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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 20% Is Not “Just a Financial Investment”
In many Hong Kong‑style structures, a company holds a minority stake in another company—for example, a listed company investing in a logistics tech startup, or a property group taking a stake in a construction consulting firm. These holdings often do not give control, but they are also more than a simple trading investment.
A common beginner mistake is to see “20% shareholding” and immediately treat it as a financial asset under HKFRS 9 Financial Instruments. However, if the investor can exert significant influence over the investee, that investment is scoped into HKAS 28 Investments in Associates and Joint Ventures (equivalent to IAS 28) and must be accounted for using the equity method.
In this article, we walk step by step through judgement on significant influence, the qualitative indicators you must look for, the role of potential voting rights, and the basic mechanics of the equity method from initial recognition onwards.
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Explain the formal definition of significant influence and how the 20% presumption works.
- Use qualitative evidence (board participation, major transactions, technical dependence, etc.) to assess influence in real‑life scenarios.
- Understand how potential voting rights (options, convertibles) affect the significant‑influence judgement when they are currently exercisable.
- Apply the equity method: from initial recognition at cost through to basic subsequent measurement.
- Perform a simple year‑one carrying amount calculation for an equity‑accounted investment.
1. Significant Influence and the 20% Presumption
Under HKAS 28 / IAS 28, significant influence is the power to participate in the financial and operating policy decisions of the investee, but without control or joint control. In everyday language, you do not run the business, but management and the board must take your views seriously when making key decisions.
The 20% “Rule” as a Starting Point
The standard gives a practical starting benchmark:
- If the investor directly or indirectly holds 20% or more of the voting power of the investee, there is a presumption of significant influence, unless there is clear evidence to the contrary.
- If the holding is less than 20%, the presumption is that significant influence does not exist, unless there is strong positive evidence that it does.
However, HKAS 28 / IAS 28 emphasises that these presumptions are not automatic rules.
Examples:
- Investor holds 25%, but another shareholder holds 60% and unilaterally directs the strategy. In practice, the 25% investor may have little or no real influence over key decisions, so significant influence might not exist.
- Investor holds only 15% but has a board seat and is actively involved in policy decisions. In this case, despite the low percentage, the investor may indeed have significant influence.
So, percentage is just the opening question. The real test is whether the investor can participate in key financial and operating decisions.
2. Qualitative Evidence You Must Look For
When assessing significant influence, HKAS 28 / IAS 28 directs you to look beyond raw voting rights and consider a set of qualitative indicators. These indicators bring the judgement closer to commercial reality.
Common qualitative indicators include:
- Board representation The investor has one or more representatives on the board of directors or equivalent governing body. This usually indicates participation in strategic decision‑making.
- Participation in policy‑making The investor is involved in setting budgets, business plans, investment policies, or dividend policies.
- Material transactions between investor and investee There are significant sales, purchases, or other business dealings between the two parties, requiring ongoing negotiation and cooperation.
- Interchange of key management personnel Senior staff move between the investor and the investee, or management is seconded from the investor to the investee.
- Provision of essential technical information or know‑how The investee relies heavily on the investor’s technology, brand, or specialised expertise.
Imagine a media company holds 30% of a digital advertising startup:
- It occupies two seats on the startup’s board.
- It provides key technology, data, and sales channels.
- It is actively involved in strategy discussions.
Here, the media company is clearly doing more than passively holding shares. It participates in policy‑making and provides critical resources, so this is a textbook case of significant influence and calls for the equity method under HKAS 28 / IAS 28.
In practice, whenever you see that the investor is actively involved—not just providing cash—you should seriously consider whether HKAS 28 applies.
3. Potential Voting Rights in the Significant‑Influence Assessment
In modern deal structures, investors often hold not only ordinary shares but also options, convertible bonds, or other instruments that could turn into voting rights in the future. HKAS 28 / IAS 28 requires you to consider potential voting rights that are currently exercisable or convertible when assessing significant influence.
Examples:
- The investor holds a convertible bond that can be converted at any time into enough shares to reach, say, 25% of voting rights. These rights are currently exercisable and therefore must be factored into the assessment.
- The investor holds options that can only be exercised if a third party approves, or if some future event occurs. These are not currently exercisable, so they are ignored in the significant‑influence judgement.
Because deal terms can be complex, both preparers and auditors must carefully review:
- The legal agreements (terms of exercise, conversion, and expiry).
- Whether rights are truly currently exercisable without significant barriers.
This area is frequently challenged in audits, especially when the “headline” ownership percentage sits between 15% and 25% and potential voting rights could tip the balance.
4. Equity Method – Core Mechanics in HKAS 28 / IAS 28
Once you conclude that an investment falls within HKAS 28 / IAS 28 (i.e. you have significant influence and the investee is an associate or a joint venture), you apply the equity method.
Conceptually, the equity method sits between two extremes:
- It is not full consolidation (used for subsidiaries under HKFRS 10 / IFRS 10).
- It is not a simple fair value investment under HKFRS 9 / IFRS 9.
Instead, it behaves like a “partial consolidation”: your investment reflects your share of the investee’s net assets and performance.
Initial Recognition
On the acquisition date, the investment in the associate or joint venture is initially recognised at cost.
Cost usually includes:
- The purchase price paid.
- Directly attributable transaction costs (for equity‑accounted investments, these are generally capitalised, unlike many financial instruments under HKFRS 9).
Subsequent Adjustments
After initial recognition, the carrying amount of the investment is adjusted for the investor’s share of the investee’s profit or loss and other comprehensive income.
In summary:
- Share of profit → increase the carrying amount; recognise share of profit in the investor’s profit or loss.
- Share of loss → decrease the carrying amount; recognise share of loss in profit or loss (subject to limits when the investment is reduced to zero).
- Share of OCI items (for example, cash flow hedging reserves, revaluation reserves, foreign currency translation) → adjust the carrying amount and recognise the investor’s share in OCI.
Distributions (Dividends)
When the investee pays dividends or similar distributions to the investor:
- The investor does not recognise dividend income in profit or loss.
- Instead, the distribution is treated as a reduction of the carrying amount of the investment.
The logic: the investor has already recognised its share of profits through equity accounting. Dividends are simply a cash realisation of those already‑recognised profits.
This mechanism ensures that the investment’s carrying amount reflects your ongoing share of the investee’s net assets, not just the cash you have received.
5. A Simple Year‑One Equity Method Example
To bring all of this to life, let’s walk through the basic numbers.
- At the start of the year, Company A acquires 30% of Company B’s ordinary shares.
- A pays 1,000,000 in cash as the purchase price (assume no complex fair value adjustments or goodwill for this basic illustration).
- During the year, B earns profit of 200,000.
- B declares and pays cash dividends of 50,000 before year‑end.
We assume that A has significant influence and therefore uses the equity method.
Initial Recognition
At acquisition, A recognises the investment at cost:
- Investment in associate: 1,000,000
- Cash: 1,000,000 (outflow)
Carrying amount at day 1 = 1,000,000.
Share of Profit
At year‑end, B’s profit is 200,000. A’s share at 30% is:
- 200,000 × 30% = 60,000
A records:
- Increase in investment: +60,000
- Share of profit in profit or loss: +60,000
New carrying amount: 1,060,000.
Dividends
B pays total dividends of 50,000. A’s share at 30% is:
- 50,000 × 30% = 15,000
A records:
- Cash received: +15,000
- Reduction in investment: −15,000
Updated carrying amount = 1,000,000 (initial cost) + 60,000 (share of profit) − 15,000 (dividends) = 1,045,000
This is the core dynamic of the equity method: the carrying amount tracks the investee’s net asset movements, not market price fluctuations.
In exam questions or working papers, you will often see similar calculations, sometimes with extra layers like OCI, foreign currency movements, or impairment. As long as you remember this basic engine—initial cost plus share of comprehensive income minus distributions—you have a solid base to handle more complex variants.
6. Final Thoughts: Why Understanding “Significant Influence” Matters
The equity method can look technical on paper, but the underlying idea is straightforward: it translates an economic relationship (sharing risks and returns in another entity) into accounting numbers.
Whenever you see a non‑controlling shareholding—often between 20% and 50%—you should immediately ask:
- Does the investor actually participate in key decisions?
- Are there board seats, major related‑party transactions or technical dependencies?
- Are there currently exercisable potential voting rights that change the picture?
- If the answer leans “yes”, should we apply HKAS 28 / IAS 28 and the equity method instead of treating this as a simple financial asset?
Once you are clear on significant influence and comfortable with the equity method’s basic mechanics, reading “investment in associates and joint ventures” in published financial statements becomes much less intimidating.
Key Takeaways for Students and Junior Accountants
- Always start with the nature of the relationship, not just the percentage. Use 20% as a presumption, then confirm (or rebut) using qualitative indicators.
- Pay special attention to board representation, policy‑making involvement, and major transactions—they are often decisive in audit discussions and exam scenarios.
- For potential voting rights, check whether they are currently exercisable; if yes, they may push you into significant‑influence territory even below 20%.
- Under the equity method, remember the core movement: opening carrying amount + share of profit or loss + share of OCI − dividends ± other adjustments (e.g. impairment). Practice this with numbers until it feels natural.
- When preparing working papers, clearly document your significant‑influence judgement (both quantitative and qualitative) and reconcile the investment’s carrying amount from opening to closing balance.
- When reading contracts or term sheets, scan for rights that allow the investor to sit at the decision‑making table—those clauses often drive whether HKAS 28 / IAS 28 applies.
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