Issues from the IFRS Interpretations Committee
The IASB discussed two issues recently considered by the Committee.
IAS 28 Investments in Associates and Joint Ventures – Application of the equity method when an associate’s equity changes outside comprehensive income
At its March 2012 meeting, the Committee considered a request to correct an inconsistency between the requirements of IAS 28 (revised 2011) and IAS 1 Presentation of Financial Statements (revised 2007) regarding the description and application of the equity method and clarify the accounting for the investor’s share of changes in the investee’s net assets that are not recognised in the investee’s profit or loss or other comprehensive income and are not distributions received (e.g., movements in other reserves of the associate or gains and losses arising on an associate’s transactions with non-controlling interests of its subsidiaries).
At that meeting, the Committee affirmed certain principles. Namely, where an investor’s share ownership interest in the associate is reduced, whether directly or indirectly, the affect of the change should be recognised in profit and loss of the investor; and where an investor’s share ownership interest in the associate increases, whether directly or indirectly, the affect of the change should be accounted for as an incremental purchase of the associate and should be recognised at cost.
The Committee decided not to address equity settled share-based payments of the associate and written call options issued by the associate for an asset because of concern about the complexity of these types of transactions. Therefore, the Committee instructed the staff to recommend to the IASB that IAS 28 (revised 2011) should be amended to incorporate the tentative principles established from previous meetings but not to address equity-settled share-based payments or written call options.
At this meeting, the staff asked the Board if it agreed with the Committee recommendations. Many Board members believed that the most important question that needs to be addressed is whether, for the purposes of accounting for other net asset changes in associates, the equity method should be treated as a one-line consolidation methodology or a valuation methodology. They noted that IAS 28 currently requires certain aspects of the equity method to be applied using a consolidation type methodology, while other aspects require the use of a valuation methodology, which is acknowledged in paragraph 26 of IAS 28. Coupling with this more broad concern, many Board members were troubled that the Committee’s recommendation would not address equity settled share-based payments of the associate and written call options issued by the associate for an asset.
Through deliberations, Board members expressed support for IAS 28 having as its core principle a consolidation methodology for purposes of accounting for other net asset changes in associates. The Board requested that the staff bring back an agenda paper to a future meeting which applies a one-line consolidation ideology and considers whether changes in the parent’s share of other net assets should be recognised in equity, other comprehensive income or profit or loss.
IFRS 1 First-time Adoption of International Financial Reporting Standards – Meaning of effective IFRSs
At its May 2012 meeting, the Committee considered a request to clarify the meaning of ‘effective’ in paragraph 7 of IFRS 1 when the issuance of an IFRS which is not yet mandatorily effective results in two possible versions of an IFRS that are potentially effective at the end of an entity’s first IFRS reporting period.
At that time, the Committee noted that if a new IFRS is not yet mandatorily effective but permits early application, the entity would be permitted, but not required, to apply that IFRS in its first IFRS financial statements provided that the IFRS is applied throughout all periods presented in its first IFRS financial statements.
The Committee observed that the requirement in paragraph 7 was clear, but acknowledged necessary clarifications to paragraph BC11 to avoid misunderstanding. Consequently, the Committee decided to recommend that the IASB amend BC11 through Annual Improvements by adding a new paragraph in the Basis for Conclusions.
At this meeting, the staff provided the IASB with the draft revision to the Basis for Conclusions to clarify the meaning of ‘effective’ IFRSs and recommended its inclusion in the next Annual Improvements cycle. With no objections, the IASB tentatively agreed with the recommendation to amend IFRS 1 as part of the annual improvements project.