What happens when equity method losses exceed the carrying amount under IAS 28.31?

Core rule Under IAS 28 Losses Exceeding the Investment, once an investor's share of an associate's or joint venture's losses reduces the carrying amount to zero, the investor discontinues recognising further losses — unless it has incurred legal or constructive obligations or made payments on behalf of the investee. How it works - Loss absorption sequence (IAS 28.38): The investor first reduces the equity-accounted investment to nil. Losses are then applied against other long-term interests that, in substance, form part of the net investment — such as long-term loans or preference shares for which settlement is neither planned nor likely in the foreseeable future. The hierarchy follows IAS 28.38 in reverse seniority (most subordinated instruments absorbed first). - Defining the "net investment" (IAS 28.38–28.40): Long-term interests included in the net investment are those akin to equity (e.g., interest-free or low-interest loans with no fixed repayment date). Trade receivables and short-term payables are explicitly excluded (IAS 28.38). Loans intended for settlement in the near term do not form part of the net investment and are assessed for impairment under IFRS 9 independently. - Suspension of lo

If the investor provides a formal guarantee over the associate's bank debt, how does IAS 28.37 interact with IAS 37 in measuring the obligation to recognise further losses?

ss recognition (IAS 28.37): Once the entire net investment is reduced to zero, additional losses are not recognised unless the investor has a legal or constructive obligation (e.g., guarantees given to third-party creditors of the associate) or has made payments on behalf of the associate. Unrecognised losses must be tracked off-balance-sheet. - Interaction with IFRS 9 (IAS 28.41A–28.41B): Long-term interests forming part of the net investment are first subject to equity-method loss allocation under IAS 28; only after that process is complete are they assessed for impairment under IFRS 9's expected credit loss model. The sequencing matters: you cannot impair a long-term interest under IFRS 9 before exhausting equity-method losses against it. - Resuming recognition (IAS 28.39): When the associate subsequently returns to profitability, the investor resumes recognising its share of profits only after the share of profits equals the unrecognised share of losses previously suspended. Accumulated unrecognised losses must be fully offset before any income is recorded. - Disclosure (IAS 28.40): The investor must disclose its share of unrecognised losses for the period and cumulatively in the notes, so users

How should an investor account for the long-term loan to an associate under IFRS 9 ECL after equity-method losses have fully absorbed its carrying amount under IAS 28.38?

can assess the latent exposure. Practical example Investor holds a 30% stake in Associate X and a €400,000 long-term loan to Associate X (no fixed repayment date — part of net investment). Carrying values at year-start: equity investment €150,000; loan €400,000. Associate X reports a loss of €2,500,000 in the year. Investor's share = 30% × €2,500,000 = €750,000. Step 1: Reduce equity investment to zero (€150,000 absorbed). Step 2: Apply remaining €600,000 against the loan (capped at €400,000 loan balance). Step 3: Remaining €200,000 is suspended (no obligation or guarantee exists). | Account | Dr (€) | Cr (€) | |---|---|---| | Share of loss in associate (P&L) | 550,000 | | | Investment in associate | | 150,000 | | Long-term loan to associate | | 400,000 | The €200,000 of unrecognised losses is disclosed in the notes per IAS 28.40. If in the following year Associate X earns a profit giving Investor a 30% share of €280,000, the first €200,000 offsets suspended losses (no P&L credit), and only €80,000 is recognised as income. Common pitfalls - Including short-term receivables in the net investment: Practitioners sometimes sweep all balances owed by the associate into the loss-absorption waterfall. IAS

When an associate restores profitability after a multi-year loss period, what is the correct mechanics for unwinding suspended losses under IAS 28.39 if the investor's ownership percentage changed during the loss years?

28.38 is explicit — only balances for which settlement is not planned nor likely in the foreseeable future qualify. Including ordinary trade receivables overstates loss absorption capacity and understates IFRS 9 impairment exposure. - Forgetting to track suspended losses: When an associate recovers, teams often recognise income immediately without offsetting the cumulative unrecognised losses (IAS 28.39). This is a frequent audit finding and leads to overstated equity-accounted income. - Missequencing IAS 28 and IFRS 9: Applying IFRS 9 ECL to long-term interests before completing the equity-method loss allocation (IAS 28.41A) double-counts the credit risk and misstates both the P&L charge and the carrying amount of the instrument. Key paragraphs to know - IAS 28.37 — core rule suspending loss recognition once net investment reaches zero. - IAS 28.38 — definition and composition of the net investment; ordering of loss absorption. - IAS 28.39 — conditions for resuming profit recognition after suspended losses. - IAS 28.40 — disclosure of unrecognised losses (current period and cumulative). - IAS 28.41A–41B — sequencing of equity-method loss allocation versus IFRS 9 ECL assessment on long-term interes

IAS 28 Losses Exceeding the Investment

IAS 28 Losses — Core Rule

Under IAS 28 Losses Exceeding the Investment, once an investor's share of an associate's or joint venture's losses reduces the carrying amount to zero, the investor discontinues recognising further losses — unless it has incurred legal or constructive obligations or made payments on behalf of the investee.

How IAS 28 Losses Works

Loss absorption sequence (IAS 28.38): The investor first reduces the equity-accounted investment to nil. Losses are then applied against other long-term interests that, in substance, form part of the net investment — such as long-term loans or preference shares for which settlement is neither planned nor likely in the foreseeable future. The hierarchy follows IAS 28.38 in reverse seniority (most subordinated instruments absorbed first).

Defining the "net investment" (IAS 28.38–28.40): Long-term interests included in the net investment are those akin to equity (e.g., interest-free or low-interest loans with no fixed repayment date). Trade receivables and short-term payables are explicitly excluded (IAS 28.38). Loans intended for settlement in the near term do not form part of the net investment and are assessed for impairment under IFRS 9 independently.

Suspension of loss recognition (IAS 28.37): Once the entire net investment is reduced to zero, additional losses are not recognised unless the investor has a legal or constructive obligation (e.g., guarantees given to third-party creditors of the associate) or has made payments on behalf of the associate. Unrecognised losses must be tracked off-balance-sheet.

Interaction with IFRS 9 (IAS 28.41A–28.41B): Long-term interests forming part of the net investment are first subject to equity-method loss allocation under IAS 28; only after that process is complete are they assessed for impairment under IFRS 9's expected credit loss model. The sequencing matters: you cannot impair a long-term interest under IFRS 9 before exhausting equity-method losses against it.

Resuming recognition (IAS 28.39): When the associate subsequently returns to profitability, the investor resumes recognising its share of profits only after the share of profits equals the unrecognised share of losses previously suspended. Accumulated unrecognised losses must be fully offset before any income is recorded.

Disclosure (IAS 28.40): The investor must disclose its share of unrecognised losses for the period and cumulatively in the notes, so users can assess the latent exposure.

IAS 28 Losses — Practical Example

Investor holds a 30% stake in Associate X and a €400,000 long-term loan to Associate X (no fixed repayment date — part of net investment). Carrying values at year-start: equity investment €150,000; loan €400,000.

Associate X reports a loss of €2,500,000 in the year. Investor's share = 30% × €2,500,000 = €750,000.

Step 1: Reduce equity investment to zero (€150,000 absorbed).Step 2: Apply remaining €600,000 against the loan (capped at €400,000 loan balance).Step 3: Remaining €200,000 is suspended (no obligation or guarantee exists).

Account	Dr (€)	Cr (€)
Share of loss in associate (P&L)	550,000
Investment in associate		150,000
Long-term loan to associate		400,000

The €200,000 of unrecognised losses is disclosed in the notes per IAS 28.40.

If in the following year Associate X earns a profit giving Investor a 30% share of €280,000, the first €200,000 offsets suspended losses (no P&L credit), and only €80,000 is recognised as income.

IAS 28 Losses — Common Pitfalls

Including short-term receivables in the net investment: Practitioners sometimes sweep all balances owed by the associate into the loss-absorption waterfall. IAS 28.38 is explicit — only balances for which settlement is not planned nor likely in the foreseeable future qualify. Including ordinary trade receivables overstates loss absorption capacity and understates IFRS 9 impairment exposure.

Forgetting to track suspended losses: When an associate recovers, teams often recognise income immediately without offsetting the cumulative unrecognised losses (IAS 28.39). This is a frequent audit finding and leads to overstated equity-accounted income.

Missequencing IAS 28 and IFRS 9: Applying IFRS 9 ECL to long-term interests before completing the equity-method loss allocation (IAS 28.41A) double-counts the credit risk and misstates both the P&L charge and the carrying amount of the instrument.

IAS 28 Losses — Key Paragraphs

IAS 28.37 — core rule suspending loss recognition once net investment reaches zero.
IAS 28.38 — definition and composition of the net investment; ordering of loss absorption.
IAS 28.39 — conditions for resuming profit recognition after suspended losses.
IAS 28.40 — disclosure of unrecognised losses (current period and cumulative).
IAS 28.41A–41B — sequencing of equity-method loss allocation versus IFRS 9 ECL assessment on long-term interests.