What is Equity Method Accounting?
The equity method is an accounting technique used to measure an investment in an associate or joint venture. The investment is initially recognised at cost and subsequently adjusted by the investor’s share of post-acquisition profits, losses, and other comprehensive income.
How It Works
- Confirm the investor has significant influence — typically 20%–50% of voting rights.
- Record the investment at cost on acquisition.
- Add the investor’s share of the investee’s post-acquisition profit (or deduct the share of loss).
- Reduce the carrying amount by dividends received from the investee.
- Test the investment for impairment whenever there is an indicator.
Saudi Context
Saudi listed companies under SOCPA-adopted IFRS apply IAS 28 for investments in associates and joint ventures. ZATCA reviews the share of investee profit when reconciling the zakat base and taxable income.
Example
An investor holds 30% of an associate. The associate reports a SAR 2,000,000 profit and pays a SAR 500,000 dividend. The investor recognises SAR 600,000 of share of profit and reduces the carrying amount by the SAR 150,000 dividend received.