This is from the “Accounting Makes Cents” podcast episode #89 released on Monday, 19 May 2025.

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So I’ve been covering this series for a couple of episodes, and now we’ve reached the final one. Throughout the series, we’ve discussed consolidated group accounts and some of the related accounting standards surrounding it. To wrap things up, we’ll focus on understanding how companies come together and how different ownership levels affect consolidation. It’s a fitting way to conclude the series, as understanding different ownership levels bring everything together in group accounting.

To make sense of it, let’s use something familiar: a local pharmacy. Imagine there’s a neighborhood pharmacy you’ve always trusted, one that’s been around for years and has a steady stream of loyal customers. and one day, you decide to invest in it. How much control or influence you have depends on how much of the business you own.

Jump to show notes.

Minor Influence (Less Than 20%)

Let’s say you buy a 10% stake in a neighborhood pharmacy. At this level, you’re just a passive investor. You’re not involved in decisions about which medications to stock, staffing, or pricing. From an accounting perspective, this type of investment is treated under IFRS 9 as a financial asset. You record it at fair value, and any changes in that value flow through your financial statements. But there’s no consolidation, because you’re not involved in running the business. You benefit if the pharmacy does well, but you’re not making any of the calls. I’ll circle back to fair value once we’ve gone through all the ownership scenarios. I think it’s important to know how this fair valuation work so that to understand how to value this type of investment.

Significant Influence (20% to 50%)

Now, imagine you increase your ownership in the pharmacy to 30%. At this point, you’re no longer just a passive investor—you now have a say in how the business is run, even if it’s still limited. You might get a seat at the table during strategic discussions, and your opinions start to carry some weight. This level of involvement is known as significant influence, and it’s accounted for using the equity method under IAS 28. You still don’t consolidate the pharmacy’s financials, but you do recognise your share of its profits or losses in your own statements. In this case, the pharmacy is referred to as an associate, and you’ll likely see a line in your books labeled ‘investment in associates.’

I’ll walk through the equity method in more detail toward the end of today’s episode.

Now, alongside significant influence, there’s another concept that’s worth mentioning here—shared control, which brings us to joint arrangements. These happen when two or more parties share control over a business activity. Joint arrangements are categorised into two types: joint ventures and joint operations.

In a joint venture, you and the other party recognise your share of net assets and profits using the equity method.

In a joint operation, each party recognises their direct share of the assets, liabilities, revenues, and expenses.

So let’s bring it back to our pharmacy example. If you and another investor jointly own and control the business, and decisions require mutual agreement, that might be structured as a joint venture—you’d recognise your portion of the profits and he will recognise his portion of the profits. But if you’re each directly responsible for separate aspects—say, you manage procurement and inventory while your partner oversees sales and staffing—it may be classified as a joint operation, where each of you reports your respective share of the pharmacy’s financials.

Control (More Than 50% But Not Quite 100%)

Now, what if you go all in and acquire 60% of the pharmacy? At this point, you have control. You’re making the key decisions—choosing suppliers, setting medication pricing, overseeing staff, and steering the business strategy. This is where IFRS 3 comes into play, because now you’re dealing with a business combination.

Under IFRS 3, owning more than 50% of a company typically means you have control. That means you’re required to consolidate the pharmacy’s financials into your own. This involves recognising all of its assets, liabilities, and equity on your books. If you paid more than the fair value of the net assets, you record goodwill. If you paid less, you may recognise a bargain purchase gain.

Consolidation allows you to report the pharmacy as if it’s part of your own business—because operationally, it is. In this scenario, the pharmacy is classified as a subsidiary. Any investment where you hold over 50%—up to full ownership—falls into this category.

Now, if you don’t own 100%, the portion you don’t own is referred to as a non-controlling interest, and that gets presented separately in your consolidated financial statements. It represents the share of the pharmacy that still belongs to other investors.

Full Ownership

Finally, let’s say you go one step further and purchase all the remaining shares of the pharmacy. You now own 100% of the business. That means complete control—every decision is yours, from inventory sourcing to pricing strategies and even relocating or expanding.

Under IFRS 3, since you now own the entire business, there’s no need to account for any non-controlling interest. That is actually the only difference here. Exactly like how it’s consolidated under Control, you consolidate line by line. You consolidate the pharmacy’s financials in full, and any goodwill or bargain purchase gain from the transaction is fully recognised on your books.

And sixth, we need to be able to measure the costs reliably. That might mean tracking time spent, ingredients used, and other direct expenses related to the new product line.

Only if all six of those are clearly met can we start putting development costs onto the balance sheet as an intangible asset. If even one of them isn’t satisfied, it all stays as an expense in the profit and loss account.

Fair Value Method and Equity Method

Earlier, I mentioned that investments could be recorded using either the fair value method or the equity method. Here’s what those terms actually mean.

The fair value method applies when you hold a relatively small stake in a company—typically less than 20%—and don’t have significant influence over its operations. In this case, the investment is reported at fair value on your balance sheet. Any changes in value—whether gains or losses—are recognised either in profit or loss or in other comprehensive income. Under this method, you don’t account for the investee’s actual performance—just the changes in market value. Furthermore, dividends received are treated as income, boosting your profits.

On the other hand, the equity method is used when you have significant influence—usually ownership between 20% and 50%. This means you’re involved in key decisions, but not in full control. The investment is initially recorded at cost, and then adjusted to reflect your share of the investee’s profits or losses. These are reported in your income statement. Importantly, dividends received aren’t treated as income—they reduce the carrying amount of the investment on your balance sheet. Over time, the value of the investment also reflects your share of any changes in the investee’s equity.

Conclusion  

In conclusion, it’s essential to understand the different levels of influence, control and ownership so you can accurately reflect your investment in your books. Understanding the different types of ownerships will ensure your financial statements remain transparent, consistent, and aligned with IFRS standards, giving stakeholders a clear and reliable view of your business structure and investments.

Show notes simplified

In this episode, MJ the tutor explores how different levels of business ownerships affect influence, control and the way the investment is reflected or consolidated in the financial statements. Join her as she breaks down the different levels of ownership, the impact of each on financial reporting, and how the different accounting standards guide these decisions.