In May 2006, the Board discussed potential amendments to IFRS 1 to grant relief from determining cost in accordance with IAS 27 on first-time adoption of IFRSs and directed the staff to analyse one of those methods (the 'proposed relief') further.
The proposed relief permits a parent to use deemed cost for its investments in subsidiaries instead of restating cost in accordance with IAS 27. This deemed cost is to be calculated by reference to the underlying IFRS-compliant net asset position at the date of transition.
At this meeting the staff's recommendations were discussed.
Measurement of initial cost - the Proposed Relief
Some constituents have argued that, in some cases, it is difficult to measure the cost of an investment in a subsidiary in accordance with IAS 27 on first-time adoption of IFRSs. This is because entities adopting IFRSs may have measured the cost of an investment in a subsidiary under their previous GAAP in a manner that is not in accordance with IAS 27. Particularly, when a method of accounting other than the purchase method in accordance with IFRS 3 was used under previous GAAP, the parent would have to reconstruct the business combination using the purchase method in order to determine cost on adoption of IFRSs.
Based on its analysis, the staff recommended that IFRS 1 be amended to allow a parent to use either:
- The carrying amount of the net assets of a subsidiary (in accordance with IFRSs); or
- The fair value of a subsidiary at the date of the parent's transition to IFRSs.
The Board agreed to the staff's recommendation.
In addition to measuring the initial cost of an investment, constituents have highlighted difficulties in determining the cost of an investment in a subsidiary on first-time adoption when dividends have been paid since acquisition. IAS 27 requires an assessment whether dividends received by a parent from the subsidiary relate to pre- or post-acquisition profits of the subsidiary. Under IAS 27, pre-acquisition profits received from the subsidiary reduce the investment in the subsidiary and post-acquisition profits are recognised as income. In some jurisdictions, there was no requirement to assess whether distributions were received from the pre- or post-acquisition profits of a subsidiary. In these jurisdictions a parent would have to reassess every distribution received.
The Board agreed that:
- If a parent applies the relief from restating the cost of an investment in a subsidiary in accordance with IAS 27 on transition to IFRSs, the accumulated profits of the subsidiary at that date are deemed to be pre-acquisition profits for the purposes of the cost method in IAS 27.
- If a parent does not use the relief from restating the cost of an investment in a subsidiary in accordance with IAS 27 on transition to IFRSs, the pre-acquisition accumulated profits of the subsidiary under the previous national GAAP at that date are deemed to be the pre-acquisition profits for the purpose of IAS 27.
No Board member indicated an intention to dissent to an Exposure Draft based on the staff's recommendations.