Another problem arises when interest is paid on the internal capital accounts. With a negative equity or negative collective reserve account, members are paid interest on an inflated value of their internal capital account, not adjusted for losses. This creates interest payments on phantom assets that don’t exist. The added interest expense to the cooperative is real even if the underlying assets are not. If interest is being paid, it should be paid on the real (loss adjusted) value of the member investments. Or put another way, the coop should pay interest only on its tangible assets.
The negative equity accounts make the interest expense include losses the coops incurs, so the total interest expense for the coop is based on the assets plus accumulated losses. There is no compelling reason interest should be paid on the accumulated losses. The only reason this is done is to hide the fact that the losses exist in the first place.