ASC 323 vs IAS 28: loss of significant influence and the retained investment
When an investor sells part of a stake in an associate, or loses its board seat, and no longer has significant influence, both frameworks require it to stop applying the equity method from that date. Under IAS 28 the retained interest is measured at fair value and the difference, together with the sale proceeds, goes to profit or loss in a single calculation. Under ASC 323 the investor stops accruing its share of earnings, keeps the previously accrued amounts in the carrying amount, and then remeasures the retained investment under ASC 321, which produces fair value in most cases and a carried-over cost basis in a smaller set of cases.
The two routes often land on the same total gain when the retained shares have an observable price. They diverge when the investee is private, nothing trades, and the investor applies the ASC 321 measurement alternative, and they diverge again in how accumulated other comprehensive income is cleared. The investor's share of the associate's OCI is reclassified or transferred under IFRS as if the associate had disposed of the underlying items, while US GAAP offsets the remaining balance against the carrying amount of the investment.
The question comes up in partial exits, in dilution when the associate issues shares to new investors, in renegotiated shareholder agreements that remove board representation, and in group reorganizations. The FASB added a current angle on October 28, 2026, when it issued a proposed Accounting Standards Update on targeted improvements to the equity method that would remove the presumption of no significant influence below 20 percent, with comments due January 11, 2027.
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WHEN SIGNIFICANT INFLUENCE IS LOST UNDER ASC 323 AND IAS 28.
Significant influence is the power to participate in the financial and operating policy decisions of the investee without control or joint control. Both frameworks presume it at 20 percent or more of the voting power and look at the same indicators: board representation, participation in policy-making, material transactions between investor and investee, interchange of managerial personnel and provision of essential technical information.
Influence can be lost in several ways. The investor sells shares and drops below the level that supports influence. The investee issues new shares to others and the investor's percentage is diluted. A shareholder agreement changes and removes the investor's board seat or veto rights. The associate becomes subject to the control of a government, court or administrator. ASC 323-10-35-36 lists the first three routes explicitly: a sale of a portion of the investment by the investor, a sale of additional stock by the investee, or other transactions.
The date of loss matters because everything is measured at that date. Equity method income is recognized up to that point, the investment account is not adjusted retroactively, and the subsequent accounting follows the new classification. The equity method mechanics up to that date are covered in how associates are accounted for under IAS 28 and ASC 323.
Two neighbouring situations follow different rules. If the investor gains control, the transaction is a step acquisition under IFRS 3 and ASC 805, explained in how step acquisitions from significant influence to control are accounted for. If an associate becomes a joint venture, or a joint venture becomes an associate, IAS 28 paragraph 24 requires the investor to continue the equity method without remeasuring the retained interest.
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HOW IAS 28 DISCONTINUES THE EQUITY METHOD AND REMEASURES THE RETAINED INTEREST.
IAS 28 paragraph 22 requires the entity to discontinue the equity method from the date the investment ceases to be an associate or a joint venture. When the retained interest is a financial asset, the entity measures it at fair value, and that fair value becomes its initial carrying amount under IFRS 9. The entity then recognizes in profit or loss the difference between the fair value of the retained interest plus any proceeds from disposing of part of the interest, and the carrying amount of the investment at the date the equity method is discontinued.
The calculation treats the event as a disposal of the whole associate followed by the acquisition of a new financial asset at fair value. The gain on the sold shares and the remeasurement gain on the retained shares are therefore one number. After that date the retained interest is an IFRS 9 equity instrument measured at fair value through profit or loss, unless the entity makes the irrevocable election at initial recognition to present fair value changes in OCI for an equity investment that is not held for trading.
Paragraph 22 also requires the entity to account for all amounts previously recognized in OCI in relation to the investment on the same basis as would have been required if the investee had directly disposed of the related assets or liabilities. Paragraph 23 gives the consequence: a gain or loss that the investee would reclassify to profit or loss on disposal, such as cumulative exchange differences on a foreign operation, is reclassified to profit or loss when the equity method is discontinued. Items that would never be recycled, such as the investee's revaluation surplus, are not reclassified to profit or loss and are usually transferred within equity to retained earnings.
If the ownership interest is reduced but the investment remains an associate, paragraph 25 applies instead: the equity method continues and only the proportion of recyclable OCI that relates to the reduction is reclassified to profit or loss. Paragraph 20 covers the case where the portion to be sold is classified as held for sale under IFRS 5; the retained portion stays on the equity method until the held-for-sale portion is disposed of.
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HOW ASC 323-10-35-36 AND ASC 321 MEASURE THE RETAINED INVESTMENT.
Under ASC 323-10-35-36 the investor discontinues accruing its share of earnings or losses of an investment that no longer qualifies for the equity method. The earnings or losses previously accrued on the stock retained remain part of the carrying amount, and the investment account is not adjusted retroactively. The paragraph, as amended by ASU 2020-01, then requires the investor to remeasure the retained investment in accordance with paragraph 321-10-35-1 or 321-10-35-2, as applicable.
The two branches lead to different results. Under 321-10-35-1, an equity security with a readily determinable fair value is measured at fair value with changes in net income, so the retained shares of a listed former associate are remeasured to fair value and the gain or loss goes to earnings. Under 321-10-35-2, the measurement alternative for securities without a readily determinable fair value, the investment is carried at cost less impairment, adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
ASU 2020-01 closed a gap in the second branch. If the investor identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer that result in it discontinuing the equity method, it remeasures the retained investment at fair value immediately after discontinuing the equity method. A partial sale of the investor's own shares at an arm's-length price is the typical example. When influence is lost without any such transaction, for instance because a board seat is removed, the carrying amount at the date of discontinuance becomes the starting basis under the measurement alternative and no remeasurement gain arises. The amendments became effective for public business entities for fiscal years beginning after December 15, 2020, and for all other entities a year later. The subsequent ASC 321 model is described in accounting for investments in equity securities.
The shares sold are accounted for separately. The gain or loss on the sale is the difference between the selling price and the carrying amount of the shares sold. The investor's proportionate share of the investee's OCI that relates to the shares sold is reclassified to income with the sale. ASC 323-10-35-37 lists a loss of significant influence among the circumstances that trigger the OCI guidance, and the remaining balance of the investor's share of investee OCI is offset against the carrying value of the investment at the time influence is lost. If the offset would take the carrying value below zero, the carrying value is reduced to zero and the remaining balance is recorded in income.
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LOSS OF SIGNIFICANT INFLUENCE: IFRS VS US GAAP COMPARISON.
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Issue | IAS 28 | ASC 323 and ASC 321 |
Equity method stops | Date investment ceases to be an associate | Date investment no longer qualifies |
Retained interest | Fair value, becomes IFRS 9 cost | Remeasured under ASC 321 |
No observable price | Still fair value | Measurement alternative: carrying amount as basis |
Gain calculation | Proceeds plus fair value less total carrying amount | Sale gain, then remeasurement of retained shares |
Recyclable OCI | Reclassified to profit or loss in full | Sold portion to income, rest offset against investment |
Non-recyclable OCI | Transferred within equity | No equivalent category |
Associate to joint venture | No remeasurement, equity method continues | Equity method continues |
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The comparison shows where the reporting differences come from. A listed former associate usually produces the same total income statement effect under both frameworks, split differently between captions. A private former associate without a fresh transaction produces a gain under IFRS and none under US GAAP when the investor uses the measurement alternative.
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WORKED EXAMPLE: PARTIAL SALE OF A 30 PERCENT ASSOCIATE.
The figures are illustrative and computed in Python. Investor Co holds 30 percent of Target Inc and applies the equity method. At the date of sale the carrying amount of the investment is $4,800,000. That amount includes Investor Co's $150,000 share of Target's unrealized gains on debt securities recognized in OCI (fair value through OCI under IFRS 9, available for sale under US GAAP), which sits as a credit balance in Investor Co's accumulated OCI and would be recycled on disposal.
Investor Co sells 20 percentage points, two thirds of its stake, to an unrelated buyer for $3,600,000 in cash, which is $180,000 per percentage point. It keeps 10 percent, loses its board seat and no longer has significant influence. The sale price is an observable orderly transaction in the identical investment, so the fair value of the retained 10 percent is $1,800,000 under both frameworks.
Under IAS 28, the gain is $3,600,000 of proceeds plus $1,800,000 of fair value for the retained interest, less the $4,800,000 carrying amount, which equals $600,000. The $150,000 OCI balance is reclassified to profit or loss, so the total effect on profit or loss is $750,000.
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IFRS entry | Debit | Credit |
Cash | 3,600,000 | |
Equity investment (IFRS 9) | 1,800,000 | |
Investment in associate | 4,800,000 | |
Gain on loss of significant influence | 600,000 | |
OCI reserve, share of associate | 150,000 | |
Reclassification gain, profit or loss | 150,000 | |
Total | 5,550,000 | 5,550,000 |
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Under US GAAP, the carrying amount of the shares sold is two thirds of $4,800,000, or $3,200,000, so the gain on sale is $400,000. Two thirds of the OCI balance, $100,000, is reclassified to income with the sale. The retained shares carry $1,600,000. The remaining $50,000 of OCI is offset against that carrying value, reducing it to $1,550,000. Remeasurement to the $1,800,000 fair value under ASU 2020-01 adds $250,000 to net income. The total income effect is $400,000 plus $100,000 plus $250,000, which equals $750,000.
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US GAAP entry | Debit | Credit |
Cash | 3,600,000 | |
Investment in Target, shares sold | 3,200,000 | |
Gain on sale of investment | 400,000 | |
AOCI, share of investee OCI | 100,000 | |
Gain reclassified from AOCI | 100,000 | |
AOCI, share of investee OCI | 50,000 | |
Investment in Target, retained | 50,000 | |
Investment in Target, retained | 250,000 | |
Gain on remeasurement | 250,000 | |
Total | 4,000,000 | 4,000,000 |
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The retained investment ends at $1,800,000 under both frameworks, and both report $750,000 in earnings. The difference lies in the presentation: one combined gain plus an OCI reclassification under IFRS, three separate amounts under US GAAP.
A second set of facts shows where the results separate. Assume Investor Co instead holds a 22 percent stake in a private company carried at $2,000,000, including an $80,000 credit balance from its share of recyclable investee OCI. A new shareholder agreement removes its board seat without any share transaction, and the stake's fair value is $2,600,000. Under IAS 28, Investor Co recognizes a $600,000 remeasurement gain and reclassifies the $80,000 OCI, a total of $680,000 in profit or loss. Under US GAAP, if Investor Co elects the measurement alternative, it offsets the $80,000 against the investment and carries the retained stake at $1,920,000 with no gain until an observable transaction or impairment occurs.
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Second case | IFRS | US GAAP, measurement alternative |
Retained stake after the event | 2,600,000 | 1,920,000 |
Income statement effect | 680,000 | 0 |
OCI balance remaining | 0 | 0 |
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PRESENTATION AND DISCLOSURE OF THE GAIN AND THE RETAINED STAKE.
Under IFRS the gain on loss of significant influence and the OCI reclassification are presented in profit or loss, and the reclassification adjustment appears in the statement of comprehensive income. Entities that apply IFRS 18 from its effective date need to consider how it classifies income from investments in associates and their disposal; the general classification rules are set out in how IFRS 18 classifies income and expenses. IFRS 12 requires disclosure of interests in associates, and IFRS 7 and IFRS 13 apply to the retained financial asset, including the fair value hierarchy level used.
Under US GAAP, the gain on sale, the AOCI reclassification and the remeasurement gain are reported in net income, and the reclassification out of AOCI is disclosed under the AOCI presentation requirements. The retained investment moves into the ASC 321 disclosures, including the carrying amount of investments under the measurement alternative and any upward or downward adjustments.
Cash flow presentation follows the transaction under both frameworks: the cash received for the shares sold is an investing inflow, while the remeasurement gain is a non-cash item removed in the reconciliation of profit to operating cash flows.
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COMMON ERRORS AND JUDGEMENT AREAS ON THE DISCONTINUED EQUITY METHOD.
The most frequent error is to keep the retained stake at its old equity method carrying amount under IFRS. IAS 28 leaves no carry-over option for a retained financial asset, so a private associate requires a fair value measurement under IFRS 13 even when no shares change hands.
The second error runs the other way. US GAAP preparers sometimes remeasure a private retained stake to an appraisal value when the measurement alternative applies and no observable transaction exists. ASU 2020-01 requires remeasurement when an observable price change in an orderly transaction results in discontinuing the equity method; an appraisal alone is not such a transaction.
OCI is often left behind. Under IFRS recyclable items must be reclassified and non-recyclable items transferred within equity; under US GAAP the remaining balance must be offset against the investment. A stranded credit or debit in accumulated OCI after the investee has left the equity method is a sign that this step was missed. Cumulative translation adjustments on a foreign investee need specific attention: IAS 28 paragraph 23 names them as recyclable, and under US GAAP the analysis also involves ASC 830.
The date of loss is a judgement. Significant influence can disappear before the sale closes, for instance when the investor gives up its board seat at signing. A related judgement is whether the investor already had losses in excess of the investment that were suspended; the treatment of suspended losses is discussed in ASC 323 vs IAS 28 equity method losses that exceed the investment.
Finally, whether influence is lost at all is a matter of facts. Holding less than 20 percent does not by itself remove influence when board seats, veto rights or key transactions remain. The FASB's October 2026 proposal would remove the US GAAP presumption of no significant influence below 20 percent and apply a single significant influence threshold to partnerships and LLCs as well, which would put more weight on this assessment if finalized.
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PRACTICAL CHECKLIST FOR A LOSS OF SIGNIFICANT INFLUENCE.
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Step | What to document |
Date of loss | Event that removed influence and its date |
Equity income | Share of earnings accrued up to that date |
Carrying amount | Balance including OCI share and basis differences |
Shares sold | Proceeds and carrying amount allocated to them |
Retained stake | Fair value, or ASC 321 basis if alternative applies |
OCI | Recycle, transfer or offset per framework |
Disclosure | IFRS 12, IFRS 7 and 13, or ASC 321 and AOCI notes |
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ASC 323 AND IAS 28 RETAINED INVESTMENT: WHERE THE RESULTS CONVERGE AND DIFFER.
Both standards stop the equity method on the date influence is lost and both measure a listed retained stake at fair value, so a partial sale at an observable price usually produces the same total earnings effect, with IFRS reporting a single gain plus an OCI reclassification and US GAAP reporting a sale gain, a pro rata AOCI reclassification and a remeasurement gain on the retained shares.
The frameworks part ways for private investees. IAS 28 always remeasures the retained interest to fair value, while ASC 323 hands the retained investment to ASC 321, where the measurement alternative carries the old basis forward unless an observable transaction caused the loss of influence. Investors with retained stakes in private former associates under US GAAP will see their gains deferred until a later transaction, while IFRS reporters book them on the date influence ends. Non-recyclable OCI, translation adjustments and the exact date of loss remain the points that require documented judgement, and the FASB's 2026 proposal on the significant influence threshold is still open for comment.
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