IAS 28 Investments in Associates
Venture capital consolidations and partial use of fair value through profit or loss
The issue under discussion was one in which an investor, at a consolidated level, has an investment in an associate, a part of which is held by a subsidiary that is an investment-linked insurance fund (or any entity potentially included within the scope exemption of paragraph 1 of IAS 28). The question raised was whether that part of the investment held by a subsidiary that is an investment-linked insurance fund is able to be designated at initial recognition as at fair value through profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement, while another part of the investment held by another group entity is accounted for in accordance with IAS 28.
The Board determined that there were 2 steps to this question:
- first to determine whether, at a consolidated level, there was significant influence; and then
- to conclude on the appropriate accounting.
The Board agreed with the staff recommendation that all direct and indirect interests held in the associate should be identified, but that the scope criteria in IAS 28 should be used to determine the allowed accounting treatments for the investment (or a portion of the investment). Therefore the scope of IAS 28 should be used to group the investment holdings into one of potentially two valuation models (equity method or fair value through profit or loss, or both).
Impairment of investments in associates
The issue under discussion was whether the Board agreed with the staff recommendation that impairment testing of investments in associates should be performed:
- for the consolidated financial statements in accordance with IAS 36 Impairment of Assets; and
- for the separate financial statements of the investor in accordance with IAS 39.
In respect of the consolidated financial statements, the staff believed that the guidance in IAS 28.31-33 is clear. In respect of the separate financial statements, the staff believed that paragraph BC66 of IAS 27 clearly explains the Board's intent that, in the separate financial statements of the investor, investments in associates should be accounted for consistent with the accounting for financial instruments. Given the Board's underlying rationale for separate financial statements, in the staff's opinion, in the separate financial statements of the investor, impairment testing of investments in associates should be performed in accordance with the provisions of IAS 39 for both investments 'at cost' and 'in accordance with IAS 39'. The Board agreed with the staff recommendation.
Contingent consideration of an Acquiree ('pre-existing contingent consideration')
The issue under discussion was to clarify the treatment of contingent consideration of an acquiree that an acquirer assumes in a business combination ('pre-existing contingent consideration' or 'PCC').
The staff presented 2 views:
- Although PCC does not meet the definition of contingent consideration, it retains its nature in the subsequent acquisition. Accordingly, it should be accounted for in the same way as any contingent consideration in the subsequent business combination.
- PCC does not meet the definition of contingent consideration in the subsequent business combination. Therefore, it should be accounted for as part of the acquired identifiable assets and liabilities in the subsequent acquisition.
The staff recommended the second view and the Board agreed.
IFRS 1 First-time Adoption of International Financial Reporting Standards
Accounting for privatisation
The issue under discussion was to clarify the accounting guidance for a continuing business restructured in connection with privatisation and subsequent initial public offering (IPO).
The first scenario presented was where an entity is about to undergo an IPO and its revaluation occurs at about the same time as the restructuring for privatisation and during the periods covered by its first IFRS financial statements.
The staff provided two views to support a possible conclusion that a privatisation-triggered revaluation would qualify for 'deemed cost' under IFRS 1 , as follows:
- View A - The revaluation date falls within the periods covered by Newco's first set of IFRS financial statements even though that period includes predecessor periods of the restructured or carved-out business; or
- View B - The date of transition is Year 3 when Newco is formed because Newco cannot adopt IFRS before it was legally formed.
The Board agreed with the staff recommendation that the Board adopt View A and amend IFRS 1 to permit an entity to use the revaluation basis as deemed cost when the revaluation for a privatisation occurs during the period covered by its first set of IFRS financial statements, even if that revaluation date is after the entity's date of transition to IFRSs and before the entity's legal date of formation.
The rationale for this decision is that an SOE whose assets and liabilities are revalued contemporaneously with a privatisation and IPO is similar to a first-time adopter that established a deemed cost under previous GAAP. The similarity is also the same when such an SOE presents 'carved-out' financial statements because those financial statements related to a continuing business that was previously a portion of its predecessor's, was subsequently revalued by its predecessor, and is now transferred to be held by Newco. The staff therefore recommended that the Board should broaden the current exemption in paragraph D8 of IFRS 1 to cover such an SOE even though its revaluation was obtained during the period covered by its first set of IFRS financial statements and not prior to its date of transition to IFRS.
The Board then discussed how, under View A above, comparative information should be presented. The staff had considered two alternatives:
- Option A - establish the deemed cost on the date of transition to IFRSs using the revaluation amounts obtained in Year 3, adjusted to exclude any depreciation, amortisation or impairment between the date of transition to IFRSs and the date of that revaluation; or
- Option B - establish the deemed cost on the date of revaluation, present historical costs or previous GAAP amounts as permitted by IFRS 1 for the comparative periods prior to revaluation date.
Some Board members supported option B on the basis that it would be impossible to apply option A without employing hindsight. Other Board members supported option A on the basis that they believed that option B did not provide meaningful information. Overall the majority of the Board agreed with the staff recommendation of option B.
The Board agreed with the staff recommendation that retrospective application of these proposed amendments to IFRS 1 should be permitted but not required.
Existing IFRS Preparer
The Board agreed not to address how an existing IFRS preparer should account for a one-off restructuring for a privatisation or whether the revaluation in relation to that restructuring results in a change in accounting policy.
Accounting policy changes in the year of adoption
The issue under discussion was to clarify whether a first-time adopter is exempt from all the requirements of IAS 8 for the interim and annual periods presented in its first IFRS financial statements. If IAS 8 does not apply, what, if any, requirements apply if an entity changes its accounting policies between the first interim financial statements it presents in accordance with IFRSs and the first annual financial statements? In addition, although this was not part of the clarification requested, a similar question arises with respect to changes an entity might make in the IFRS 1 exemptions it chooses to apply.
The staff recommended that:
- IFRS 1 should continue to specify the required disclosures relating to first-time adoption and an entity's transition to IFRSs rather than referring to IAS 8. IFRS 1.27 should be amended to explicitly state that:
- (a) IAS 8 does not apply both to the entity's selection of accounting policies at the date of transition to IFRSs and to any changes to those policies made up to the date of the first annual IFRS financial statements, and
- (b) all of IAS 8's requirements related to changes in accounting policies do not apply (rather than only its disclosure requirements); and
- that the reconciliations required by paragraphs IFRS 1.27 and 32 must be updated for changes the entity makes during the year of first time adoption in accounting policies and in transitional choices made in accordance with IFRS 1.
The Board agreed with the staff recommendation.
- IAS 39 — Financial Instruments: Recognition and Measurement
- IFRS 1 — First-time Adoption of International Financial Reporting Standards
- IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors
- IAS 27 — Consolidated and Separate Financial Statements (2008)
- IAS 28 — Investments in Associates (2003)
- IAS 36 — Impairment of Assets