Equity method of accounting in Separate Financial Statements now allowed

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Doesn’t this sounds interesting? Equity method of accounting in the separate financial statements are now allowed which will help some jurisdictions move to (International Financial Reporting Standards (IFRS) for separate financial statements, reducing compliance costs without reducing the information available to investors. The International Accounting Standards Board (IABS) define this amendment as a “narrow-scope” amendment that will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.

(When used in this article, IFRS and International Accounting Standards (IAS) shall also mean Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS) as Philippines adopt its reporting standards from the international standard-setting bodies)

What are Separate Financial Statements?

For accountants handling group accounts, “separate financial statements” must have been a very over-used term, but for accountants dealing with certain relatively small companies, it’s a taboo (exaggerating). How is separate financial statements defined? Following are definition of separate financial statements taken from the amended IAS 27:

Separate financial statements are those presented by an entity in which the entity could elect, subject to the requirements in this Standard, to account for its investments in subsidiaries, joint ventures and associates either at cost, or in accordance with IFRS 9 Financial Instruments, or using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.

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Separate financial statements are those presented in addition to consolidated financial statements or in addition to the financial statements of an investor that does not have investments in subsidiaries but has investments in associates or joint ventures in which the investments in associates or joint ventures are required by IAS 28 to be accounted for using the equity method, other than in the circumstances set out in paragraphs 8–8A.

If you notice, their is separate financial statements only if there is an investee which is either a subsidiary, an associate or a joint venture. Any other investments where there is no control, joint control or significant influence are not within the scope of this standard.

The New Requirements

Simple! Equity method of accounting is now allowed.

The previous standard only allows the following method of accounting its investment in subsidiaries, joint ventures and associates either:

  • at cost, or
  • in accordance with IFRS 9

With amended standard included “using the equity method as described in IAS 28” as once of the choices.  Of course, as a result of this change, the then before requirement to recognize dividend from subsidiary, joint venture or an associate to profit or loss has now exception, which is, to recognize it as a reduction from the carrying amount of the investment when an entity uses the equity method.

And what do we expect the impact of the amendments? 

Basically, a reduced compliance cost and more informed disclosure for the readers of the financial statements.  Remember that under IAS 28, Investments in Associates and Joint Ventures, investments in associates and joint ventures are accounted for using the equity method of accounting with certain exceptions. By providing an option to use equity method of accounting to in the separate financial statements of companies, they will no longer have to account for those investments differently in the financial statements, at the same time, disclosures presented are more meaningful to the users of financial statements.

For those who are preparing consolidated financial statements, however, using the equity method in accounting for investment in subsidiaries will require additional work compared to accounting them at cost but will provide different level of disclosures which may be useful for the users of financial statements.

There is also consequential amendments to other standards in relation to this amendment to make it consistent.

To further clarify, nothing in this article or in the standard that mentions that equity method of accounting can be used in the consolidated financial statements. Consolidated financial statements are covered by IFRS 12 and nothing has changed in the accounting requirements.

Effectivity Date

Equity Method in Separate Financial Statements (Amendments to IAS 27), issued in August 2014, amended paragraphs 4–7, 10, 11B and 12. An entity shall apply those amendments for annual periods beginning on or after January 1, 2016 retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact.

So, will you be affected by this amendment? Let us hear your thoughts regarding this matter! 😉


Disclaimer: Opinions expressed in this article are that of the author and information provided are for general conceptual guidance for public information and are not substitute for expert advice. Contact support@philcpa.org for more information and if you want to avail professional services. Find us on Facebook!



Orlando Calundan is a CPA who has exposures in FS audit of entities in various industries such as real estate, food/restaurants, manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements.

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