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IFRS 1/IAS 27 – Cost of a subsidiary in separate financial statements

Background

In March 2006, the IASB considered a proposal to prepare an amendment to IFRS 1 First-time Adoption of IFRSs to address problems in the separate financial statements of the parent:

  • Initial cost. In some cases it is difficult to determine the initial cost of an investment in a subsidiary in the separate financial statements of a parent, in accordance with IAS 27 Consolidated and Separate Financial Statements when an entity adopts IFRS for the first time. This difficulty has been highlighted by the use of merger relief accounting in the United Kingdom and other countries. Under merger relief accounting, any shares provided as consideration for the purchase of an investment in a subsidiary are recorded (for the purposes of cost) at their nominal value. This nominal value is not cost in accordance with IAS 27, which requires that the cost be stated initially at the amount of consideration paid.
  • Post acquisition dividends. IAS 27 requires that the initial cost is adjusted for any dividends paid out of pre-acquisition reserves, and impairments. When the cost of investment is restated under IAS 27, on transition to IFRS, the pre-acquisition retained earnings would also need to be restated accordingly in order to determine which distributions are a recovery of the initial investment. This would require a reconstruction of pre-acquisition reserves under IFRS. Constituents argue that the related compliance burden has led to many entities choosing to prepare the separate financial statements of parent entities in local GAAP rather than in accordance with IFRS.

These issues had been raised to the IFRIC. The IFRIC referred them to the IASB on the grounds that this is not a matter of interpretation, the standards are clear and do not provide any basis for granting the relief sought.

 

Current status of the project

This project has been completed. The IASB issued Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (Amendments to IFRS 1 and IAS 27) on 22 May 2008.

 

Project milestones

DateDevelopmentComments
March 2006 Added to the IASB's agenda
25 January 2007 Exposure Draft Cost of an Investment in a Subsidiary (Proposed Amendments to IFRS 1) published Comment deadline 27 April 2007
13 December 2007 Revised Exposure Draft Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (Proposed Amendments to IFRS 1 and IAS 27) published Comment deadline 26 February 2008
22 May 2008 Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (Amendments to IFRS 1 and IAS 27) issued Effective for annual periods beginning on or after 1 January 2009

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