How are joint ventures accounted for under IFRS 11 using the equity method?

Under IFRS 11, a joint venture (an arrangement where parties have joint control over net assets) must use the equity method. The Level II exam goes well beyond the basics — here are the key nuances.

Equity Method Mechanics Recap:

1. Initial investment recorded at cost
2. Each period: increase by share of JV net income, decrease by dividends received
3. Adjust for excess purchase price amortization, unrealized intercompany profits, and impairment

Nuance 1 — Excess Purchase Price:

When Ashford Capital invests $15,000,000 for a 50% interest in Riverton Logistics, but 50% of Riverton's book value of net assets is only $12,000,000, the $3,000,000 excess must be allocated:

Each period, Ashford reduces its recognized share of Riverton's income by the amortization of the PP&E adjustment. If PP&E has 10 years remaining: $2,000,000 / 10 = $200,000 annual reduction.

Nuance 2 — Unrealized Intercompany Profits:

If Riverton sells inventory to Ashford (upstream) for $500,000 at a 20% margin, and $300,000 remains unsold at year-end:

• Unrealized profit = $300,000 x 20% = $60,000
• Ashford eliminates its share: $60,000 x 50% = $30,000 reduction in equity income

For downstream sales (Ashford sells to Riverton), the investor eliminates its full share of unrealized profit on the goods remaining in the JV's inventory.

Nuance 3 — Impairment:

Under IAS 28, the equity method investment is tested for impairment as a single asset. If Riverton's fair value declines significantly, Ashford compares the investment's carrying amount to its recoverable amount (higher of value-in-use and fair value less costs of disposal). Any impairment loss goes to P&L.

Unlike goodwill impairment in full consolidation, IFRS does not require separate testing of embedded goodwill — the entire investment is assessed as one unit.

Nuance 4 — Losses Exceeding Investment:

If the JV generates persistent losses that reduce the investment carrying amount to zero, the investor stops recognizing losses unless it has a legal or constructive obligation (e.g., loan guarantees to the JV). Any additional obligations are recognized as provisions.

Journal entry summary for a typical period:

Exam tip: CFA Level II frequently tests the full equity method with excess purchase price allocation AND intercompany profit elimination in a single item set. Practice working through the complete calculation: start with share of net income, subtract amortization of excess, subtract unrealized profits, and check for impairment.

Explore our CFA Level II FRA module for more joint venture scenarios.