Equity method

The equity method accounts for investments in associates by recording the initial investment at cost, then adjusting each period for the investor's proportional share of the associate's profit or loss and other comprehensive income.

ByHoang TruongUpdated July 3, 2026

FrameworkConsolidation

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An investor holding 30% of an associate begins with an investment carried at cost of €200,000. The associate earns €150,000 for the year, so the investor adds its €45,000 share of that profit, then deducts €10,000 of dividends received, since dividends are a return of capital rather than income. The closing carrying amount is €235,000.

Where it fits

SubjectFinancial AccountingAdvancedTopicThe Financial StatementsAdvancedTopicAsset Measurement & ValuationAdvanced

The formula

LaTeX

\text{Investment} = \text{Cost} + p \times \text{Post-acquisition Profit} - \text{Dividends Received}

Variables

$C os t$: Acquisition cost of the investment (€)
$p$: Investor's ownership percentage in the associate (decimal)
$P os t - a c q u i s i t i o n P r o f i t$: Associate's cumulative profit or loss since acquisition (€)
$D i v i d e n d s R ece i v e d$: Cumulative dividends received from the associate (€)

Dividends received reduce the carrying amount rather than being recognised as income, preventing double-counting of earnings already recognised through the equity pick-up.