This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.

IAS 28 — Application of the equity method when an associate's equity changes outside of comprehensive income

Date recorded:

The Board previously requested that the Committee further analyse an issue related to IAS 28 Investments in Associates and the equity method of accounting. The issue focuses on the fact that paragraph 3 of IAS 28 indicates that all changes in the net assets of an investee should be recognised by the investor. However, because of the consequential amendments to paragraph 10 of IAS 28, the standard no longer states whether and where the investor should account for its share of changes in the net assets that are not recognised in net profit or other comprehensive income of the investee (such as movements in other reserves of the associate or gains and losses arising on an associate's transactions with non-controlling interest of its subsidiaries).

At this meeting, the staff attempted to derive underlying principles to address this issue by looking at practical examples. Based on the examples outlined in the staff agenda papers, the staff developed the following underlying principles:

  • Any reduction in the investor's shareholding should be treated as a disposal of the related interest, with the resulting gain or loss recognised in profit and loss.
  • Any increase in the investor's shareholding should be treated as an acquisition of the related interest and should be accounted for at cost (i.e., no gain or loss recognised in comprehensive income).
  • Any transaction that does not affect the investor's share of the associate's net assets (i.e., equity settled employment options) will be offset for the purposes of applying the equity method.

With little debate, Committee members agreed with the first two principles, but many concerns were raised with respect to the third principle. These concerns were more a function of timing of recognition. Specifically, many Committee members saw share-based payments as operating transactions, and therefore, they preferred recognition in profit and loss on issuance. Other Committee members preferred treatment as a financing transaction whereby a credit would be recognised against the investment in the associate at the date of option grant with a true-up at option exercise.

As no progress was made on the third principle (employee options), the Committee asked that the staff develop examples illustrating the third principle. In drafting these examples, the Committee asked that the staff also develop examples considering both equity and cash settled awards as well as examples of the accounting for shareholder's equity in equity method accounting. This analysis will be brought back in a future meeting.