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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 the Story of an Associate Moves to the “Next Chapter”
Every investment has a life cycle. It starts, grows, sometimes changes shape, and eventually ends or moves into a different category. In practice, you will often see situations like:
- A company selling part of its stake in an associate.
- A joint venture turning into an associate (or the other way around).
- A parent that qualifies for exemptions and no longer applies the equity method.
- An associate that becomes “just a financial asset” measured at fair value.
Many people learn HKAS 28 / IAS 28 only at the “steady‑state equity method” stage and forget that the exits and changes are tested more often in real life and in exams.
What You Should Be Able To Do After Reading?
By the end, you should be able to know:
- Exemptions from applying the equity method.
- The fair value through profit or loss (FVPL) option.
- Reliefs for investment entities.
- Losing significant influence or joint control and stopping the equity method.
- Reclassification to held for sale, OCI recycling, and changes between associates and joint ventures.
This article walks through these key turning points and the economic logic behind them.
1. When Can You Skip the Equity Method?
As a starting point, HKAS 28 / IAS 28 requires that investments in associates and joint ventures are accounted for using the equity method. However, there are two broad types of exemptions.
Exemption Type 1: Parent Exempt from Consolidation
If a parent is itself exempt from preparing consolidated financial statements under HKFRS 10 / IFRS 10 (for example, because it is a wholly owned subsidiary and the ultimate parent publishes general‑purpose consolidated financial statements), then that parent can also be exempt from applying the equity method to its associates and joint ventures.
This is a “chain” relief: if you are allowed not to consolidate, you are also allowed not to equity‑account, so you do not have to prepare a full set of group‑style numbers twice.
Exemption Type 2: Venture Capital Organisations and Similar Entities
If the investment is held by (or through) a:
- Venture capital organisation.
- Mutual fund, unit trust or similar investment vehicle, including some investment‑linked insurance funds.
Then the holder may elect to measure that investment at fair value through profit or loss (FVPL) under HKFRS 9 / IFRS 9 instead of applying the equity method.
This option aligns the accounting with how such investors actually manage their business: focusing on fair value changes and exit values, not on long‑term share of profit.
Simple Example
A venture capital fund holds 25% of several startups. Its business model is to invest, monitor value and eventually exit, not to participate in day‑to‑day management. Under HKAS 28 / IAS 28, it can elect FVPL for those investments and avoid the equity method.
2. Fair Value Option and “Partly FV, Partly Equity Method”
HKAS 28 / IAS 28 allows the fair value option to be applied investment by investment. You do not have to pick the same method for all associates and joint ventures.
One‑by‑One Election
For each associate or joint venture held by a qualifying venture capital or investment‑type entity, you may elect either:
- Equity method, or
- FVPL under HKFRS 9 / IFRS 9.
This “single‑investment” choice allows a group to tailor accounting to the nature of each holding—more “strategic” stakes might use equity method, while more “portfolio‑style” stakes might use FVPL.
Mixed Structures: Partly FVPL, Partly Equity Method
In some groups, part of the holding in an associate is held by an investment entity, and another part is held directly by a non‑investment entity parent. In these situations, you can end up with split treatment:
- The investment entity subsidiary measures its stake at FVPL.
- The non‑investment entity parent measures its own direct stake using the equity method (unless another exemption applies).
Simple Example
- Parent A is not an investment entity.
- Subsidiary B is an investment entity.
- B holds 20% of Company C.
- A directly holds another 10% of C.
B may measure its 20% at FVPL under HKFRS 9 / IFRS 9 because it is an investment entity. A’s direct 10% interest, however, may still need to be accounted for using the equity method if A has significant influence in C when taken together.
This type of layered structure is common in large groups and allows management to see fair‑value information where it matters, while still preparing consolidated information that reflects the underlying economic participation.
3. Investment Entities and Relief from Policy Alignment
Under HKFRS 10 / IFRS 10, an investment entity usually does not consolidate its controlled investees. Instead, it measures them at fair value through profit or loss, reflecting performance through fair value changes.
A practical challenge arises when the investor applying the equity method is not itself an investment entity, but its associate or joint venture is an investment entity.
The Policy Alignment Problem
In theory, the non‑investment entity investor should “look through” the investment entity and pretend that the subsidiary underlying investments are consolidated, so that the equity method uses a traditional consolidation basis.
In practice, this is often very costly and complex because it would require the investment entity to prepare an extra set of financial statements as if it did not use fair value but instead consolidated each underlying investee. That means more time, more cost, and a set of numbers that nobody inside the investment entity actually uses.
Relief in HKAS 28 / IAS 28
To address this, HKAS 28 / IAS 28 allows the investor to retain the investment entity’s FVPL measurement when applying the equity method. In other words, the investor can treat the investment entity’s fair value accounting as “good enough” and not unwind it back to a full consolidation basis.
This relief:
- Preserves consistency with how the investment entity itself reports.
- Reduces the cost and complexity of preparing equity‑method information.
Simple Example
A group’s strategy is to manage a portfolio of private equity investments at fair value. It owns 30% of an investment entity associate that holds multiple subsidiaries at FVPL. Rather than reconstructing those subsidiaries’ assets and liabilities, the group can keep the investment entity’s FVPL numbers when applying the equity method to that associate and disclose that policy choice in the notes.
4. Losing Significant Influence or Joint Control – When Equity Method Stops
At some point, the investor may lose significant influence over an associate or lose joint control over a joint venture. This can happen when:
- The investor sells part of its shareholding.
- The investee issues new shares to third parties.
- The investor loses its board representation or key contractual rights.
When this happens, the equity method stops. This is one of the main junctions between HKAS 28 / IAS 28 and HKFRS 9 / IFRS 9.
What Happens on the Date of Loss of Significant Influence / Joint Control?
On the date the investor ceases to have significant influence or joint control:
- Stop applying the equity method.
- Re‑measure any retained interest in the former associate or joint venture at fair value.
- Recognise any difference between the previous carrying amount and the new fair value in profit or loss.
- From that date forward, the retained interest is accounted for under HKFRS 9 / IFRS 9 (or another relevant standard, depending on the nature of the asset).
This re‑measurement is treated as a new initial recognition under HKFRS 9 / IFRS 9.
Simple Example
Company A holds 30% of Company B and applies the equity method (A has significant influence). A sells half of its shareholding and is left with 15%. At that point, A no longer has significant influence:
- A stops using the equity method for B.
- A re‑measures the remaining 15% at fair value.
- Any gain or loss (difference between fair value and carrying amount) goes to profit or loss.
- From then on, the 15% is treated as a financial asset under HKFRS 9 / IFRS 9 (FVPL or FVOCI, depending on classification).
From an economic viewpoint, the relationship has changed from “partner in performance” to “ordinary investor”.
5. OCI Recycling and Held‑for‑Sale Classification
Stopping the equity method also has consequences for other comprehensive income (OCI) and, in some cases, held‑for‑sale classification.
OCI Reclassification on Loss of Significant Influence / Joint Control
If the investor has accumulated OCI related to the associate or joint venture (for example, foreign currency translation differences or some types of fair‑value reserves), HKAS 28 / IAS 28 requires that:
- Those OCI items are reclassified in the same way they would be if the investee itself had disposed of the related assets or liabilities.
In practice, that means:
- If the underlying item would be recycled to profit or loss on disposal, then the investor also recycles the related OCI to profit or loss when it stops applying the equity method.
- If the underlying item would never be recycled (e.g. some equity FVOCI items), then OCI is not reclassified but may be moved within equity where required.
HKFRS 5 / IFRS 5: Held for Sale
When an investment in an associate or joint venture meets the criteria to be classified as held for sale (for example, a highly probable sale within 12 months), HKFRS 5 / IFRS 5 applies.
Key points:
- The investment is reclassified as a non‑current asset held for sale.
- The equity method is temporarily suspended—you no longer update for share of profits/losses.
- OCI balances remain until the sale actually occurs; then any required recycling is done on disposal.
- If only part of the investment is classified as held for sale and the investor still has significant influence over the remainder, the residual interest continues to be accounted for using the equity method.
This ensures that the financial statements reflect the fact that the investment is now in “exit mode” rather than long‑term partnership mode.
6. Moving Between Associate and Joint Venture – No “Big Bang” Remeasurement
HKAS 28 / IAS 28 has a specific view on changes between associate and joint venture status. When an investment changes from:
- Associate → joint venture, or
- Joint venture → associate,
the standard says do not re‑measure the retained interest at fair value.
Why No Remeasurement Here?
The reasoning is that both associates and joint ventures represent similar levels of economic participation: the investor has significant influence or joint control, but not control. The switch between them usually reflects a change in contractual arrangements, not a fundamental change in the nature of the underlying investment.
In contrast, losing control of a subsidiary (under HKFRS 10 / IFRS 10) is treated as a major economic event, so the retained interest is re‑measured at fair value and gains or losses are recognised.
Simple Example
Company A holds 40% of Company B as an associate. Later, A signs a new agreement with another investor that creates joint control over B. The investment becomes a joint venture, but A still uses the equity method and does not re‑measure its investment.
This avoids unnecessary volatility and keeps the accounting aligned with the fact that A’s overall economic exposure to B has not suddenly changed.
Key Takeaways for Students and Junior Accountants
- Don’t stop at “basic equity method”: learn the entry and exit points—exemptions, FVPL options, loss of significant influence, and changes of status.
- Remember the two main exemptions from the equity method: (1) parent exempt from consolidation under HKFRS 10 / IFRS 10, and (2) investments held by venture capital organisations, mutual funds and similar entities that can elect FVPL.
- When you lose significant influence or joint control, you stop the equity method, re‑measure any retained interest at fair value, and recognise the difference in profit or loss; from then on, HKFRS 9 / IFRS 9 applies.
- On stopping the equity method, review all OCI balances related to the investment and recycle them where required, mirroring how they would behave if the investee itself disposed of the underlying items.
- Distinguish clearly between:
- Associate ↔ joint venture changes (no re‑measurement), and
- Subsidiary → associate / joint venture (remeasurement required under HKFRS 10 / IFRS 10).
- In working papers, always map each transaction to the “life cycle” step: entry (significant influence), ongoing measurement (equity method), and exit or change (exemptions, fair value, loss of influence, held for sale).
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