The cap on recognised losses

Learning objectives

• Calculate the share of losses recognised up to the investor's interest and the unrecognised portion.L2, L3
• Record the share of losses limited to the interest.L3

Normative references

• IAS 28 §38If the entity's share of losses of an associate or a joint venture equals or exceeds its interest in it, the entity discontinues recognising its share of further losses. That interest comprises the carrying amount of the equity-accounted investment and the long-term interests that, in substance, form part of the net investment (items for which settlement is neither planned nor likely to occur in the foreseeable future, for example preference shares and long-term receivables or loans), excluding trade receivables, trade payables and secured receivables; losses in excess of the investment in ordinary shares are applied to the other components in the reverse order of their seniority.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

4 questions

• Alba SA applies the equity method to Brise SA, an associate. At the reporting date, the carrying amount of the investment is {remaining_interest}, and Alba has no other interest in Brise. Its share of the losses for the year is {share_of_loss}. Calculate the share of losses recognised and the share that is not recognised.L2
• Alba SA applies the equity method to Brise SA, an associate. The carrying amount of the investment is {remaining_interest} and Alba's share of the losses for the year is {share_of_loss}. Case convention: Alba has no other interest in Brise and no obligation towards it. Record the entry for the share of losses for the year.L3
• Alba SA has reduced its interest in Brise, an associate, to zero after several years of losses; it has no long-term interest in Brise and no commitment towards it. A colleague nevertheless recognises a further share of losses of 90,000 and presents a negative investment. What is the error?L3
• What should be remembered about the 2024 exposure draft on the equity method, which proposes among other things not to recognise previously unrecognised losses when an additional interest is bought?L4