Český finanční a účetní časopis 2014(1):61-71 | DOI: 10.18267/j.cfuc.381

"Negative" Amount of the Investment Accounted for by Equity Method

Vladimír Zelenka
Doc. Ing. Vladimír Zelenka, Ph.D. - docent; Katedra finančního účetnictví a auditingu, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, nám. W. Churchilla 4, 130 67 Praha 3; <vzelenka@vse.cz>.

In case of negative amount of total equity can occur phenomenon 'negative amount of investment' in application of equity method, in its developed as well as undeveloped form. 'Negative investment' doesn't comply with definition of asset in internationally respected standards of financial reporting (e.g. Conceptual Framework of IFRS). It is possible to recognize 'negative investment' as liability only to the extent that the investor has incurred obligations due to negative equity of the associate or joint venture. The equity method is applicable not only for ordinary shares but also for other parts of the net investment in the entity. The method is applied to components of the equity's net investment sequentially according to reverse order of their seniority and by the share of investor on the particular component of the net investment. There are inconsistencies while using combination of equity method and impairment loss accounting due to sequential application of equity method on the components of the net investment and due to specific rules for impairment of goodwill in equity method according to IAS 28.

Keywords: Equity Method; Undeveloped Form of Equity Method; Developed Form of Equity Method; Amount of Equity Method Losses; IAS 28; Impairment Loss.
JEL classification: M41

Published: March 1, 2014  Show citation

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Zelenka, V. (2014). "Negative" Amount of the Investment Accounted for by Equity Method. Czech Financial and Accounting Journal, 2014(1), 61-71. doi: 10.18267/j.cfuc.381
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