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Equity method in separate financial statements

Date recorded:

The project manager opened the session by giving an overview of the comments that the Board had received on its Exposure Draft (the ED). Generally, there had been overwhelming support for the proposed inclusion of the equity method in IAS 27 to account for investments in subsidiaries, associates and joint ventures. Those who disagreed cited the introduction of yet another option to IAS 27 as well as the inclusion of an accounting treatment which was still under review generally. As regards the specific questions of the ED as well as other comments, the project manager summarised the views of those agreeing and disagreeing with the respective treatments.

A Board member addressed one of the comments raised by respondents, being the accounting for dividends, where they had requested a adding a cross-reference to IFRS 9. The Board member cautioned about including a cross-reference to IFRS 9. She noted that this had been provided for very specifically in the context of IFRS 9 because of the prohibition on recycling for equity investments measured at OCI. She added that the specific reference to dividends had been to prevent people describing something as a dividend that could be recognised in profit or loss, which was really a return of capital that otherwise wouldn’t be able to be recycled.

Another Board member asked for a clarification regarding the investments the equity method could be applied to. For example, if an entity had a number of associates, could it select on a case by case basis which associates it applied the equity method to? The staff member responded noting that IAS 27 required that a consistent method be applied to all investments in a particular category. Accordingly, all associates would be accounted for using the same method, and likewise for all joint ventures. He added that the staff intended to bring additional analysis on this aspect to the next Board meeting.

Another Board member commented on the concerns raised in the feedback. She recognised that this was a facilitative amendment, and accordingly, the Board didn’t want to go to a lot of effort to provide guidance on how to apply the equity method. However, she noted her concerns that if there was nothing in terms of guidance, questions would come to the IFRS Interpretations Committee. She wondered whether there was any way for the Board not to provide a lot of guidance and prevent questions coming to the IFRS Interpretations Committee. The staff member responded noting that this was only a facilitative amendment, which was referring to using the equity method procedures as described in IAS 28. He noted that, as a consequence, IAS 28 might need to be amended to make it consistent with the accounting for a subsidiary using the equity method. He further noted that providing too much guidance could result in amendments to IAS 28. Another Board member agreed with not giving guidance because not all problems could be solved. He also questioned whether, in jurisdictions that might prohibit a parent company from applying this amendment, that jurisdiction was really applying IFRSs. In response to the question raised above, another Board member noted that many jurisdictions had regulatory requirements and noted that where IFRS had options and the jurisdiction prohibited one of those options, the financial statements would still be considered IFRS compliant. He used Brazil as an example, where securities regulators prohibited the use of the revaluation method in IAS 16, but financial statements were still IFRS compliant.

Another Board member noted that retrospective application should be required and added that retrospective application was always going to be backstopped by IFRS 1 and the date of an entity’s first-time adoption of IFRSs. She further noted that because this amendment was being provided in response to a request (from many jurisdictions), the proposed amendments should be applied retrospectively. Another Board member questioned even continuing with the project given there were so many open questions. He added that the Board would likely receive a lot of questions over the next couple of years. Another Board member noted that this was a good facilitative amendment that answered a need.

Reference was made to the equity method accounting project; however, it was noted by the Vice Chairman that the Board needed to be clear that this project was on the research agenda, not on the Board’s active agenda; consequently, he cautioned about raising expectations that this would be on the Board’s agenda. Another Board member noted that the Board should continue with the project, noting that it would be almost impossible to back out now.

A further Board member wondered whether the same net assets and net income would be seen in both a set of consolidated financial statements and in the parent company’s separate financial statements if all investments were accounted for using the equity method. The staff member responded, noting that with the current guidance in IAS 28, this would not necessarily be the case as there were certain differences in the accounting. He provided the examples of the impairment testing requirements in IAS 28, the accounting for acquisition related costs, the situation where a subsidiary had a net liability position, and the accounting for borrowing costs.

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