Equity method in separate financial statements

Date recorded:

The project manager introduced the agenda paper. He said that the paper addressed the comments received from respondents.

He continued by saying that the first issue dealt with the application of the elected method of accounting for investees. He said that IAS 27 permitted the investor to elect a different method of accounting for each category of investment. As an example, that could lead to subsidiaries being accounted for at cost, associates being accounted for using the equity method and joint ventures being accounted for using fair value. He said that respondents had asked the Board to assess the purpose of separate financial statements. However, he thought that this was only a facilitative amendment and therefore suggested to adhere to the principles of IAS 27 stated in the Basis for Conclusions. He said those principles stated that the purpose was to assess the assets as equity investments. He asked the Board whether they agreed with the staff’s recommendation to amend IAS 27 to require an investor to elect a method of accounting for the investee on an instrument-by-instrument basis as this would be more in line with the principles of an individual assessment of equity investments.

One Board member asked whether there would be guidance on how to decide on an accounting method. The project manager replied it would be a free choice. He said that the advantage of the amendment would be that the accounting would not have to be changed when there was a change in the status of the investment (e.g. from subsidiary to associate). The Board member asked whether this meant that although two subsidiaries had substantially the same activities, they could be accounted for differently. The project manager confirmed this.

Another Board member asked her fellow Board members whether anyone saw a comparability problem. She also asked whether the staff meant instrument-by-instrument or rather investee-by-investee. The project member said that the idea was investee-by-investee.

One Board member said he was concerned about the fact that when a change in status occurred, e.g. from associate to subsidiary, the investor had no ability to change the accounting to make it consistent with other subsidiaries. The project manager replied that he knew that comparability was an issue with separate financial statements, but thought that the amendment would better reflect the intention of the standard. The Board member agreed that it was simpler, but the amendment had conceptual flaws. He said that it would give a lot of leeway for structuring. The Board member asked the project manager to confirm that a change of accounting method would not be permitted at a change in status. The project manager confirmed this.

Another Board member said that although investors had a choice, it was not a free choice of which accounting method they could use. For example, investment entities would not have a choice as they had to account for their investments in subsidiaries at fair value.

One Board member came back to the question how Board members saw the comparability issue, which had been raised by another Board member. He said that he was not sure whether separate financial statements would actually be used as a basis for information. He further said that the election should actually be allowed on an instrument-by-instrument basis as, for example, an investor could have different intentions for ordinary shares of an investee and preference shares of the same investee. He said that the accounting should be able to reflect those different intentions.

Another Board member said that in light of the amendment being a facilitating amendment, the Board should not change the requirements for the accounting by category. She said that the Board had not thought enough about separate financial statements to understand the unintended consequences that came with the amendment recommended by the staff. Also, she said that not all constituents had demanded this amendment. Considering that it would also prohibit investors from changing their classification on a change in status, some constituents might object to this change. Therefore, she felt that the change required re-exposure. In light of this she suggested not to go forward with the change.

One Board member supported the staff’s view not to undertake a fundamental assessment of separate financial statements in this amendment. She said that the amendment should continue to be facilitative and should therefore not look into issues that had not been addressed in the exposure draft. She reminded the Board that the objective was to allow the application of IFRSs for separate financial statements in countries where the equity method was required, which would be achieved without the instrument-by-instrument amendment.

Upon calling a vote, the IASB agreed not to include the instrument-by-instrument amendment.

The project manager continued by asking Board members whether they agreed with the staff’s recommendation to allow using the carrying value of the net assets of the investee attributable to the investor in the investor’s consolidated financial statements or those of the investor’s ultimate or intermediate parent to arrive at the opening balance of the investment on initial application of the proposed amendments or on first-time adoption.

One Board member said that she would not fundamentally object to this proposal on conceptual grounds, however, she was concerned that there would be too many alternatives available. She asked how pervasive the problem had been in the comments received. The project manager replied that the comments were balanced, i.e. around 50% had asked for transition relief while 50% had not. The Board member replied that the problem might be fixable by postponing the mandatory effective date to give entities more time to calculate their opening balance. She said that she did not see the need to solve the problem in this amendment.

Another Board member disagreed with the staff’s recommendation to clarify that dividends would be accounted for in accordance with IFRS 9 when an entity elected to account for the investments in accordance with IFRS 9. He said that this had not been exposed and, therefore, should not be changed. The project manager replied that they had discussed dividends with the revenue project team. He said that upon issuance of IFRS 15 the revenue recognition guidance for dividends would be moved to IFRS 9. To avoid further amendments, the staff would like to incorporate the recognition criteria for dividends in IAS 27. He also said that the exposure draft proposed to recognise dividends in profit or loss. Some respondents had commented that if an entity elected to account for their investments in accordance with IFRS 9, the requirements of IFRS 9 with regard to dividend recognition would apply, particularly if the investment was classified at fair value through OCI. Those respondents suggested clarifying this in IAS 27. The Board member replied that without re-exposure, unintended consequences of this amendment might not be discovered.

Another Board member agreed with this view. She said that IFRS 9 referred to IAS 18 for recognition of dividends and that it would only be incorporated in IFRS 9 when IFRS 15 became effective, which would be in 2017. She therefore suggested saying as little as possible about dividends in this amendment and relying on the requirements of other IFRSs.

Upon calling a vote, the IASB disagreed with the staff’s recommendation.

The project manager continued by asking the Board whether they agreed with the staff’s recommendation to amend the definition of separate financial statements and explicitly state that the financial statements of an investor that has no investments in subsidiaries and has investments in associates or joint ventures which are accounted for in accordance with IAS 28 were not separate financial statements.

One Board member said that with this recommendation, too, she was worried about unintended consequences. She said that amending the definition without exposing for comment would probably lead to problems. She said from this definition it was unclear whether an investment entity that did not consolidate its subsidiaries did in fact prepare separate financial statements. She suggested adding the proposed amendment as an observation to the Basis for Conclusions.

Another Board member supported this by saying that the intention was not to change the current practice of equity accounting. The project manager replied that respondents had asked for amendments of IAS 28 to provide guidance on subsidiaries that are accounted for using the equity method. He said that the staff recommendations made in the agenda paper would help to solve this problem. A Board member replied that he thought the scope should be the same as in the exposure draft.

The project manager asked whether the amendments should be finalised without amendment and, therefore, without re-exposure and whether the effective date should be 1 January 2016, as proposed. The Board agreed.

The project manager asked whether the Board was satisfied that all due process steps applicable had been complied with and whether any of the Board members intended to dissent from the final amendment. The Board was satisfied with the due process and no IASB member intended to dissent.

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