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IAS 28/IFRS10 — Partial gain recognition on transactions with associates and joint arrangements

Date recorded:

The Interpretations Committee received a request to clarify whether a business meets the definition of a ‘non-monetary asset’. The question was asked within the context of identifying whether the requirements of SIC-13 Jointly Controlled Entities—Non-Monetary Contributions by Venturers and IAS 28 Investments in Associates and Joint Ventures (revised in 2011) apply where a business is contributed to:

  1. a jointly controlled entity (JCE) as defined in IAS 31 Interests in Joint Ventures; or to:
  2. a joint venture (JV) as defined in IFRS 11 Joint Arrangements; or to:
  3. an associate

in exchange for an equity interest in that JCE/JV or associate.

At the January 2012 Interpretations Committee meeting, the Committee noted that this matter was related to the issues arising from the acknowledged inconsistency between the requirements in IAS 27 Consolidated and Separate Financial Statements (revised in 2008) and SIC-13, in dealing with the loss of control of a subsidiary that is contributed to a JCE/JV or an associate. SIC-13 restricts gains and losses arising from contributions of non-monetary assets to a JCE to the extent of the interest attributable to the other equity holders in the JCE. IAS 27 (2008) requires full profit or loss recognition on the loss of control of the subsidiary. It was noted that this inconsistency will remain when IFRS 10 Consolidated Financial Statements replaces IAS 27 (2008) as the requirements of IFRS 10 on accounting for the loss of control of a subsidiary are similar to those in IAS 27 (2008) and IAS 28 contains the requirements of SIC-13.

At the May 2012 IASB meeting, the IASB discussed three alternatives that would address the inconsistency that had been noted:

  • Alternative 1 — account for all contributions in accordance with the rationale developed in IAS 27 (2008) (i.e. full gain recognition);
  • Alternative 2 — account for all contributions of businesses (whether housed in a subsidiary or not) in accordance with the rationale developed in IAS 27 (2008) (i.e. full gain recognition) and account for all other contributions in accordance with the rationale developed in SIC-13 (i.e. partial gain recognition); and
  • Alternative 3 — account for all contributions to a JCE/JV or associate in accordance with the rationale developed in SIC-13 (i.e. partial gain recognition).

The IASB members expressed support for alternative 2 and at the July 2012 Interpretations Committee meeting, some proposed amendments to IAS 28 (2011) and IFRS 10 were proposed due to the conflict between the requirements of IAS 28 (2011) and IFRS 10. Also prior to this IASB meeting, the IASB and the Interpretations Committee had concluded that a full gain or loss should be recognised on the loss of control of a business, whether the business is housed in a subsidiary or not. It was recommended that IAS 28 (2011) be amended so that:

  1. the current requirements regarding the partial gain or loss recognition for transactions between an investor and its associate or joint venture only apply to the gain or loss resulting from the sale or contribution of assets that do not constitute a business as defined in IFRS 3 Business Combinations; and
  2. the gain or loss resulting from the sale or contribution to an associate or a joint venture of assets that constitute a business as defined in IFRS 3 is recognised in full.

It was also recommended to amend IFRS 10 so that the gain or loss resulting from the sale or contribution of a subsidiary that does not constitute a business as defined in IFRS 3 to an associate or joint venture is recognised only to the extent of unrelated investors’ interests in the associate or joint venture.

The consequence of these proposed amendments is that a full gain or loss would be recognised on the loss of control of a subsidiary that constitutes a business as defined in IFRS 3, including cases in which the investor retains joint control of, or significant influence over, the investee.

It was also proposed to add a reminder that when determining whether a group of assets or a subsidiary that is sold or contributed constitutes a business as defined in IFRS 3, an entity should consider whether that sale or contribution is part of multiple arrangements that should be accounted for as a single transaction in accordance with the current requirements in paragraph B97 of IFRS 10.

It was noted that both “upstream” (i.e. sale of assets that do not constitute a business from an associate or joint venture to the investor) and “downstream” (i.e. sale or contribution of assets from the investor to its associate or its joint venture) transactions would be affected by the proposed amendments and that the proposed amendments in paragraph 28 of IAS 28 (2011) would affect the sale or contribution of all types of assets (i.e. to both monetary and non-monetary assets).

The staff noted that the proposed amendments to IFRS 10 and IAS 28 (2011) should not be applied before the amendments regarding the loss of control of a subsidiary in IAS 27 (2008) became effective. Three transition requirements were proposed:

  • Alternative 1 apply the proposed amendments prospectively to contributions or sales occurring in annual periods beginning on or after the date that the proposed amendments would become effective.
  • Alternative 2 apply the proposed amendments prospectively to contributions or sales occurring after the beginning of the earliest comparative period of the financial statements in which the proposed amendments would be applied for the first time.
  • Alternative 3 — apply the proposed amendments prospectively to contributions or sales occurring in annual periods beginning on or after 1 July 2009 (i.e. from the date that the requirements in IAS 27 (2008) regarding the loss of control of a subsidiary were applied).

The staff highlighted that they did not consider that by adopting alternative 3, an entity would have to restate many transactions and that any restatements would not be impractical. The staff recommended alternative 3.

The staff proposed that the amendments to IFRS 10 and IAS 28 (2011) be part of a narrow-scope IASB project. An Exposure Draft was proposed for December 2012 with 120 day comment period. The staff asked the Board whether they agreed with the proposed amendments to IFRS 10 and IAS 28 (2011), the proposed transition requirements and to publishing an Exposure Draft with a 120 day comment period based upon the amendments.

Only two Board members commented on the staff proposals with respect to the transition period and preferred alternative 1 as the proposed alternative 3 was not consistent with changes that had been made to business combination/acquisition standards in the past where changes were not made retrospectively. Other Board members were also in agreement.

Subject to alternative 1 as the choice for the transition period, all Board members tentatively agreed to the staff proposals and recommendations.