IAS 28, Investments in Associates and Joint Ventures (2011), currently requires that gains and losses resulting from transactions between an entity and its associate or joint venture are recognized in the entity's financial statements only to the extent of unrelated investors' interests in the associate or joint venture. However, IFRS 10, Consolidated Financial Statements, requires full profit or loss recognition when a parent loses control of a subsidiary. In considering the conflict, the IASB concluded that a full gain or loss should be recognized on the loss of control of a business, whether the business is housed in a subsidiary or not. At the same time, the gain or loss resulting from the sale or contribution of a subsidiary that does not constitute a business as defined in IFRS 3, Business Combinations, to an associate or joint venture should only be recognised to the extent of unrelated investors' interests in the associate or joint venture.
In developing the amendment, the IASB focused on the conceptual basis considered when developing the requirements of IFRS 3, which considers the gaining or losing of control as a significant economic event that triggers remeasurement and gain/loss recognition. Consideration was also given as to whether all sales and contributions between an investor and an associate should give rise to fully recognized gains and losses, which was viewed as more robust from a conceptual point of view. However, this idea was considered to be too broad for a narrow-scope project. Therefore, the amendments require full gain or loss recognition for transactions between investors and associates only where a sale of contribution of assets constitutes a business.
Amendments to IAS 28:
- The requirements on gains and losses resulting from transactions between an entity and its associate or joint venture have been amended to relate only to assets that do not constitute a business.
- A new requirement has been introduced that gains or losses from downstream transactions involving assets that constitute a business between an entity and its associate or joint venture must be recognized in full in the investor's financial statements.
- A requirement has been added that an entity needs to consider whether assets that are sold or contributed in separate transactions constitute a business and should be accounted for as a single transaction.
Amendments to IFRS 10:
- An exception from the general requirement of full gain or loss recognition has been introduced into IFRS 10 for the loss control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method.
- New guidance has been introduced requiring that gains or losses resulting from those transactions are recognized in the parent's profit or loss only to the extent of the unrelated investors' interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement at fair value of investments retained in any former subsidiary that has become an associate or a joint venture that is accounted for using the equity method are recognised in the former parent's profit or loss only to the extent of the unrelated investors' interests in the new associate or joint venture.
Three IASB members have voted against the publication of the amendments. One member disagrees with introducing another accounting difference that is dependent on the interpretation of the definition of a business when the line between what constitutes a business versus a collection of assets is frequently unclear, often based on judgment and represents an interpretation challenge in practice. Two members believe that amendments do not fully address the concerns they were intended to address.
The amendments are effective for annual periods beginning on or after January 1, 2016. Earlier application is permitted.
The IASB has decided that the amendments should apply prospectively to transactions that occur in annual periods beginning on or after the date that the amendments become effective because the Board believes that the benefits of comparative information would not exceed the cost of providing it.