IAS 28 — Application of the equity method when an associate’s equity changes outside comprehensive income
At the June 2012 meeting, the IASB discussed an IAS 28 amendment proposed by the IFRS Interpretations Committee which aimed to provide guidance on whether and where an investor should account for its share of the changes in the net assets of the associate that are not recognised in profit or loss or other comprehensive income (OCI) of the associate (i.e., ‘other net asset changes’). Several Board members disagreed with the proposed amendment citing concerns that it did not address all types of other net asset changes that could occur in practice (e.g., share-based payments in an associate) as well as causing complexity arising from an asymmetry in accounting between a reduction and an increase in the investor’s share ownership interest in an associate. As such, the IASB asked the staff to analyse the following views for where an investor could recognise such changes: 1) investor’s equity, 2) investor’s OCI or 3) investor’s profit or loss for discussion at the next meeting.
At the July 2012 meeting, the IASB discussed the following views for accounting for other net asset changes of an associate:
- View 1: recognise share of associate’s other net asset changes in investor’s equity:
- This view is consistent with the ‘one-line consolidation’ perspective and provides some symmetry by recognising the other net asset changes in the same part of the investor’s financial statement as it is recognised in the associate’s financial statements.
- In addition, it was noted that prior to the consequential amendment to IAS 28, the investor’s share of changes in the investee’s equity was required to be recognised in the investor’s equity. If there had been an unintentional oversight in the consequential amendment leading to a lack of clarity, then equity could be seen as the logical place to recognise the changes which would be in line with the original requirements of IAS 28.
- View 2: recognise share of associate’s other net changes in investor’s OCI:
- This view notes that IAS 1 precludes the associate’s other net asset changes from being regarded as ‘owners transactions’ from an investor’s perspective and therefore prevents such changes from being presented within equity (as an associate is not considered as part of the consolidated group under IFRS 10 Consolidated Financial Statements/IAS 27 Consolidated and Separate Financial Statements).
- View 3: recognise share of associate’s other net asset changes in investor’s profit and loss:
- This view notes that the equity method is the basis of measurement of a financial asset investment and that changes in the measurement of financial assets should be recognised in profit or loss.
A few Board members noted that conceptually the changes should go through either profit and loss or OCI. However, these Board members acknowledged that the work on defining performance had yet to be completed.
The Board noted that the tentative decision taken below was not a conceptual answer but rather a pragmatic short term solution to address current diversity in practice.
The IASB tentatively decided that an investor should account for its share of the changes in the net assets of the associate in equity (i.e., View 1). The IASB also tentatively decided that given the significant change this amendment would have on current practice, it would issue a separate exposure draft to amend IAS 28 rather than to include it as part of the annual improvement. No additional amendment to IFRS 1 First-time Adoption of International Financial Reporting is required and the amendment would apply retrospectively. The comment period should be no less than 120 days.