How is investment in associates accounted for in consolidated accounts?

In consolidated accounts, investment in associates is accounted for using the equity method of accounting. This method is appropriate because it reflects the investor's share of the associate's profits or losses, thereby providing a more accurate picture of the financial performance and position of the consolidated entity.

Under the equity method, investments in associates are initially recorded at cost. Subsequently, they are adjusted for the investor's share of the associate's profits or losses and reduced by any dividends received. This approach aligns with the principle that an associate is an entity over which the investor has significant influence but does not control.

The equity method is particularly relevant to consolidated financial statements, as it allows for the inclusion of the associate's financial performance in a way that impacts the investor's financial results. This method recognizes that the investor is entitled to a portion of the associate’s retained earnings, which affects the overall equity reported on the consolidated balance sheet.

In contrast, other methods like the cost method or only recognizing dividend income would not reflect the ongoing financial performance of the associate or the impact on the investor's results adequately. Moreover, adjusting through share premium is not applicable in this context as it does not relate to the accounting for investments in associates. Understanding the equity method is crucial for accurately representing the economic realities