and then moves the carrying amount with its share of the investee's results, instead of counting dividends as income. Ind AS 28 says when it applies and how to run it year by year.
An investor with significant influence over an investee (presumed at 20 per cent or more of voting power, paragraph 5) or joint control of a joint venture uses the equity method (paragraph 16). The investment starts at cost, goodwill stays inside it and is not amortised (paragraph 32), the carrying amount rises with the investor's share of profit and OCI and falls with dividends (paragraph 10), and profit on transactions with the investee is eliminated to the investor's share (paragraph 28). Losses stop at zero (paragraph 38), and impairment is tested on the net investment (paragraphs 40 to 41C).
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). Amendments notified after 1 April 2025 are not reflected in this article; check mca.gov.in before applying it to a later period.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| Ind AS 28, 5 to 9 | 20 per cent or more voting power is presumed to give significant influence; board seats, policy participation, material transactions, managers and technical information are evidence | The presumption can be rebutted; a lower holding can still give influence |
| 10, 11 | Cost on initial recognition; carrying amount moves with share of profit or loss and OCI; distributions reduce it | Dividends are not income |
| 16 to 19 | Apply the method unless an exemption applies | Exemptions are narrow |
| 26, 27 | Procedures resemble consolidation; share includes holdings of the parent and subsidiaries | Add group holdings together |
| 28, 29 | Upstream and downstream gains are recognised only to the extent of unrelated investors' interests; losses showing impairment are recognised in full for downstream transactions | Eliminate the investor's share of the profit |
| 32 | Goodwill is included in the investment and not amortised; an excess of share of net fair value over cost goes to equity as capital reserve | Adjust profit for fair value depreciation |
| 33, 34 | Use the latest statements; no more than three months apart | Adjust for significant events |
| 35, 36 | Uniform policies | Align the investee's policies |
| 38, 39 | Stop at zero; include long-term interests that form part of the net investment; recognise further losses only for obligations | Reverse order of seniority |
| 40 to 41C | Impairment tested on the net investment on objective evidence | Cost, rather than a fall in fair value alone, drives the test |
Joint venture or joint operation
The standard applies to a joint venture, not a joint operation. Under Ind AS 111 a joint operation gives the parties rights to the assets and obligations for the liabilities of the arrangement (paragraph 15), and a joint venture gives them rights to the net assets (paragraph 16). Judgement is applied from the structure, the agreed terms and other facts (paragraph 17), and the type is reassessed when facts change (paragraph 19). A joint operator accounts for its own assets, liabilities, revenue and expenses; a joint venturer applies the equity method.
Step by step
Establish influence or joint control at the acquisition date. Compare cost with the investor's share of the net fair value of the investee's identifiable assets and liabilities; any excess of cost is goodwill within the investment, and any shortfall is a capital reserve in equity (paragraph 32). Each year, take the share of profit after fair value depreciation, deduct the share of unrealised profit, add the share of OCI, and deduct dividends received. Then test for impairment and for losses beyond the carrying amount.
In an Accounting Standards entity, the corresponding rules are in our post on AS 23, and are not the same as the ones here.
Equity-method workings are easy to get wrong when several entities share a group. Our financial statement preparation team can review your roll-forward, eliminations and impairment notes with your finance team.
Worked example
The entity and all figures in this example are invented for illustration. Amounts are in ₹ lakh and tax is ignored for arithmetic only.
Brahmani Steels Limited buys 30 per cent of Subarnarekha Fabrics Limited on 1 April 2025 for ₹400.00 lakh and gains significant influence. Subarnarekha's book net assets are ₹1,000.00 lakh and its plant has a fair value ₹100.00 lakh above carrying amount, with a remaining life of ten years.
Step 1: goodwill (paragraph 32).
| Item | ₹ lakh |
|---|---|
| Identifiable net assets at fair value (1,000.00 + 100.00) | 1,100.00 |
| Brahmani's share, 30% | 330.00 |
| Cost | 400.00 |
| Goodwill inside the investment | 70.00 |
Step 2: 2025-26 roll-forward. Subarnarekha reports profit of ₹200.00 lakh and pays dividends of ₹60.00 lakh, and its OCI gain is ₹20.00 lakh. The extra depreciation on the uplift is 100.00 ÷ 10 = ₹10.00 lakh. During the year Brahmani sold goods to Subarnarekha for ₹80.00 lakh at a profit of ₹24.00 lakh; goods bought for ₹40.00 lakh remain unsold at year-end, so the unrealised profit is half of 24.00 = ₹12.00 lakh. Brahmani eliminates its 30 per cent share of that profit (paragraph 28): 30% x 12.00 = ₹3.60 lakh.
| 2025-26 | ₹ lakh |
|---|---|
| Opening (cost) | 400.00 |
| Share of profit: 30% x (200.00 - 10.00) | 57.00 |
| Share of OCI: 30% x 20.00 | 6.00 |
| Unrealised profit eliminated | (3.60) |
| Dividend received: 30% x 60.00 | (18.00) |
| Closing | 441.40 |
| Particulars | Debit (₹ lakh) | Credit (₹ lakh) |
|---|---|---|
| Investment in associate | 57.00 | |
| To Share of profit of associate (profit or loss) | 57.00 | |
| Investment in associate | 6.00 | |
| To Share of OCI of associate (OCI) | 6.00 | |
| Share of profit of associate (profit or loss) | 3.60 | |
| To Investment in associate | 3.60 | |
| Bank | 18.00 | |
| To Investment in associate | 18.00 |
Check: Net debits to the investment 57.00 + 6.00 = 63.00 less credits 3.60 + 18.00 = 21.60 gives a rise of ₹41.40 lakh, from 400.00 to 441.40. Cross-check from the balance sheet: Subarnarekha's net assets are 1,000.00 + 200.00 + 20.00 - 60.00 = 1,160.00; add uplift remaining 90.00 to get 1,250.00; 30 per cent is 375.00; add goodwill 70.00 for 445.00; deduct unrealised profit 3.60 to reach 441.40.
Step 3: 2026-27. Subarnarekha earns ₹150.00 lakh and pays ₹90.00 lakh in dividends; there is no OCI. The remaining goods are sold on to outsiders, so the 3.60 is released.
| 2026-27 | ₹ lakh |
|---|---|
| Opening | 441.40 |
| Share of profit: 30% x (150.00 - 10.00) | 42.00 |
| Unrealised profit realised | 3.60 |
| Dividend received: 30% x 90.00 | (27.00) |
| Closing | 460.00 |
Check: net assets 1,160.00 + 150.00 - 90.00 = 1,220.00; plus uplift remaining 80.00 = 1,300.00; 30 per cent is 390.00; plus goodwill 70.00 equals 460.00. There is no unrealised profit left.
Losses and impairment
If Brahmani's share of losses reached the carrying amount, it would stop recognising more, and the carrying amount includes long-term interests that are in substance part of the net investment, such as preference shares and loans for which settlement is neither planned nor likely, but not trade balances or well-secured loans (paragraph 38). Losses beyond that are provided for only for legal or constructive obligations or payments made (paragraph 39), and later profits are recognised only after making good the unrecognised losses. Impairment applies to the net investment on objective evidence of a loss event, such as significant financial difficulty (paragraph 41A); a fall in fair value or a downgrade is not enough by itself (41B), though a significant or prolonged fall below cost is evidence for equity instruments (41C).
Presentation and disclosure
The investment is a non-current asset (paragraph 15) and the share of profit is a separate line in profit or loss. See our Ind AS 28 post for the standard's outline. The associate's own control tests are in our guides to assessing control and to loss of control, where a retained stake becomes an associate.
Common mistakes
- Treating dividends as income instead of reducing the carrying amount (paragraph 10).
- Amortising goodwill inside the investment (paragraph 32).
- Forgetting the extra depreciation on fair value uplifts (paragraph 32).
- Eliminating the whole unrealised profit instead of the investor's share (paragraph 28).
- Continuing to book losses below zero without an obligation (paragraphs 38 and 39).
Need help with equity accounting?
Associate and joint venture workings sit across year-ends, group entities and changing stakes. Our financial statement preparation team can build the roll-forward, the elimination schedule and the impairment file with your finance team.
Key takeaways
- The method applies to associates and joint ventures; joint operations are accounted for line by line.
- Cost includes goodwill, which is not amortised.
- Carrying amount moves with share of profit and OCI, and falls with dividends.
- Unrealised profit is eliminated to the investor's share, upstream or downstream.
- Losses stop at the net investment; impairment is tested on objective evidence.
Read next
- Assessing control under Ind AS 110: power, variable returns, de facto control and potential voting rights
- Changes in ownership and loss of control under Ind AS 110
- AS 23: accounting for investments in associates in consolidated financial statements
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.