Equity Method in Australia: 2025 Guide for Investors

When Australian investors acquire a significant stake in another company, the accounting isn’t as simple as marking assets at fair value. The equity method comes into play, shaping both financial statements and strategic decisions. For 2025, understanding this method is more important than ever, especially as accounting standards and cross-border investments evolve.

What Is the Equity Method and When Is It Used?

The equity method is an accounting approach used when an investor holds significant influence over another entity, typically with a 20% to 50% ownership stake. Instead of recording the investment at cost or marking it to market, the investor recognises their share of the investee’s profits or losses directly in their own financial results.

Key scenarios for applying the equity method in Australia:

• Holding between 20% and 50% of another company’s voting shares

• Having representation on the board or participation in policy-making

• Material transactions between the investor and investee

For example, if an ASX-listed company acquires a 30% stake in a regional fintech startup and gains a board seat, it must use the equity method rather than simply recording the shares as a financial asset.

Latest Regulatory Updates: AASB and International Alignment in 2025

In 2025, the Australian Accounting Standards Board (AASB) continues to align its standards with international norms (IFRS), but there are some local nuances:

• AASB 128 governs how the equity method is applied in Australia, mirroring IAS 28 but with additional guidance on related party disclosures.

• Recent updates clarify the treatment of cumulative translation differences for foreign investments and set stricter rules for impairment testing when signs of underperformance arise.

• Cross-border investments are now subject to enhanced reporting, especially for companies with significant offshore associates, thanks to ATO transparency measures introduced in late 2024.

These updates mean that Australian investors need robust systems to track not just their share of profits, but also adjustments for dividends, impairments, and currency fluctuations.

Real-World Example: How the Equity Method Impacts Financial Statements

Let’s say Sydney-based mining firm TerraOz acquires a 25% stake in a Western Australian lithium explorer. Here’s how the numbers play out under the equity method:

• TerraOz records its initial investment at cost (say, $10 million).

• Each year, TerraOz increases or decreases the carrying amount by its 25% share of the explorer’s profit or loss. If the explorer posts a $4 million profit, TerraOz recognises $1 million as income.

• If the explorer pays dividends, TerraOz reduces its investment’s carrying amount accordingly.

• Material impairment or foreign currency losses are also reflected proportionally.

This method gives a more accurate picture of the investor’s exposure and performance, especially when the investee isn’t fully controlled but remains strategically important.

Why the Equity Method Matters for Australian Investors in 2025

With increased cross-border M&A, more ASX companies are reporting investments in overseas associates. The equity method ensures investors and stakeholders see a transparent, up-to-date picture of these relationships—crucial for sectors like mining, renewables, and tech, where joint ventures are common.

Key benefits of the equity method for Australians:

• Reflects real economic influence, not just ownership percentage

• Ensures profits and losses are recognised in line with actual business involvement

• Improves comparability for analysts and investors tracking diversified portfolios

As 2025 brings tighter compliance and more complex corporate structures, mastering the equity method is now a must for both CFOs and retail investors navigating the evolving Australian investment landscape.