ASC 323 vs IAS 28: equity method losses that exceed the investment

Under both ASC 323 and IAS 28, an investor stops recording its share of an investee's losses once its interest has been reduced to zero, unless it has guaranteed the investee's obligations or is otherwise committed to fund it. The two frameworks diverge on what counts as the "interest" that absorbs losses, on when losses continue below zero, and on how the investor's other holdings in the investee, such as loans and preferred shares, are drawn into the calculation.

The question arises whenever an associate or joint venture runs up sustained losses: a start-up funded partly with shareholder loans, a project company in its construction phase, or a struggling joint venture that its partners keep alive with advances. Once the equity-method carrying amount hits zero, the investor has to decide whether to keep booking losses against loans or preference shares, whether to record a liability, or whether to suspend recognition and track the unrecorded losses off the books until the investee returns to profit.

The answer changes reported earnings, the carrying amount of shareholder loans, and the disclosures in the investment note. It also carries forward: under both frameworks, an investor that has suspended losses cannot recognize its share of later profits until those profits have absorbed every dollar of the losses it did not record.

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HOW IAS 28 TREATS LOSSES THAT EXCEED THE INVESTOR'S INTEREST.

IAS 28 Investments in Associates and Joint Ventures defines the interest that absorbs losses broadly. It is the carrying amount of the investment determined using the equity method, together with any long-term interests that, in substance, form part of the entity's net investment in the associate or joint venture. The standard gives preference shares and long-term receivables or loans as examples, provided settlement is neither planned nor likely in the foreseeable future. Trade receivables, trade payables and long-term receivables backed by adequate collateral, such as secured loans, are excluded.

When the investor's share of losses equals or exceeds that interest, IAS 28 requires the entity to discontinue recognizing its share of further losses. Losses recognized under the equity method in excess of the investment in ordinary shares are applied to the other components of the interest in the reverse order of their seniority, meaning their priority in liquidation. A subordinated shareholder loan therefore absorbs losses before a more senior instrument would.

Paragraph 14A, added by the IASB's October 2017 amendments on long-term interests and effective for annual periods beginning on or after January 1, 2019, sets the sequence for those long-term interests. The investor first applies IFRS 9 Financial Instruments to them, including the expected credit loss model, without taking account of any adjustments to their carrying amount that arise from applying IAS 28. Only after that IFRS 9 step does the investor allocate equity-method losses to them and assess impairment of the net investment.

Below zero, IAS 28 permits additional losses to be provided for, and a liability recognized, only to the extent that the investor has incurred legal or constructive obligations or has made payments on behalf of the associate or joint venture. A guarantee of the investee's bank debt or a binding commitment to fund operating losses meets that test, whereas a general expectation of continued support does not. If the associate later reports profits, the investor resumes recognizing its share of those profits only after its share of the profits equals the share of losses it did not recognize.

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HOW ASC 323 TREATS LOSSES BELOW A ZERO INVESTMENT.

US GAAP starts from a similar rule with a narrower base. The guidance carried into ASC 323 from APB Opinion No. 18 states that an investor's share of losses may equal or exceed the carrying amount of the investment plus advances made by the investor, and that the investor ordinarily discontinues applying the equity method when the investment and net advances are reduced to zero. The investor does not provide for additional losses unless it has guaranteed obligations of the investee or is otherwise committed to provide further financial support. ASC 323-10-35-20 carries this rule in the codification.

US GAAP also contains an exception with no IFRS equivalent. ASC 323-10-35-21 requires the investor to keep providing for losses when the imminent return of the investee to profitable operations appears to be assured. The original APB 18 footnote illustrates the case of a material, nonrecurring loss of an isolated nature that reduces the investment below zero even though the investee's underlying profitable operating pattern is unimpaired. In that situation the investor records a negative carrying amount, or a liability, rather than suspending the losses.

For investors that also hold loans, preferred stock or debt securities of the investee, the guidance that originated in EITF Issue 98-13, Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee, extends the loss allocation beyond common stock. Once the common stock investment is exhausted, further equity-method losses are recognized against the other investments in order of their seniority, and the investor measures its share of losses at each level on the basis of its ownership of that particular security or loan. EITF Issue 99-10, Percentage Used to Determine the Amount of Equity Method Losses, addresses how that percentage is determined. An investor that holds 40% of the common stock but 100% of a subordinated loan can therefore absorb a larger share of losses at the loan level than its common ownership suggests, which is a point of difference from IAS 28's single ownership share. The adjusted basis of those other investments remains subject to their own measurement and credit loss guidance.

When the investee returns to profit, the investor resumes the equity method only after its share of net income equals the share of net losses not recognized during the suspension.

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EQUITY METHOD LOSSES: IAS 28 VS ASC 323 COMPARISON.

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Issue	IAS 28	ASC 323
Base that absorbs losses	Equity-method carrying amount plus long-term interests forming part of the net investment	Investment plus net advances, then other investments in the investee
Order across instruments	Reverse order of seniority (priority in liquidation)	Order of seniority of the other investments
Share of losses at each level	Ownership interest in the associate	Ownership of the particular security or loan held
Interaction with credit losses	IFRS 9 applied first to long-term interests, ignoring IAS 28 adjustments	Other investments remain subject to their own measurement and credit loss guidance
Losses below zero	Only for legal or constructive obligations or payments made	Only for guarantees or commitments to provide further support
Imminent return to profit	No exception	Losses continue if a return to profitability appears assured
Resuming profit recognition	After profits equal unrecognized losses	After net income equals unrecognized losses

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The practical gap is largest for investors that fund an investee through shareholder loans. Under IAS 28 those loans become part of the loss-absorbing interest when settlement is neither planned nor likely, and the investor applies its ordinary ownership share to all losses. Under ASC 323 the investor needs to look at each instrument's seniority and its own percentage of that instrument, which can accelerate the losses it recognizes once the common equity is gone.

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WORKED EXAMPLE: ALLOCATING EQUITY METHOD LOSSES TO A SHAREHOLDER LOAN.

The following figures are illustrative. Investor Co holds 40% of the ordinary shares of Associate Co and accounts for the holding using the equity method. At the start of Year 1 the equity-method carrying amount is $1,000,000. Investor Co has also lent Associate Co $500,000 on subordinated terms with no repayment planned or likely in the foreseeable future, so the loan forms part of the net investment under IAS 28. A trade receivable of $80,000 from Associate Co is excluded from the loss-absorbing interest. Investor Co has given no guarantee and has no commitment to fund further losses. For simplicity, the credit loss allowance on the loan is assumed to be immaterial, so the IFRS 9 step leaves the loan at $500,000 before equity-method losses are allocated, and Investor Co's share of losses is taken at 40% at every level.

Associate Co reports a net loss of $3,000,000 in Year 1, a net loss of $2,500,000 in Year 2 and a net profit of $2,000,000 in Year 3.

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Year	Investee result	40% share	Applied to shares	Applied to loan	Unrecognized	Cumulative unrecognized
Year 1	Loss $3,000,000	$1,200,000	$1,000,000	$200,000	$0	$0
Year 2	Loss $2,500,000	$1,000,000	$0	$300,000	$700,000	$700,000
Year 3	Profit $2,000,000	$800,000	$0	$100,000 restored	$700,000 absorbed	$0

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In Year 1 the first $1,000,000 of Investor Co's $1,200,000 share of losses reduces the equity-method investment to zero, and the remaining $200,000 is applied to the subordinated loan, leaving the loan at $300,000. In Year 2 the share of losses is $1,000,000, but only $300,000 can be absorbed before the loan also reaches zero. The remaining $700,000 is not recognized and is tracked in a memorandum record. In Year 3 Investor Co's share of profit is $800,000. The first $700,000 offsets the unrecognized losses, and only $100,000 is recognized, which restores part of the loan.

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Entry	Account	Debit	Credit
Year 1	Share of loss of associate (P&L)	$1,200,000
Year 1	Investment in associate		$1,000,000
Year 1	Loan to associate		$200,000
Year 2	Share of loss of associate (P&L)	$300,000
Year 2	Loan to associate		$300,000
Year 3	Loan to associate	$100,000
Year 3	Share of profit of associate (P&L)		$100,000

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The order in which restored profits are applied, here to the loan before the ordinary shares, follows the reverse of the loss allocation. US GAAP applies subsequent income in that reverse order. IAS 28 sets out the order for losses explicitly, so an IFRS reporter should document the policy it applies to subsequent profits and apply it consistently.

If Investor Co had guaranteed $1,000,000 of Associate Co's bank borrowings, the outcome in Year 2 would change. The $700,000 that exceeds the net investment would be recognized because Investor Co has a legal obligation under both frameworks.

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Entry	Account	Debit	Credit
Year 2 (guarantee)	Share of loss of associate (P&L)	$700,000
Year 2 (guarantee)	Liability for losses of associate		$700,000
Year 3 (guarantee)	Liability for losses of associate	$700,000
Year 3 (guarantee)	Loan to associate	$100,000
Year 3 (guarantee)	Share of profit of associate (P&L)		$800,000

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With the guarantee, total losses recognized in Year 2 are $1,000,000 and the full $800,000 share of Year 3 profit is recognized, first eliminating the liability and then restoring $100,000 of the loan. Without the guarantee, the investor reports $300,000 of losses in Year 2 and $100,000 of profit in Year 3. The economics across the three years are identical, and only the timing of recognition differs.

Under US GAAP, the same totals arise only if Investor Co's loss share at the loan level is 40%. Because Investor Co holds the entire loan, the seniority-based approach can require it to absorb a larger share of the losses allocated to that level, which would move the Year 1 and Year 2 figures and must be computed from Associate Co's capital structure.

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PRESENTATION AND DISCLOSURE OF SUSPENDED EQUITY METHOD LOSSES.

Under IFRS, IFRS 12 Disclosure of Interests in Other Entities requires an investor that has stopped recognizing its share of losses of an associate or joint venture to disclose the unrecognized share of losses, both for the reporting period and cumulatively. In the example, Investor Co would disclose $700,000 for Year 2 and $700,000 cumulatively at the end of Year 2, falling to zero after Year 3. Losses allocated to a shareholder loan reduce the loan's carrying amount in the statement of financial position, and the investor's share of the associate's results is presented as a single line in profit or loss.

Under US GAAP, the investment note should explain that the equity method has been suspended, the amount of losses not recorded, and any guarantees that could require additional losses to be recognized. A guarantee also brings its own recognition and disclosure requirements under the guarantees guidance in ASC 460. Where losses have been applied to loans or preferred stock, the reduced basis of those instruments should be traceable to the equity-method loss allocation, so that the auditor and readers can reconcile the carrying amounts.

A negative carrying amount, or a liability for losses of an associate, is presented as a liability and not netted against unrelated assets. Investors with several associates track suspended losses investee by investee, because profits of one associate cannot absorb unrecognized losses of another.

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COMMON ERRORS IN ACCOUNTING FOR EQUITY METHOD LOSSES.

The most frequent IFRS error is leaving shareholder loans out of the net investment. If a loan has no planned or likely settlement, it absorbs losses after the ordinary shares, and treating it as an ordinary receivable overstates assets. The reverse error also occurs: a trade receivable or a well-secured loan is pulled into the net investment and written down through the equity method when it should be measured only under IFRS 9.

A second error is applying IAS 28 losses to a long-term loan and then running the IFRS 9 expected credit loss model on the reduced carrying amount. Paragraph 14A requires the IFRS 9 assessment first, on a carrying amount that ignores IAS 28 adjustments, which avoids double counting the same deterioration.

Under US GAAP, the common errors are applying the common stock percentage to losses absorbed by instruments the investor holds in a different proportion, and overlooking the imminent-return exception when a profitable investee suffers a one-off loss. Under both frameworks, investors sometimes resume recording profits as soon as the investee turns profitable, without first absorbing the memorandum balance of unrecognized losses.

Judgement is concentrated in three areas. Whether settlement of a loan is planned or likely depends on its terms and on the parties' intentions. Whether an investor has a constructive obligation to fund losses depends on its past practice and public statements. Whether a return to profitability is assured under the US GAAP exception requires strong evidence, since the exception allows losses to be recorded below zero.

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CHANGES PROPOSED FOR EQUITY METHOD LOSS ACCOUNTING.

Both standard-setters have equity method projects under way. The IASB's Exposure Draft ED/2024/7 Equity Method of Accounting, published in September 2024, proposed that an investor that has not recognized its share of losses should not recognize those losses by reducing the carrying amount of an additional ownership interest it purchases, and that it should recognize its share of the associate's profit or loss and its share of other comprehensive income separately, including after the net investment has been reduced to nil. According to the IASB's project page, redeliberations are complete and the revised IAS 28 is expected in the first half of 2027, with a tentative effective date of January 1, 2029. The final wording of the loss requirements should be checked when the revised standard is issued.

The FASB issued a proposed Accounting Standards Update on Equity Method of Accounting: Targeted Improvements on October 28, 2026, with comments due January 11, 2027. It would move loss guidance from the real estate subtopic 970-323 into Subtopic 323-10 so that it applies to all equity method investments, including guidance on losses allocable to other investors that may be unable to bear their share, and it would expand the example of a legal obligation to fund losses to a noncontrolling general partner or its functional equivalent. The effective date will be set after the Board considers stakeholder feedback.

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EQUITY METHOD LOSSES UNDER ASC 323 AND IAS 28: PRACTICAL CHECKLIST.

The core rule is shared. Losses stop at zero unless the investor is obliged to fund the investee, and suspended losses must be recovered from later profits before any income is recognized. The differences sit in the details that drive the numbers: IAS 28 counts long-term interests in the net investment and applies IFRS 9 to them first, while ASC 323 allocates losses across other investments by seniority and by the investor's percentage of each instrument, and continues losses below zero when a return to profit is assured.

Before closing the books on a loss-making associate, a controller should confirm the following points:

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Check	IAS 28	ASC 323
Identify the loss-absorbing base	Shares plus long-term interests	Investment, net advances, other investments
Rank other instruments	By priority in liquidation	By seniority
Set the loss percentage	Ownership interest	Ownership of each security or loan
Credit losses on loans	IFRS 9 first	Own measurement guidance
Obligations to fund	Legal or constructive	Guarantees or commitments
Track unrecognized losses	By investee, period and cumulative	By investee, until absorbed

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The answers depend on the loan terms, the capital structure of the investee and the investor's commitments, which is why the same loss can produce different reported results under the two frameworks even when the cumulative outcome is identical. For background on the method itself, see how associates are accounted for using the equity method under IAS 28 and ASC 323, how equity method investments are tested for impairment, and how ownership, control and significant influence change the accounting.

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