An investment does not become an associate merely because the investor owns a meaningful percentage of another entity. Under AS 23, the key question is whether the investor has significant influence without control or joint control. Once that relationship exists, the accounting in consolidated financial statements is generally based on the equity method rather than simply carrying the investment at cost and recognising dividends as income.
ICAI’s current AS 23 text sets out the recognition and measurement rules, while the dedicated AS 23 publication page and ICAI’s Accounting Standards collection as on April 1, 2025 provide official reference routes.
First, confirm that AS 23 is the right standard
AS 23 applies to investments in associates when an investor prepares consolidated financial statements. It does not prescribe accounting for an associate in the investor’s separate financial statements; the official text points to AS 13 for that separate-financial-statement accounting. This distinction prevents a common error: applying the equity method automatically in both sets of accounts.
An associate is an enterprise over which the investor has significant influence and which is neither a subsidiary nor a joint venture. Significant influence means the power to participate in financial or operating policy decisions without controlling those policies.
The 20% test is a presumption, not an automatic rule
If the investor holds, directly or indirectly through subsidiaries, 20% or more of the investee’s voting power, AS 23 presumes significant influence unless it can be clearly demonstrated otherwise. Conversely, a holding below 20% creates a presumption that significant influence does not exist unless the investor can clearly demonstrate it. Potential equity shares held by the investor are not taken into account for this voting-power test.
Evidence of significant influence can include board representation, participation in policy-making, material transactions, interchange of managerial personnel or provision of essential technical information. The analysis should therefore document both ownership and the actual governance relationship.
How the equity method works
The equity method starts by recording the investment at cost and identifying any goodwill or capital reserve arising at acquisition. After acquisition, the carrying amount is increased or decreased for the investor’s share of post-acquisition changes in the associate’s net assets. The consolidated statement of profit and loss includes the investor’s share of the associate’s results. Distributions received from the associate reduce the carrying amount of the investment rather than being treated as a fresh measure of earnings.
Worked example
Assume Investor Ltd acquires 30% of Associate Ltd for ₹30 lakh. At the acquisition date, the investor’s share of the associate’s equity is ₹24 lakh. The ₹6 lakh difference is goodwill under the AS 23 mechanics and is included in the carrying amount of the investment, with separate disclosure as required.
During the next period, Associate Ltd earns ₹20 lakh after acquisition and declares and pays dividends of ₹4 lakh. Ignoring other adjustments, Investor Ltd’s share of post-acquisition profit is ₹6 lakh and its share of the distribution is ₹1.2 lakh. The carrying amount therefore moves from ₹30 lakh to ₹34.8 lakh: ₹30 lakh plus ₹6 lakh share of profit less ₹1.2 lakh distribution. The equity-method income is driven by the associate’s post-acquisition result, not by the cash dividend received.
Eliminate unrealised profits and losses to the investor’s interest
AS 23 requires unrealised profits and losses from transactions between the investor, including its consolidated subsidiaries, and the associate to be eliminated to the extent of the investor’s interest in the associate. Unrealised losses are not eliminated to the extent that the cost of the transferred asset cannot be recovered. Finance teams should therefore identify upstream and downstream transactions before finalising the equity pickup instead of relying only on the associate’s reported profit.
Align reporting dates and accounting policies
The most recent available financial statements of the associate are used, and they are usually drawn up to the same date as the investor’s financial statements. If matching dates are impracticable, a different reporting date may be used consistently, with adjustments for significant events or transactions occurring between the two reporting dates.
AS 23 also expects uniform accounting policies for like transactions and events in similar circumstances. If the associate uses different policies, appropriate adjustments are made when practicable. Where adjustment is not practicable, the fact and a brief description of the policy differences are disclosed.
What happens when the associate keeps making losses?
If the investor’s share of losses equals or exceeds the carrying amount of the investment, AS 23 ordinarily stops further loss recognition and reports the investment at nil. Additional losses are recognised to the extent the investor has incurred obligations or made payments on behalf of the associate for obligations it has guaranteed or is otherwise committed to. If the associate later returns to profit, the investor resumes recognising its share only after the previously unrecognised share of losses has been recovered.
When the equity method is not used or is discontinued
AS 23 provides exceptions where an investment is acquired and held exclusively for disposal in the near future, or the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Such investments are accounted for under AS 13 and the reason for not using the equity method is disclosed. The standard explains that “near future” ordinarily means not more than twelve months from acquisition unless a longer period is justified by the facts and circumstances.
The equity method is discontinued from the date significant influence ceases, or when severe long-term restrictions make its use no longer appropriate. The carrying amount at that date becomes the cost for subsequent AS 13 accounting.
Year-end AS 23 checklist
- Confirm the reporting framework. Make sure the entity is applying AS 23 in consolidated financial statements rather than importing an Ind AS or separate-financial-statement treatment.
- Document significant influence. Record voting rights, board representation, policy participation and other evidence; do not treat 20% as an irrebuttable rule.
- Lock the acquisition analysis. Reconcile cost, the investor’s share of equity at acquisition and the resulting goodwill or capital reserve.
- Build the equity pickup. Reconcile post-acquisition profit or loss, distributions and other movements in the associate’s net assets.
- Review inter-company transactions. Identify unrealised profits and losses requiring elimination to the investor’s interest.
- Check dates and policies. Address reporting-date differences, significant intervening events and accounting-policy differences.
- Test the loss limit. Track unrecognised losses and any obligations that require additional recognition.
- Complete disclosures. Include the associate listing, ownership and voting interests, separate presentation of equity-method investments and the investor’s share of results, plus required disclosures for reporting-date or policy differences.
Common mistakes
- Using the equity method in separate financial statements merely because the investee is an associate.
- Assuming a 20% holding automatically proves significant influence without considering contrary evidence.
- Recognising dividends as income while also taking the investor’s share of the associate’s profit, which can double count returns.
- Ignoring unrealised gains in investor-associate transactions.
- Using the associate’s financial statements without addressing material events between different reporting dates.
- Continuing to recognise losses below a nil investment balance without checking whether the investor has further obligations.
Practical takeaway
AS 23 is easiest to apply as a controlled roll-forward. First prove significant influence and confirm that the calculation belongs in consolidated financial statements. Then establish acquisition-date cost and goodwill or capital reserve, update the investment for post-acquisition results and distributions, eliminate relevant unrealised gains, align dates and policies, and monitor the loss limit. A documented roll-forward makes the equity-method number easier to audit and far less likely to be confused with dividend accounting or a simple percentage-of-profit shortcut.
