When is the equity method applied to investments in associates?

The application of the equity method to investments in associates hinges on the concept of significant influence. This method is used when an investor has the ability to participate in the financial and operating policy decisions of the associate, which typically occurs when the investor holds a stake that allows for that influence, usually defined as 20% to 50% ownership of the voting power of the investee. It’s important to note that the determination of significant influence is not strictly limited to the percentage of ownership; qualitative factors can also play a role.

This understanding helps in discerning why significant influence—and thus the equity method—comes into play. The equity method requires the investor to recognize its share of the associate's profits or losses in its own financial statements, reflecting the investor's effective control over its investment without full consolidation. In contrast, other ownership levels, such as those exceeding 50%, typically require full consolidation rather than the equity method, which highlights why the focus on significant influence is critical in this context.