Equity accounting

Equity accounting gains and losses investors should ignore

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In 2025 Renault reported a net loss of €10.9bn, of which €9.3bn arose from a change in the accounting for its investment in Nissan. However, no shares were sold and nothing happened in 2025 to the value of the stake to justify a loss of this size.

The charge results from reclassifying Nissan from an associate, measured using the equity method, to a financial asset measured at fair value. A similar accounting construct, this time a gain, appears in Microsoft’s 2026 results, arising from dilution of its stake in OpenAI. Both reveal, in our view, the deficiencies of equity accounting.

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Equity investments – Why accounting differences matter

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Many non-financial companies have venture capital style equity investment portfolios. However, these investments may be valued and presented in financial statements using very different methods – two under IFRS, with a choice of presentation for one, and three under US GAAP, with two options.

We examine the challenges faced by investors when analysing corporate investment portfolios, including when investments are subject to equity accounting. A recent IFRS amendment to clarify the scope of the option to apply fair value, instead of equity accounting, has our support. However, we do not think this change goes far enough.

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Receivables, payables and (hidden) financial leverage

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When analysing receivables and payables the focus of investors tends to be on their cash flow and liquidity effects. However, these balances also impact financial leverage and equity risk, which may affect the comparability of valuation metrics. Factoring and other working capital financing contributes to the problem, but all companies are potentially affected.

We explain the leverage effects of receivables and payables, and use two European Auto Parts companies to demonstrate how equity valuation metrics can be adjusted to provide additional analytical insights. We also consider how the accounting for working capital balances and financing arrangements complicates the analysis.

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No insight for investors from equity accounting

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The underlying rationale and conceptual basis for the equity method of accounting for investments in associates is unclear. Equity accounting can be regarded as either the cost-based measurement of an investment or as a quasi (one-line) form of consolidation – but neither is particularly helpful for investors.

We explain the limitations of the equity method and advocate measuring all investments in associates at fair value, consistent with other minority equity holdings. This results in a more relevant basis for investors to include investments in associates in their analysis and valuation.  

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Operating profit – improved presentation coming soon

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Most investors make extensive use of operating profit to assess company performance and as a starting point for valuation. But operating profit, like many company-provided subtotals, is not defined by IFRS; it is largely up to companies to decide what subtotals to include and even what to call them. However, the IASB may soon bring an end to this operating profit ‘free for all’.

The proposal will lead to significant changes to the presentation of financial statements, notably the income statement, and end the current diversity in presentation of income from associates and joint ventures. We examine some of the changes and the impact on financial analysis and valuation methods.

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