When is a sale not a sale? When it’s made by a joint venture (JV) or associate. The equity method remains on the workplan of the International Accounting Standards Board (IASB) and is a much maligned area of accounting. The key here is that any joint ventures or associates are not included line by line in the financial statements but simply shown as one line in the statement of profit or loss representing the parent’s share of the profits (or losses).
This statement of profit or loss treatment carries some criticisms. One is that it is unrealistic to take your share of profit, as it only really reaches the parent if a dividend is paid. Another, contrasting, criticism is that it can mean there is no recognition of sales or expenses on a line by line basis in profit or loss, which can omit some key items.
Little has changed financially, but the results will look drastically different
A similar situation (and similar criticisms) can be found in the treatment in the statement of financial position. This again includes just one line, representing the value of the investment.
Relationship accounting
If you allow me a brief departure, when I met the wonderful Mrs Deller, who lived in Orlando, Florida, the idea of her having an English boyfriend was all glamorous to her friends, who assumed I had met the royal family and lived in Downton Abbey. At this point, I was an asset to her, with the benefits nicely summarised and displayed in one line. That line was: ‘He’s English.’
However, upon the consolidation of our marriage, all of our resources became combined. Instead of being simply a summarised asset, the full glorious package of all the Deller assets and liabilities were to be displayed, including moving from sunny Orlando to industrial Warrington in the UK, and the life-long liability of having to support Grimsby Town Football Club.
The case of ORL
To illustrate the change, it can be useful to consider the example of Marks & Spencer, a large food retailer in the UK. In 2019, Marks & Spencer and Ocado Group incorporated a new company in which they each owned 50%. The new company, Ocado Retail (ORL), was an online food retailer through which all Marks & Spencer online food sales would be made.
From 2019 until 2025, Ocado Group held control through board representation, and ORL was accounted for through equity accounting. This meant that the statement of profit or loss simply showed the overall loss from ORL.
For 2024 and 2025, those losses were £79.9m and £43.6m respectively. They may seem large to some of us, but on Marks & Spencer’s revenues of £13bn and £13.8bn in those years they feel pretty insignificant. Indeed in that period, Marks & Spencer made operating profits of £714m and £624m, giving slim operating margins of 5% and 4.5% in the past two years.
Some are pining for the days before IFRS 11 when proportionate consolidation was allowed
The story is about to be transformed, as ORL figures will be consolidated into Marks & Spencer’s group results in the 2025/26 financial year. ORL’s retail turnover is around £2.5bn, which will significantly and immediately increase group revenues by around 20%. However, ORL continues to make operating losses, so the overall operating profit margins will fall further. There has been very little change in the situation, but the impact on the financial statements will be huge.
It is situations like this that have some commenters pining for the days before IFRS 11, Joint Arrangements, when proportionate consolidation was allowed as an accounting treatment, but that option has been closed for many years.
Casual stakeholders looking at the accounts will probably be surprised when the ORL results are consolidated in, and significant disclosures and clarifications will be needed to explain that while very little has changed, the results look drastically different.
Reality vs results
In addition to meaning that the results are included, the transition from joint venture to subsidiary can also trigger a fair value gain on ‘disposal’ of the joint venture as it is replaced with a subsidiary.
In the example of Marks & Spencer, this actually triggered an impairment review and the recognition of an impairment loss (which some of us cynics have been arguing should have previously been recognised as ORL made losses) of £248m. When BMW brought the results of BMW Brilliance, a joint venture in China, into its financial statements after increasing its ownership stake, it actually triggered a remeasurement gain of €7.6bn in addition to bringing in all the revenue and expenses of the joint venture.
So in both cases, not a huge difference has been made to the group, but the financial reporting treatment is completely different. The impact of the joint ventures is now felt throughout the financial statements. You could see that as a benefit to the accounting for subsidiaries, or you could be like many others and conclude that the equity method is just not really producing valid enough information.
Watch and learn
See Adam Deller’s videos on different aspects of financial reporting, including his latest on accounting at Nintendo
