At 20–50%, or wherever significant influence exists through board seats or policy participation, you use the equity method (IAS 28 / Ind AS 28 / ASC 323). Think of it as a one-line consolidation:
- Balance sheet: one line,
Investment in associate, carried at cost, then + your share of post-acquisition profits − dividends received (± share of OCI, − impairment). - Income statement: one line,
Share of profit of associates/JVs, after tax, typically below operating profit.
This roll-forward leaves one thing out on purpose. The excess of what you paid over your share of the associate's book value has to be allocated to the underlying assets and then amortised against equity income. The whole investment also carries its own impairment test. Both come a little later in this phase, along with the eliminations that run at the associate level.
Worked example: a 30% stake, and what to adjust
Worked example. Suppose Meridian had bought 30% of Kaveri for ₹90 cr instead. In year 1 Kaveri earns PAT of ₹60 cr and pays dividends of ₹20 cr. Meridian's share of profit is 30% × 60 = ₹18 cr, on one P&L line. In cash it actually receives 30% × 20 = ₹6 cr. Its investment balance becomes 90 + 18 − 6 = ₹102 cr. None of Kaveri's revenue, cost, cash or ₹100 cr of debt appears anywhere in Meridian's statements.
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Put the two treatments side by side for the same underlying business, the 80%-control case on the consolidated financial statements page against this 30% case. Consolidated revenue is ₹1,020 cr vs ₹800 cr, and consolidated borrowings ₹400 cr vs ₹300 cr. Margins and turns shift too, along with gearing. The accounting boundary moved, and the economics stayed put. So you have to look through presentation.
When associates matter, make three standing adjustments. (1) Equity income is non-cash. Only the dividend arrives, so an earnings stream from an associate with a low dividend payout deserves a cash-quality haircut. (2) The associate's debt is invisible, so do a look-through for anything material. (3) Margins computed on consolidated revenue are flattered by associate income that has no matching revenue line. Real-world anchors include Coca-Cola's stakes in its bottling partners (decades of large equity income), Bharti Airtel's stake in Indus Towers, and bank-promoted insurance associates in India.
Joint operations and joint ventures
Joint arrangements (IFRS 11 / Ind AS 111) are the cases where control is shared by contract, and you classify them by rights. In a joint operation you have rights to the assets and obligations for the liabilities. They're common in oil & gas blocks and construction consortia, and you book your share of each line. In a joint venture you have rights only to the arrangement's net assets, as with a separate vehicle like Tata Starbucks, the 50:50 JV between Tata Consumer and Starbucks. A joint venture takes the equity method. IFRS killed proportionate consolidation for joint ventures in 2013, and US GAAP reaches the equity method for most corporate JVs too. When a partner later buys control, the whole thing flips to full consolidation. The previously held stake is remeasured to fair value through P&L, which sometimes produces a large one-time "gain on obtaining control" that inflates that year's earnings. Flag it as non-operating.