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IASB proposes clarifications on when unrealised profits are eliminated when equity accounting

Dec 13, 2012

The International Accounting Standards Board has published ED/2012/6 'Sale or Contribution of Assets Between and Investor and its Associate or Joint Venture (Proposed Amendments to IFRS 10 and IAS 28)'. The Exposure Draft proposes to clarify when unrealised profits and losses on transactions between an investor and an associate should be fully recognised: requiring full recognition in relation to transactions involving businesses, but requiring partial elimination in the case of asset sales.

The Exposure Draft proposes amendments to both IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011). No amendments are proposed to IAS 27 Consolidated and Separate Financial Statements and IAS 28 Investments in Associates as these pronouncements will be superseded from 1 January 2013, i.e. before the amendments proposed in the Exposure Draft can be finalised.

The matter dealt with in the proposed limited scope amendment initially arose from a request to the IFRS Interpretations Committee to clarify the meaning of 'non-monetary asset' used in SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers and IAS 28 (2011) (the requirements of SIC-13 were incorporated into this standard).

The Committee's consideration of this issue subsequently broadened to the apparent conflict between the requirements of SIC-13, which requires the elimination of unrealised profits on the contribution of assets to a joint venture, and IFRS 10/IAS 27 (2008) which require the full recognition of a gain/loss on loss of control of a subsidiary.

In developing the proposed amendment, the Committee and IASB focused on the conceptual basis considered when developing the requirements of IFRS 3 Business Combinations, which considers the gaining or losing of control as a significant economic event that triggers remeasurement and gain/loss recognition.

Because those requirements were developed in the context of transactions involving businesses, the proposed amendments in the Exposure Draft propose to require full gain or loss recognition for transactions between investors and associates only where a sale of contribution of assets constitutes a business.

The requirement to fully recognise gains/losses in transactions involving businesses would apply regardless of the legal form of the transaction in which such a business was transferred, e.g. through the sale of a group of assets and liabilities, through the sale and purchase of an investment in a subsidiary, or in some other manner.  Existing guidance on 'linked transactions' in IFRS 10 would be explicitly extended to these types of transactions as well.

The Basis for Conclusions accompanying the proposed amendments notes that consideration was given as to whether all sales and contributions between an investor and an associate should give rise to fully recognised gains and losses as "the most robust [alternative] from a conceptual point of view".

However, because the premise behind the proposals for full recognition noted above are linked to the existence of a business and the IASB's considerations in the business combinations project, this proposal was considered too broad for a narrow scope amendment as it would involve multiple cross-cutting issues.  These issues might include the conceptual basis of the equity method, i.e. whether it is considered a 'one line consolidation' or a 'measurement basis'.

Accordingly, the exposure draft would retain and clarify the existing requirements for partial gain recognition for sales or contributions of assets that do not constitute a business.

The amendments, if finalised as proposed, would be applied on a prospective basis only, on the basis of the discrete and non-recurring nature of affected transactions and associated cost-benefit grounds.

ED/2012/6 is open for comment until 23 April 2012.  Click for IASB press release (link to IASB website).