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Inadequacy of Cost Method When Significant influence is presentInvestors can actively participate in associate's policy making and is partly accountable for the performance of associate. Loss-making investments can be concealed if only dividends from associate is reported by investor.Paragraph 11 of AASB 128 statesThe recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate or joint venture because the distributions received may bear little relation to the performance of the associate or joint venture. Because the investor has joint control of or significant influence over the investee, the investor has an interest in the associate's or joint venture's performance and as a result the return on its investment. The investor accounts for this interest by extending the scope of its financial statements to include its share of profits or losses of such an investee. As a result, application of the equity method provides more informative reporting of the investor's net assets and profit or loss. Under the equity method investment is stated at cost plus investor's share of post-acquisition changes in associate's net assets or equity

Equity method is often referred to as one line consolidation because all entries are recorded against a single account "investment in associate" Initial investment in an associate (cost)+ Shares of associate's post acquisition profit (loss) (subject to some adjustments, e.g. unrealised profit) - Dividends from associate + Post-acquisiton increases (decrease) in reserves = Equity carrying amount of investment in associate

Where equity method of accounting is used, it is necessary to determine whether any goodwill, or bargain purchase on acquisition, has arisen on acquisition of the investment. Under equity accoutning it is the share of the associate's profit or loss that is included in the profits of the investor and not the dividends paid by the associate.These dividends have already been recognised as revenue using the cost method; hence to avoid double counting, they must be reversed.Remember that the cost method is utilised. 

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