Under IFRS/US GAAP, when is equity method applied for investments in joint ventures or associates?

• A. When the investor has control.
• B. When the investor has significant influence or joint control but not control.
• C. When the investment is in a subsidiary.
• D. Never; always consolidate.

Answer: (B)

The key idea is that how you account for an investment depends on the level of influence you have over the investee. When you don’t control the entity but you do have significant influence (or joint control in a joint venture), IFRS and US GAAP require using the equity method for associates and joint ventures. This method recognizes your economic stake without full consolidation: you record the investment at cost, then adjust its value each period by your share of the investee’s post‑acquisition profits or losses, and by any distributions you receive. You also reflect your share of the investee’s other comprehensive income in equity, and you adjust for any fair‑value or other acquisition accounting differences over time. This approach accurately mirrors your ongoing economic interest without implying you control the investee’s assets and activities.

In contrast, if you had control, you would consolidate the investee’s assets, liabilities, and operations into your financial statements. And if there was no significant influence, you’d apply a different method (often fair value or cost, depending on the circumstances).