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IAS 28 — Elimination of intercompany profits between an investor and its joint venture

Date recorded:

In January 2013, the Committee received a request to clarify the accounting for a transaction between a joint venturer (an entity) and its joint venture. The entity accounts for its interest in the joint venture using the equity method in accordance with IAS 28 which requires partial elimination of the gain recognised on transactions between an entity and its associate or joint venture. The request describes a circumstance in which the amount of a gain in a ‘downstream’ transaction that is to be eliminated in the entity’s financial statements exceeds the amount of the entity’s interest in the joint venture. Specifically, the submitter requested that the Committee should clarify whether:

  1. the gain from the transaction should be eliminated only to the extent that it does not exceed the carrying amount of the entity’s interest in the joint venture; or
  2. the remaining gain in excess of the carrying amount of the entity’s interest in the joint venture should also be eliminated and, if so, what element in the financial statements it should be eliminated against.

IAS 28, paragraph 28 clearly states that gains and losses resulting from ‘downstream’ transactions between an entity and its associate or joint venture are recognised in the entity’s financial statements only to the extent of unrelated investors’ interests in the associate or joint venture. Therefore staff recommended that this should apply under all circumstances and hence support view b. In May 2013, the IFRS Interpretations Committee also supported view b and decided to recommend that the IASB should make a narrow-scope amendment to IAS 28 Investments in Associates and Joint Ventures.

There was also discussion around how to eliminate the gain from a “downstream” transaction. The Committee agreed with the staff proposal on method 1 under which the gain to be eliminated in excess of the carrying amount of the entity’s interest in an associate or joint venture should be presented as a gain.

Staff asked whether the IASB agree with the Committee’s recommendation to address this issue by amending IAS 28 through a narrow-scope project.

One member raised the concern that the scenario above looks at joint ventures and the standards applied to associates. For this member to recognise a liability exceeding losses seemed strange, especially if staff were proposing to make this into a rule. Further the member added there is a conflict between paragraph 39 of IAS 28 which requires the preparer of financial statements to exercise judgement and paragraph 28. Staff should address this conflict within the amendment and the board to remain neutral with regards to this matter.

Another member highlighted the key here is the elimination of gains from downstream transactions and therefore staff recommendation should be followed as it addresses that. Hence the staff proposal should be accepted.       

The board concluded to follow staff’s recommendation and address this issue by amending IAS 28 through a narrow scope project, where the gain should be eliminated in full against the carrying amount of the interest and recognise any excess as a gain.

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