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Plain‑English explainer of HKAS 28 / IAS 28 for students, junior accountants and non‑specialists who find official standards too dense to read.
This article is based on Hong Kong Accounting Standards (HKAS / HKFRS), which are fully aligned with IAS / IFRS except for minor local tweaks, so the same principles generally apply under IAS / IFRS unless noted otherwise. The goal is to unpack HKAS 28 Investments in Associates and Joint Ventures (equivalent to IAS 28) using plain English and practical, real‑life examples instead of technical jargon. It is written for students, junior accountants, audit juniors and finance professionals who want to understand not just “what the standard says” but how to actually read and prepare financial statements in line with it.
When you see “the company” or “the entity” below, you can think of any entity that prepares general purpose financial statements under HKFRS / IFRS.
When an Investment Is More Than Just Shares
In many Hong Kong‑style corporate structures, an investment in an associate or joint venture is not just about ordinary shares. It is quite common to see a parent holding, say, 30% equity, and at the same time:
- Providing a long‑term loan to the associate, and
- Giving a financial guarantee over the associate’s bank borrowings.
When the associate starts making losses, the investor has to think about more than just “share of loss” on the equity stake. The question quickly becomes: do the long‑term loan and other long‑term interests also have to absorb some of those losses?
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- What counts as long‑term interests that form part of the net investment.
- How HKFRS 9 / IFRS 9 and HKAS 28 / IAS 28 interact and in which order.
- How to allocate losses when they exceed the equity carrying amount.
- When to stop recognising further losses.
- How to perform impairment on the overall net investment.
1. What Counts as Long‑Term Interests in the Net Investment?
The “investment” in an associate is more than just the ordinary shares accounted for using the equity method. HKAS 28 / IAS 28 makes it clear that any long‑term interests that, in substance, form part of the investor’s net investment in the associate or joint venture must be considered in the equity‑method loss allocation.
In plain English, these are items that are legally loans or other instruments, but in economic substance are “stuck” in the associate for the long term—there is no realistic expectation of repayment in the foreseeable future.
Typical Long‑Term Interests (Included in Net Investment)
Common examples include:
- Perpetual preference shares issued by the associate, held by the investor.
- Non‑repayable or open‑ended long‑term loans that the investor is not expecting to be repaid soon.
- Long‑term receivables from the associate that, in substance, function like capital.
These are “long‑term interests” that, in substance, form part of the investor’s net investment, even though they may be legally debt or other instruments.
Items That Are Not Long‑Term Interests
Excluded items typically include:
- Short‑term loans or trade receivables that are expected to be settled soon.
- Trading or fair value investments measured under HKFRS 9 / IFRS 9 at FVTPL.
- Any balance that is not really “locked into” the associate on a long‑term basis.
Practical Example
A parent holds 25% of an associate and also grants a 5‑year loan of 400,000. Contractually, the loan is repayable only when the associate returns to a profitable position, and both parties understand that repayment is unlikely in the near term.
Economically, this looks more like a long‑term capital support than a standard loan. It would typically be treated as a long‑term interest that forms part of the net investment, and therefore it is included in the HKAS 28 / IAS 28 framework for loss allocation and impairment.
2. How HKFRS 9 / IFRS 9 and HKAS 28 / IAS 28 Work Together
Once you know which balances are long‑term interests, the next question is: which standard applies first—HKFRS 9 or HKAS 28?
The answer is: both apply, but in a strict order.
The Required Order of Application
The sequence is:
- Apply HKFRS 9 / IFRS 9 first
- Measure the long‑term interest and recognise impairment losses using the expected credit loss (ECL) model.
- This step applies even if the instrument is, in substance, part of the net investment.
- Then apply HKAS 28 / IAS 28
- Take the carrying amount after HKFRS 9 (including any ECL adjustment) as the starting point.
- Use this carrying amount to allocate the investor’s share of the associate’s losses under the equity method.
In other words: HKFRS 9 / IFRS 9 first, HKAS 28 / IAS 28 second.
Important Detail: Keep the Two Layers Separate
When estimating ECL under HKFRS 9 / IFRS 9, you ignore any later adjustments that may arise from applying the equity method under HKAS 28 / IAS 28. You assess credit risk and expected losses on the long‑term interest as if it were a standalone financial instrument.
Then, separately, you use the HKFRS 9‑adjusted carrying amount inside your net investment for HKAS 28 loss allocation and impairment.
Practical Example
A parent provides a long‑term loan to an associate. At each reporting date:
- First, the parent applies HKFRS 9 / IFRS 9 to measure the loan and recognise any ECL.
- Then, under HKAS 28 / IAS 28, the parent allocates its share of the associate’s losses to its ordinary share investment and long‑term interests, based on their carrying amounts after the HKFRS 9 step.
These two stages must not be “netted off” or merged. Each standard has its own perspective and must be applied consistently.
3. When Losses Exceed the Investor’s Equity—The Loss Allocation Limit
This is one of the most examined and most frequently questioned areas in HKAS 28 / IAS 28. The standard states that an investor stops recognising further losses once its share of losses has reduced its net investment to zero.
What Is Included in “Net Investment” for This Purpose?
For the loss‑allocation limit, “net investment” includes:
- The equity‑accounted ordinary share investment in the associate.
- The long‑term interests that, in substance, form part of the net investment (such as long‑term loans and perpetual instruments).
You start by allocating your share of losses to the ordinary share investment. Once that is reduced to zero, you then allocate remaining losses to the long‑term interests. When both together reach zero, you stop recognising further losses.
Important Exceptions: Legal and Constructive Obligations
There are two key exceptions where the investor must continue recognising losses even after the net investment has been reduced to zero:
- Legal obligation The investor has a legally enforceable obligation (e.g. a written guarantee or binding contract) to support the associate or cover its obligations.
- Constructive obligation Based on past practice and legitimate expectations, the investor has established a pattern of financial support such that it is expected to continue providing funds even without a strict legal requirement.
In those cases, losses are recognised beyond zero, to the extent of the obligation, and a separate liability is recognised for the obligation.
How This Appears in Working Papers
In consolidation or group working files, you will often see a schedule for an associate with:
- A column showing “investment in associate”.
- A column for “long‑term interests forming part of net investment”.
- A note such as “equity exhausted – recognition of further losses stopped” once the combined balance reaches zero.
Accountants then track “unrecognised losses” off‑balance sheet. These amounts matter later if the associate returns to profit.
4. Impairment of the Net Investment – Looking for Objective Evidence
Even after you have allocated the investor’s share of losses under the equity method, your job is not done. HKAS 28 / IAS 28 requires you to consider whether the net investment as a whole (including any embedded goodwill) is impaired, applying HKAS 36 / IAS 36 Impairment of Assets.
Common Impairment Indicators (Objective Evidence)
Typical signs that impairment may exist include:
- The associate is experiencing significant financial difficulties.
- There are defaults or significant delays in payments.
- There is a realistic possibility of bankruptcy, liquidation or restructuring.
- The market value of the associate (if observable) has fallen sharply.
- The investor’s expected future cash flows from the associate have significantly worsened.
If such evidence exists, the investor must estimate the recoverable amount of the net investment and compare it with its carrying amount.
One Unit of Account: The Entire Net Investment
For impairment, HKAS 28 / IAS 28 treats the entire net investment in the associate as a single unit of account, not separate pieces. In other words, you do not test the ordinary shares, long‑term loans and other long‑term interests separately; you test them together as one CGU‑like asset.
If the recoverable amount is lower than the carrying amount, the difference is recognised as an impairment loss and allocated across the components of the net investment.
This impairment test acts as a final check to avoid overstating the value of an associate that is performing poorly, even after applying the equity method.
5. Worked Example – Long‑Term Interests, Losses and Impairment Together
Let’s bring these concepts together with a simplified numeric example.
Scenario
- Company A holds 30% of Company B’s ordinary shares.
- Cost of A’s investment in B’s equity: 1,000,000.
- A also provides a long‑term loan of 400,000 to B. This loan is considered a long‑term interest forming part of the net investment.
- During the year, B records a loss of 600,000.
- Under HKFRS 9 / IFRS 9, the long‑term loan has an ECL impairment of 20,000 at year‑end.
We will assume no other OCI items and no previous losses.
Step 1: Apply HKFRS 9 / IFRS 9 First
Under HKFRS 9 / IFRS 9, A measures the long‑term loan and recognises the ECL:
- Long‑term loan: 400,000 → 380,000 after 20,000 impairment.
The ordinary share investment is not a financial asset under HKFRS 9 here; it is subject to the equity method under HKAS 28 / IAS 28.
Step 2: Allocate Share of Loss Under HKAS 28 / IAS 28
A’s share of B’s loss:
600,000 × 30% = 180,000.
Net investment before loss allocation:
- Ordinary shares: 1,000,000
- Long‑term loan (after HKFRS 9): 380,000
- Total net investment: 1,380,000
Under HKAS 28 / IAS 28, A allocates its 180,000 share of losses:
- First to the ordinary share investment: 1,000,000 → 820,000 after deducting 180,000.
No need to reduce the long‑term loan in this example, because there is still positive equity after the loss allocation.
Step 3: When Net Investment Hits Zero
If B continues to make losses in later periods, A will keep allocating its share of losses first to the ordinary share investment until it reaches zero, then to the long‑term interests. Once the combined carrying amount of the ordinary shares plus long‑term interests reaches zero, A stops recognising further losses, unless it has legal or constructive obligations.
At that point, any additional share of losses is tracked as unrecognised losses off‑balance sheet, ready to be reversed if B returns to profit.
Step 4: Impairment of the Net Investment
If B’s business environment deteriorates further—for example, the associate loses major customers or risks liquidation—A must test the entire net investment (ordinary shares plus long‑term loan) for impairment under HKAS 36 / IAS 36.
- If the recoverable amount (value in use or fair value less costs of disposal) is less than the current net investment, A recognises an impairment loss.
- That impairment is in addition to the ECL under HKFRS 9 and the share of losses under HKAS 28; it ensures the associate is not carried at more than its recoverable amount.
These four steps capture the core practical logic of HKAS 28 / IAS 28 for situations where long‑term interests and continued losses are involved.
6. Ongoing Debate – Are We “Double Counting” Losses?
In standard‑setting discussions, some practitioners have argued that applying both HKFRS 9 / IFRS 9 and HKAS 28 / IAS 28 to the same long‑term interest creates a risk of double counting losses. The concern is that:
- The long‑term loan is already impaired under HKFRS 9 / IFRS 9 using the ECL model.
- Then, the same instrument absorbs additional losses under HKAS 28 / IAS 28 as part of the net investment.
Supporters of the current approach point out that the two standards focus on different aspects:
- HKFRS 9 / IFRS 9 looks at credit risk and expected cash shortfalls on the specific financial instrument.
- HKAS 28 / IAS 28 focuses on the investor’s share of the associate’s overall performance.
The IASB and HKICPA have clarified that entities must:
- Apply HKFRS 9 / IFRS 9 first to long‑term interests.
- Then apply HKAS 28 / IAS 28 for loss allocation and net investment impairment.
- Keep the two “layers” conceptually separate to ensure useful, non‑duplicative information.
This is reflected in the amendments to IAS 28 / HKAS 28 and related agenda decisions.
Key Takeaways for Students and Junior Accountants
- Always identify all components of the net investment: equity‑accounted shares plus long‑term interests that are, in substance, stuck in the associate.
- Apply HKFRS 9 / IFRS 9 first, then HKAS 28 / IAS 28—don’t mix the order. Use the HKFRS 9‑adjusted carrying amounts when allocating losses.
- Stop recognising further losses once the net investment is reduced to zero, unless there are legal or constructive obligations; track additional losses off‑balance sheet for later reversal.
- For impairment, test the entire net investment as one unit, using HKAS 36 / IAS 36, instead of testing each component separately.
- In working papers, clearly document: (1) which balances are long‑term interests, (2) the HKFRS 9 / IFRS 9 ECL calculations, (3) the HKAS 28 / IAS 28 loss allocation, and (4) any unrecognised losses.
- When reading contracts and loan agreements with associates, focus on terms that make a loan effectively long‑term capital—those terms often decide whether the balance is part of the net investment.
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