DRS 26
Active
Associated companies – equity method
Assoziierte Unternehmen
1
Scope – Elaborating §§311–312's Own Equity Method
Filling in the practical mechanics of the third consolidation technique
DRS 26 elaborates the equity method mechanics established under §§311–312 HGB – the third of the three major consolidation techniques this poster series documented (alongside full and proportionate consolidation), covering the significant-influence threshold, initial measurement choice, annual share-of-profit adjustment, and dividend treatment already established in detail in that earlier HGB poster.
2
Loss Absorption – What Happens When the Associate's Losses Exceed the Investment
A genuinely important boundary condition §312 alone doesn't fully resolve
DRS 26 provides detailed guidance for a scenario the bare §312 statutory text doesn't fully address: what happens when an associate's own cumulative losses would reduce the investment's carrying amount BELOW ZERO? Unlike a subsidiary (where NCI can absorb losses into a genuine deficit, per §307), an equity-method investment generally stops recognising FURTHER losses once the investment carrying amount reaches zero – UNLESS the investor has incurred legal or constructive obligations to fund the associate's own further losses, in which case additional loss recognition continues via a separate provision.
3
Worked Example – an Associate's Losses Reaching the Investment Floor
Stopping loss recognition once the carrying amount hits zero
Continuing the equity-method investment example from the earlier HGB poster: an investment's carrying amount is €1,850,000. In a subsequent year, the associate incurs severe losses, with the investor's own 25% share amounting to €2,400,000 – genuinely EXCEEDING the remaining investment balance. The investor has made no further legal or constructive commitment to fund the associate.
Under DRS 26, the investor recognises its share of losses only DOWN TO ZERO – reducing the investment from €1,850,000 to €0, recognising €1,850,000 of loss (not the full €2,400,000) – and STOPS recognising further losses at that point, given the absence of any obligation to fund the associate beyond its own original investment.
4
Relationship to IFRS (IAS 28)
Continuing the strong convergence flagged in the original HGB posting
DRS 26's own loss-absorption-floor rule closely mirrors IAS 28's own treatment – an investor generally discontinues recognising further equity-method losses once the investment (plus any long-term interests forming part of the net investment) reaches zero, absent a genuine funding obligation. This continues the SAME genuinely strong overall convergence between HGB's equity method and IAS 28 flagged when the underlying §§311–312 provisions were first covered.