Inconsistency between IAS 27 and SIC-13
The Board discussed the inconsistency between the requirements in IAS 27 and SIC-13 relating to the accounting for gains and losses resulting from contributions of non-monetary assets to joint arrangements. The Board was reminded that SIC-13 requires gains or losses arising from contributions of non-monetary assets to a jointly controlled entity (JCE) to be recognised only to the extent of the interest attributable to the other equity holders. Where the non-monetary asset consists of a subsidiary that is contributed to a JCE, IAS 27 requires the assets and liabilities of the subsidiary to be derecognised and gains or losses to be recognised in full in profit or loss.
Several Board members supported the proposal to incorporate the current requirements of SIC-13 in the proposed Standard on Joint Ventures, but they questioned when the inconsistency would be addressed. It was pointed out that the areas that will need to be addressed to resolve the inconsistency will require further work to be performed and may result in the clarification of the scope and interaction between IFRS 3, IAS 27, IAS 31, and IAS 28. This will most likely delay the publication of the new Joint Ventures Standard.
A short discussion followed on whether it is possible for the Board to finalise the Joint Ventures Standard and what the most appropriate way would be in which to address the inconsistency. One Board member suggested that it be included in the post-implementation review of IFRS 3 and IAS 27.
When put to a vote, the Board unanimously agreed to incorporate the current requirements of SIC-13 in the consequential amendments to IAS 28 and to resolve the inconsistency separately from the Joint Ventures project.
Consequential amendments to IAS 28
The Board discussed the requirements of paragraph 5 of SIC-13 which lists the following circumstances in which it is not appropriate to recognise a portion of a gain or loss from the contribution of a non-monetary asset to a JCE:
- significant risks and rewards of ownership have not been transferred; or
- gain or loss on contribution cannot be measured reliably; or
- the transaction lacks commercial substance.
The Board deliberated whether those requirements should be carried forward to the new Joint Ventures Standard. The Board considered that the focus of ED 9 was on a control approach as opposed to a risks and reward approach. It acknowledged that the transfer of risks and rewards was not decisive in establishing whether control exists, but only an indicator of control. The Board further considered that the requirement of reliable measurement is stated in the Framework and that is was unnecessary to repeat statements from the Framework when discussing recognition.
The Board also noted that the requirement relating to a transaction that lacks commercial substance was designed to prevent the recognition of gains where an entity enters into an artificial transaction with the intention to 'manufacture' a gain through inflated values.
The Board unanimously agreed to only incorporate this requirement and omit the other two requirements from the new Standard. The Board considered further concerns raised by respondents to ED 9 regarding the omission of the existing requirements of IAS 31 regarding impairment losses. Several Board members noted that it was not the intention of ED 9 not to incorporate the guidance from IAS 31 and it was agreed to include the guidance in the new Standard.