The option to apply the equity method had been removed during the 2003 revision of IAS 27 Consolidated and Separate Financial Statements as the IASB noted at that time that the information provided by the equity method is reflected in the investor's economic entity financial statements and that there was no need to provide the same information in the separate financial statements. The decision was carried forward to IAS 27 Separate Financial Statements in 2011. Constituent feedback to the Agenda consultation 2011, however, led the IASB to reconsider the option and to publish ED/2013/10 Equity Method in Separate Financial Statements (Amendments to IAS 27) with the proposal to reinstate the option.
Separate financial statements are not required by IFRSs. In general, separate financial statements are required by local regulation or other financial statement users. In some jurisdictions, corporate law does also require the use of the equity method in separate financial statements to measure investments in subsidiaries, joint ventures and associates. Accordingly, in jurisdictions that apply IFRSs and have the equity method requirement, two sets of financial statements need currently be prepared to meet the requirements of both IAS 27 and local laws.
The amendments allow an entity to account for investments in subsidiaries, joint ventures and associates in its separate financial statements
- at cost,
- in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9), or
- using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.
The accounting option must be applied by category of investments.
The amendments also clarify that when a parent ceases to be an investment entity, or becomes an investment entity, it shall account for the change from the date when the change in status occurred.
In addition to the amendments to IAS 27, there are consequential amendments to IAS 28 to avoid a potential conflict with IFRS 10 Consolidated Financial Statements and to IFRS 1 First-time Adoption of International Financial Reporting Standards.
Given that the definition of separate financial statements has long been an area of confusion, the IASB has made changes to confirm that separate financial statements are those presented in addition to consolidated financial statements or in addition to the financial statements of an investor that does not have investments in subsidiaries but has investments in associates or joint ventures in which the investments in associates or joint ventures are required by IAS 28 Investments in Associates and Joint Ventures to be accounted for using the equity method.
The IASB refrained from providing transitional relief as entities should be able to use the information that is used for the consolidation of subsidiaries in their consolidated financial statements without performing any additional procedures. Also, the IASB concluded that information in the financial statements of ultimate, or intermediate, parents could be used on the initial application of the amendments. Finally, the IASB points out in its Basis for Conclusions, that the application of the equity method in separate financial statements is optional and not mandatory.
The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The amendments are to be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.