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IFRS Interpretations Committee issues

Date recorded:

Narrow-scope amendments to IFRS 10 Consolidated Financial Statements – Investment Entities Amendments – an investment entity subsidiary that also provides investor-related services

In this paper staff summarised the issue and the Interpretations Committee’s discussions on the issue and set out the staff’s rationale for recommending that the Board should amend IFRS 10. A staff member noted that, as described in paragraph 29 of the paper, when the staff was deliberating these amendments generally and this issue came up about investment entities providing third party services, the fact patterns provided to the staff indicated that investment entities providing third party services would do so in a separate service subsidiary that would not hold direct investments itself. She noted that the staff had been alerted to recent changes in regulatory requirements that would require entities that manage third party capital to also have minimal direct investment themselves. She noted that this would not change the staff’s recommendation, because in this case, if an entity providing third party services only had a minimal direct investment, then it would not qualify as an investment entity itself, and therefore, should be consolidated as a service providing subsidiary. The staff member asked the Board whether they agreed with the Interpretations Committee’s analysis and recommendation to amend IFRS 10. Several Board members indicated that they were in agreement with the analysis and recommendation.

One Board member noted that he didn’t agree with the recommendation noting that there could be situations where the economics are the same, but based on the structure, one could arrive at different accounting. The staff member responded that the reasoning behind the staff’s recommendation was to be consistent with the June 2012 decision that an investment entity parent should measure investment entity subsidiaries at fair value. She acknowledged that there would potentially be different answers as noted above, but believed this would be rare in practice, because of the fact patterns provided in deliberations – that if an entity was providing these third party services, these would be carried out through a separate subsidiary and that the entity would want to show income and expenses, so would have an incentive to keep activities in a separate subsidiary.

The Board member questioned why the issue was being discussed if it was rare. The staff member responded, noting that the issue was being discussed because it was an issue that was brought to the Interpretations Committee because the drafting in the standard was unclear in this area. Another staff member highlighted the fact that there had been a number of fact patterns presented to the Board during deliberations in June 2012 with different entity structures. She noted that it was clear from the June 2012 decision that there was not a lot of appetite for different requirements for different investment entity structures – the Board just wanted one clear exception from consolidation for investment entities, so the staff was trying to be consistent with that decision in their recommendation.

A Board member pointed out that the September 2012 decision [to allow the definition of an investment entity to include the provision of investment-related services to third parties] had changed the landscape. Another Board member questioned whether the staff recommendation was on the basis of consistency, because in June 2012 the Board had said that all investment entity subsidiaries should be consolidated by an investment entity parent – so keeping that constant, even though the population of what could be included as an investment entity had changed; or were there other more practical considerations why the staff had concerns with Alternative 1? The staff member responded that the basis for the recommendation was a combination of consistency and trying to keep faithful to the decision from June 2012 meeting and of simplicity – to eliminate some complexity in application.

A vote was taken, whereby eight Board members agreed with the Interpretations Committee’s recommendation, and seven members disagreed with the recommendation. The Director of Implementation Activities noted that because a majority of Board members agreed with the recommendation, the proposal can move to the next step in the process.

 

Narrow-scope amendments to IFRS 10 Consolidated Financial Statements – Investment Entities Amendments: exemption from preparing consolidated financial statements requirements in IFRS 10 – Applicability to a subsidiary of an investment entity

The staff briefly summarised the paper and the recommendation for the Board to amend IFRS 10.

A Board member noted that he agreed with the recommendation because it was in the spirit of what had been agreed previously when the Board had come up with the exemption, noting that the Board did not intend to push the consolidation requirement down the chain because relief was given at the top level and because of other protections in paragraph 4 of IFRS 10.

Another Board member disagreed with the recommendation, noting that, in the past, these entities would have been consolidated at the top level. He noted that, generally, if someone was interested in the subgroup he could obtain information from the individual financial statements in the top level consolidation. However, in the absence of a top level consolidation, this information was not available, because itwas just fair value information. He believed that the Board should be requiring consolidation of the subgroup. He further added that he did not agree with the cost benefit argument put forward and added that the comment that this scenario would be rare was irrelevant as this was not a basis for setting standards.

Another Board member noted that he disagreed with the staff’s proposal, noting that his key concern was the fact that debt held by an intermediate parent might not be visible without consolidated financial statements, and if the ultimate parent entity was an investment entity, it would have to prepare consolidated financial statements at that level. He noted that one item missing from IFRS 12 was the requirement to disclose the amount of financial and non-financial obligations at the level of the intermediate parent entity, adding that this was an issue that could result in abuse.

Thirteen Board members agreed with the Interpretations Committee’s analysis and the recommendation to amend IFRS 10.

 

Narrow-scope amendments to IAS 28 Investments in Associates and Joint Ventures – Investment entities amendments – application of the equity method by a non-investment entity investor to an investment entity investee

The staff presented the issue dealing with whether or not an entity could directly apply the equity method to the group financial statements of an intermediate investment entity, which measured its investments in investment entities at fair value. The project manager said that staff had discussed two alternative approaches with the Interpretations Committee as follows:

  • Alternative 1: a non-investment entity investor could not retain the fair value accounting applied by the intermediate investment entity when applying the equity method.
  • Alternative 2: a non-investment entity investor should retain the fair value accounting applied by the intermediate investment entity when applying the equity method

Given mixed views by members of the Interpretations Committee, the staff had come up with a third alternative being a compromise between the two preceding alternatives. According to Alternative 3, when applying the equity method a non-investment entity joint venturer

  • could not retain the fair value accounting applied by an investment entity joint venture, but
  • should retain the fair value accounting applied by an investment entity associate.

The project manager said that the staff would recommend Alternative 1.

A Board member noted that he didn’t agree with the staff recommendation because in many cases it was impractical. He noted that the entity was not really in control of the entities it had invested in, adding that the purpose was to invest in these entities, and that it had been concluded that fair value information at that level was best. He noted that he did not see why there should be a requirement to consolidate when moving up one level to the parent’s parent and noted that there could be structuring opportunities. He acknowledged that in a situation where an entity had joint control, this could be different, but noted that in a lot of situations where an entity did not have joint control, consolidating these companies would not really provide better information than if included at fair value. Based on the previous Board member’s comments, the staff member asked the Board member if he would support Alternative 3, which specified fair value accounting for associates but not for joint ventures. The Board member noted that he could accept Alternative 3.

Another Board member noted that to be consistent with what was done for non-investment entity parents he would support Alternative 1, but accepted the practicality issues and, accordingly, he could live with Alternative 3.

Another Board member noted that there was a presumption that whoever participated in a joint venture had the same level of power and access to have all the information necessary to unwind fair value, but this was not always the case, so Alternative 1 would create more complexity. He noted that he could accept Alternative 3.

The staff member noted that one of the reasons the staff had proposed Alternative 1, was because it was consistent with the recommendations for non-investment entity parents and consistent with the wording that currently exists in IAS 28. She acknowledged the practicality issues involved and, accordingly, that the staff was reasonably comfortable with Alternative 3. She further noted that the staff was not comfortable with Alternative 2 because joint control was a different relationship to significant influence, adding that Alternative 3 was considered a pragmatic compromise between the wording the staff was working with and providing a reasonable practical solution.

Another Board member noted that her preference was for Alternative 1 because this alternative was consistent with the decisions made in IFRS 10.

A vote was taken, with six Board members supporting Alternative 1, five Board members supporting Alternative 2, and four Board members supporting Alternative 3. A further vote was taken, whereby thirteen Board members noted that they could accept Alternative 3, which was the compromise between Alternatives 1 and 2.

A Board member asked about the procedure moving forward regarding the above decisions. The Director of Implementation Activities noted that the staff would bring wording back to the Board, but would need to bring a due process document to the Board to formally ask whether there were any dissents.

 

Sale or contribution of assets between an investor and its associate or joint venture (amendments to IFRS 10 and IAS 28) – inconsistency with paragraph 31 of IAS 28

The purpose of this paper was to ask the Board whether it agreed that paragraph 31 of IAS 28 should be amended and whether this proposal should be included in the forthcoming final amendments to IFRS 10 and IAS 28.

A Board member noted that he appreciated the fact that the staff were not simply removing paragraph 31. He felt that the paragraph was now much clearer. The Board members voted in favour of the staff’s recommendation to amend paragraph 31 of IAS 28. The Board members decided that the amendment should be exposed through the forthcoming IAS 28 exposure draft that contained other amendments, noting that this was a safer approach from a due process perspective.

The Senior Director of Technical Activities suggested (based on discussions held by the staff) that when amendments were made to standards, the Board usually only proposed a 1 January effective date. He noted that early application would be allowed, and accordingly, a June 30 year end reporter could choose to early adopt.

As a result of the above comment, the Board agreed to revise the effective date of the amendments to 1 January 2016.

 

Equity method: Share of other net asset changes – other decisions and summary of due process followed

The purpose of this paper was to summarise the comments received with respect to transitional requirements, assess whether the proposed amendments could be finalised, explain the steps in the due process taken to date, and to seek approval of the Board for commencing the ballot process.

A Board member referred to paragraph 10 of the staff paper, which stated that 22 out of 78 respondents were concerned about retrospective application. He inquired whether the other 56 respondents were supportive or silent with respect to retrospective application. The staff member responded that there was a mix of supportive and silent responses. Another Board member noted that there would be few benefits of requiring retrospective application, adding that it would just result in changing equity around. He noted that he could see costs to but few benefits arising from requiring retrospective application.

The Board members voted in favour of the recommendations in the staff paper, amended for the mandatory effective date of 1 July 2015 being moved to 1 January 2016.

Two Board members indicated their intention to dissent from the final amendment. One dissenting Board member noted that she intended to dissent as she did not believe that it was appropriate to recognise the gain or loss in equity rather than through comprehensive income. She also noted that she had a secondary concern regarding the lack of principle in terms of characterisations such as deemed acquisition, deemed disposal, adding that the proposals have specified the mechanics rather than concluded on the nature. The other dissenting Board member noted that he would be dissenting for similar reasons, adding that the Board’s decision was breaching the segregation between equity transactions and income transactions., As long as there was no transaction with owners, the result should be part of comprehensive income, adding that from his review of the comment letters received, three-quarters of respondents had commented on this, and although there had not been a consistent view, it was very consistent that respondents were against breaching this important notion.

 

Accounting for acquisitions of interests in Joint Operations (Amendments to IFRS 11 Joint Arrangements) – Mandatory effective date

The purpose of this staff paper was to propose an amendment to the mandatory effective date of the amendments to IFRS 11 from 1 January 2015 to 1 July 2015.

A Board member commented that in earlier discussions, it had been said that going forward, all effective dates for amendments would be 1 January unless urgent, and suggested moving the effective date of the amendments to 1 January 2016. Another Board member wondered whether the amendments to IFRS 11 were urgent? The staff member noted that the amendments provided guidance that was not currently in the standard in order to clarify diversity in practice and wondered whether waiting another 6 months would be of particular concern. He noted that moving the effective date from 1 July 2015 to 1 January 2016 would not change the effective date for entities with 31 December year ends.

The Board voted in favour of a 1 January 2016 effective date.

Correction list for hyphenation

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