Note: This article provides a focused explanation and extended discussion on a specific standard. If you’d like to see the full list of articles and short summaries for this standard, please visit the “Series Overview” page.
Since 2025, most standard‑related articles on this site have been available in both Chinese and English versions. If you’d like to read the Chinese explanation, please visit the 「系列總覽」 page and look for the corresponding article.
Plain‑English explainer of HKAS 28 / IAS 28 for students, junior accountants and non‑specialists who find official standards too dense to read.
This article is based on Hong Kong Accounting Standards (HKAS / HKFRS), which are fully aligned with IAS / IFRS except for minor local tweaks, so the same principles generally apply under IAS / IFRS unless noted otherwise. The goal is to unpack HKAS 28 Investments in Associates and Joint Ventures (equivalent to IAS 28) using plain English and practical, real‑life examples instead of technical jargon. It is written for students, junior accountants, audit juniors and finance professionals who want to understand not just “what the standard says” but how to actually read and prepare financial statements in line with it.
When you see “the company” or “the entity” below, you can think of any entity that prepares general purpose financial statements under HKFRS / IFRS.
When You Own “Part of” a Business?
Many companies invest in other businesses without owning them outright. Think of a bank taking a stake in a fintech start-up, or two property developers forming a joint venture to build a residential project. These investments are not subsidiaries — you do not have full control — but they are also far more than a passive stock market investment. So how should they appear in the financial statements?
That is exactly the question HKAS 28 is designed to answer. Once you understand this standard, you will be able to read the line “Investment in Associates” on any set of consolidated accounts and know what it really means, how the investor’s share of earnings is actually calculated, and why these investments are not simply folded into the consolidated statements through full consolidation.
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Distinguish between an associate and a joint venture — and explain why the difference matters.
- Know when HKAS 28 applies, and when HKFRS 10 or HKFRS 9 takes over instead.
- Understand the logic of the equity method — specifically, why it tracks the investor’s share of net assets rather than just dividend receipts.
- Map out how HKAS 28 interacts with other key standards.
- Lay the groundwork for more advanced topics such as long-term interests and cessation of the equity method.
1. Scope and Purpose — What Does HKAS 28 Actually Cover?
The core purpose of HKAS 28 (equivalent to IAS 28) is to prescribe how an investor should recognise and measure its investment when it has either significant influence or joint control over the investee.
Put simply, HKAS 28 does not deal with full subsidiaries (that is the territory of HKFRS 10 / IFRS 10), and it does not deal with purely passive financial assets measured at fair value (that falls under HKFRS 9 / IFRS 9). It sits in the middle — the investor has meaningful involvement in the investee, but falls short of outright control.
The Three-Way Classification at a Glance
| Standard | Relationship | Accounting Treatment |
|---|---|---|
| HKFRS 10 / IFRS 10 | Subsidiary — control exists | Full consolidation |
| HKAS 28 / IAS 28 | Associate or joint venture — significant influence or joint control | Equity method |
| HKFRS 9 / IFRS 9 | Financial asset — no significant influence | Fair value measurement |
Suppose Company A holds 30% of a technology start-up and has a seat on its board of directors. Company A does not control the start-up outright, but it can influence key decisions on strategy, financing and management appointments. In this scenario, HKAS 28 applies.
The critical point here is that the percentage held is a starting point, not the final answer. What matters is whether the investor can actually exert significant influence. A 30% stake with board representation is very different from a 30% stake with no say whatsoever.
2. Associates vs. Joint Ventures — What Is the Difference?
Associate
An associate is an entity over which the investor has significant influence — typically, but not exclusively, indicated by a shareholding of between 20% and 50%. Significant influence can be demonstrated through voting rights, board representation, participation in policy-making, or material transactions between the two parties.
Joint Venture
A joint venture is an arrangement that two or more parties jointly control under a binding contractual agreement. Unlike a subsidiary, no single party makes decisions alone — major strategic and financial decisions require the unanimous or collective consent of all venturers. A classic example in Hong Kong is two construction companies forming a company to jointly develop a property project, each holding 50% and sharing profits and risks equally.
Why Does the Distinction Matter in Practice?
- An associate reflects the investor’s participation in another entity’s business.
- A joint venture is more akin to co-managing a shared project, with formal contractual governance.
Both are accounted for under HKAS 28 using the equity method. The key difference is the source of the investor’s power: for an associate it comes from significant influence, while for a joint venture it stems from contractually established joint control.
3. The Equity Method — The Heart of HKAS 28
The equity method is not simply “record the investment at cost and recognise dividends as income.” It is a more dynamic approach that tracks the investor’s proportionate share of the investee’s net assets and results over time.
Step-by-Step: How the Equity Method Works
Step 1 — Initial recognition: The investment is recorded at cost on the date it is acquired.
Step 2 — Subsequent measurement: After initial recognition, the carrying amount of the investment is adjusted each period to reflect the investor’s share of any changes in the investee’s net assets. This includes the investee’s profits, losses and other comprehensive income.
Step 3 — Income recognition: The investor recognises its share of the investee’s profit or loss in its own income statement, typically as a line item such as “Share of profit of associates.”
Step 4 — Dividend adjustment: When the investee pays a dividend, the investor’s carrying amount is reduced by its share of that dividend. The dividend is not recognised as additional income — it is treated as a partial recovery of the investment.
Worked Example
Company A holds 30% of Company B and uses the equity method. In the current year, Company B reports a profit of HK$1,000,000 and pays a dividend of HK$100,000.
- Company A recognises HK$300,000 (30% × $1,000,000) as its share of profit in its income statement.
- Company A’s carrying amount of the investment increases by HK$300,000.
- When the dividend is paid, Company A’s carrying amount decreases by HK$30,000 (30% × $100,000). The dividend is not additional income.
Why Not Just Use Cost or Fair Value?
| Method | How Income Is Recognised | Reflects Operating Performance? |
|---|---|---|
| Cost method | Only when dividends are received | No — static |
| Fair value (FVPL/FVOCI) | Changes in market price | Only indirectly |
| Equity method | Share of the investee’s actual profits/losses | Yes — dynamic |
The equity method provides a more economically faithful picture of the investor’s stake, because it links the carrying amount directly to the performance of the business the investor participates in.
4. How HKAS 28 Connects with Other Standards — A Standards Map
One of the most common points of confusion when studying HKAS 28 is understanding where it ends and other standards begin. Here is a brief map of the key interactions.
HKFRS 10 / IFRS 10 — Consolidated Financial Statements
If the investor gains control over the investee, HKFRS 10 takes over and the entity must be fully consolidated. Conversely, if control is lost (but significant influence is retained), HKAS 28 and the equity method may begin to apply from that point.
HKFRS 3 / IFRS 3 — Business Combinations
When an associate or joint venture interest is first acquired and that acquisition constitutes a business combination, the initial recognition must take into account the fair value of the identifiable net assets at acquisition date.
HKFRS 9 / IFRS 9 — Financial Instruments
If the investor holds only a small equity stake with no significant influence, HKFRS 9 applies and the investment is measured at fair value. Additionally, certain long-term interests that form part of the net investment in an associate (such as preference shares or subordinated loans) may require treatment under both HKAS 28 and HKFRS 9 together.
HKFRS 5 / IFRS 5 — Non-current Assets Held for Sale
If the investor intends to sell its associate or joint venture investment, it may need to reclassify the investment under HKFRS 5, which changes the measurement basis.
HKAS 36 / IAS 36 — Impairment of Assets
If the investee’s performance deteriorates significantly, the investor must assess whether the carrying amount of the equity-method investment exceeds its recoverable amount. An impairment loss must be recognised if it does.
Think of HKAS 28 as a bridge in the standards framework — it connects the territory of full control (HKFRS 10) with purely passive investments (HKFRS 9), covering the middle ground of meaningful but non-controlling involvement.
5: Common Challenges — What Trips People Up
Challenge A: Long-Term Interests
Some entities extend financing to their associates through instruments such as convertible loans or preference shares. The question is whether these form part of the “net investment” in the associate for the purposes of the equity method, or whether they should be treated purely as financial instruments under HKFRS 9. The answer depends on the nature of the instrument, and getting this wrong is a common mistake.
Challenge B: Losses Exceeding the Carrying Amount
What happens if the associate keeps making losses? The investor recognises its share of the associate’s losses, which reduces the carrying amount of the investment. But what if the losses exceed the carrying amount and bring it below zero? Under HKAS 28, the investor stops recognising further losses once the investment is reduced to nil — unless it has incurred legal or constructive obligations to fund additional losses on behalf of the associate.
Challenge C: Cessation of the Equity Method
When the investor loses significant influence (for example, because its shareholding drops below 20% due to dilution), the equity method ceases. The investment is then reclassified and measured under HKFRS 9. Knowing how to account for the transition — including the recognition of any remaining fair value difference — is an area frequently tested in professional examinations.
6. Closing Thoughts: Think of HKAS 28 When the Investment Is “Not Quite a Subsidiary”
The equity method is not about complex formulas. At its heart, it is about presenting economic reality from the investor’s perspective — reflecting the fact that when you have real influence over a business, your financial performance is genuinely tied to that business’s performance.
When you encounter a non-controlling investment, ask yourself three questions:
- Can I influence or jointly determine the key strategic and financial decisions of this entity?
- Is my involvement long-term and operational in nature, rather than a short-term financial punt?
- If this entity makes a profit or a loss, should my financial statements reflect my share of that?
If the answers lean towards “yes, this is a genuine business partnership,” then HKAS 28 is almost certainly the right standard.
From here, the natural next steps are learning to calculate the equity method adjustment for long-term interests, working through impairment scenarios under HKAS 36, and practising journal entries for the cessation of significant influence. When you next read through a listed company’s annual report and come across the line “Investments in Associates,” you will know exactly what that number represents — a continuing economic partnership, faithfully reflected through the equity method.
Key Takeaways for Students and Junior Accountants
- Always start with classification. Before touching numbers, ask: is this a subsidiary (HKFRS 10), an associate or joint venture (HKAS 28), or a passive investment (HKFRS 9)? The answer determines everything that follows.
- Significant influence ≠ majority ownership. A 20% holding can carry significant influence; a 40% holding might not, if the facts say otherwise. Focus on substance, not just percentage.
- The equity method adjusts the carrying amount, not just income. In your working papers, track both the P&L impact (share of profit/loss) and the balance sheet adjustment (net asset movement including OCI) simultaneously.
- Dividends reduce the carrying amount — they are not income. This is one of the most frequently confused points in both exams and practice. Do not double-count.
- Watch for losses eroding the carrying amount to nil. Once it hits zero, stop recognising further losses — unless there are obligations that require the investor to fund the investee further.
- When reviewing contracts and shareholder agreements, look for clauses about board representation, veto rights, and decision-making procedures. These are the real indicators of significant influence or joint control — not just the ownership percentage on the share register.
If you’d like to ask me questions or chat about your learning, you can follow me on Threads / IG and send me a DM — I’ll reply as far as I can.
And if you feel these resources have helped you, you can also buy me a coffee to support me in writing more.
罔相心室: https://chinese.iamdelusionman.com/
Zero-to-Acct Substack: https://zerotoacct.substack.com/
Thread: https://www.threads.com/@yickki_mong
IG: https://www.instagram.com/yickki_mong/
