IAS 27 and SIC-13 — Accounting for the loss of control of a group of assets or a subsidiary between an investor and its associate or joint venture
This meeting is a follow on from the Committee’s meetings in January and March 2012 and IASB meeting in May 2012. The 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 whether the requirements of SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers and IAS 28 Investments in Associates and Joint Ventures (2011) would apply when a business is contributed to a jointly controlled entity (JCE) as defined in IAS 31 Interests in Joint Ventures, a joint venture (JV) as defined in IFRS 11 Joint Arrangements or an associate.
After the January 2012 meeting, the Committee noted that the submission was related to the issues arising from the inconsistency between the requirement in IAS 27 (2008) and SIC-13 in dealing with the loss of control of a subsidiary that is contributed to a JCE, a JV or an associate. IAS 27 requires full gain or loss recognition when there is a loss of control when a subsidiary is contributed to a JCE/JV or an associate in exchange for an equity interest in the JCE/JV or associate. SIC-13 only allows for a partial gain or loss arising from contributions of non-monetary assets to a JCE (i.e., the gain or loss is restricted to the extent of the interest attributable to the other equity holders in the JCE). The consequence is that the gain or loss (if any) accounted for under IAS 27 would be larger than that under SIC-13.
Because of such inconsistency, there is diversity in practice on the accounting for a loss of a subsidiary when it is contributed. The staff also noted that such an inconsistency would remain under IFRS 10 Consolidated Financial Statements and IAS 28 (2011).
In March 2012, the Committee decided to ask for the Board’s recommendation on how to proceed.
At the May 2012 meeting, the IASB discussed the following topics:
- Alternatives preferred by the Committee to resolve the inconsistency between IAS 27 and SIC-13; and
- Next steps on how the Committee should proceed with this project.
Alternatives preferred by the Committee to solve the inconsistency between IAS 27 and SIC-13
Alternatives presented at the Committee’s March 2012 and IASB May 2012 (which also included outcomes) meetings included:
- Alternative 1: account for all contributions in accordance with the rationale developed in IAS 27
- Alternative 2: account for all contributions of businesses (whether housed in a subsidiary or not) under IAS 27 and account for all other contributions under SIC-13
- Alternative 3: account for all contributions to JCE/JV or associate under SIC-13;
A majority of the Committee members considered Alternative 1 to be the most robust but they acknowledged it would require addressing other cross-cutting issues. Alternative 1 would allow for full gain recognition on all contributions regardless of whether it is a business. The Committee noted that Alternative 2 would be easier to implement, but had more focus on the definition of a business. Both Alternatives 1 and 2 would resolve the issue related to a contribution of a business as both would result in the same accounting (i.e., would allow for full gain recognition for a contribution that constitutes a business). The Committee rejected Alternative 3 as it is not consistent with decisions reached in IFRS 3 Business Combinations. The Committee also rejected other alternatives as they could potentially create structuring opportunities.
At its May 2012 meeting, IASB members discussed the Committee’s recommendations. Although some IASB members preferred Alternative 1 conceptually, they expressed concerns with proceeding with this alternative. In particular, IASB members expressed concerns related to the cross-cutting issues that Alternative 1 could present and that these issues might not be able to be addressed by the Committee on a timely basis.
The majority of the IASB expressed support for Alternative 2. They believed that it would be easier and take a shorter period of time to implement and also would have minimal cross-cutting issues.
The IASB and the Committee noted that:
- the accounting for the loss of control of a business as defined in IFRS 3 should be consistent with the latest thinking developed in the Business combinations project; and
- that a full gain or loss should therefore be recognised on the loss of control of a business, whether the business is housed in a subsidiary or not.
As groups of assets that do not constitute a business were not part of the Business combinations project, the IASB and the Committee concluded that:
- the current requirements in IAS 28 (2011) regarding the partial gain loss recognition for transactions between an investor and its associate joint venture should only apply to the gain or loss resulting from the sale or contribution of a group of assets that is not a business; and
- a partial gain or loss should also be recognised in accounting for the sale or contribution of a subsidiary that is not a business to an associate or joint venture.
To achieve this, the staff recommended that Alternative 2 should be implemented by amending only IAS 28 (2011) and IFRS 10 and not IAS 27 (2008) and SIC-13 as these would be superseded when the proposed amendments would be effective (2013):
- IAS 28 (2011) amendments:
- amend the current requirements regarding the partial gain or loss recognition for transactions between an investor and its associate or joint venture so that they only apply to the gain or loss resulting from the sale or contribution of a group of assets that is not a business as defined in IFRS 3; and
- the gain or loss resulting from the sale or contribution of a group of assets that is a business as defined in IFRS 3 to an associate or a joint venture is recognised in full.
- IFRS 10 amendments:
- the gain or loss resulting from the sale or contribution of a subsidiary that is not a business as defined in IFRS 3 to an associate or a joint venture is recognised only to the extent of unrelated investors’ interests in the associate or joint venture.
The result of these proposed amendments is that a full gain or loss would be recognised on the loss of control of a subsidiary that is a business as defined in IFRS 3, including cases in which the investor retains joint control of, or significant influence over the investee. The proposed amendments also intend to reiterate that when determining whether a group of assets or a subsidiary that is sold or contributed is 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 IFRS 10. B97.
At the July 2012 meeting, the Committee tentatively agreed to move the process forward, subject to editorial changes. A number of Committee members expressed concern with the precision of the wording/drafting of the amendments including the implications of removing the term non-monetary asset as well as including references to groups of assets and whether that would extend the scope of the amendments and whether there could be any unintended consequences. The staff agreed to consider these concerns and work on the drafting changes as well as to note the Committee’s concerns to the IASB.