Equity method of accounting — Research project

Date recorded:

The ASAF Coordinator advised the Board members that the IASB had recently started a research project on the equity method of accounting. The project should examine the financial reporting issues that the application of the equity method sought to resolve. Also, application issues should be explored. She asked the IASB whether they had any comments on the agenda paper.

One Board member asked whether the main objective of the project was to simplify the equity method. The Senior Director for Technical Activities replied that simplification was one way to deal with it; however, the project needed to examine whether there were alternatives to the equity method.

Another Board member said she agreed with the reference in the agenda paper that the requirement of the equity method for associates was introduced to cover related party transactions. She said that in this light it should be distinguished whether the equity method was used for simple associates or for joint ventures, for example. She was concerned that simplifying the equity method might not address the underlying reasons for introducing it in the first place.

A fellow Board member said that the main objective of the project should be to examine whether there was indeed a problem with the equity method as he did not see one.

One Board member said he would like to see which information non-investors derived from the equity method. He said that this could also be linked to the Conceptual Framework project.

Another Board member said that the requests received in the agenda consultation pertain mainly to a preparer perspective. She warned that a simplification might lead to less information for users of financial statements. The Senior Director for Technical Activities replied that it was not the number that users were interested in but what it meant.

A fellow Board member said that she did not see a problem today but said that there might be a problem in the future. The Senior Director for Technical Activities replied that there was indeed a problem today as the IFRS Interpretations Committee had already received many submissions on the equity method.

One Board member said that the problem should be examined separately by group investments and external investments and should then be distinguished for separate financial statements and consolidated financial statements. She also said that the root cause of all the problems in practice should be identified.

Another Board member said that the bright line between simple investments and associates played a big role in practice. However, he was not convinced that the 20 % threshold decided over significant influence. As an example, owning 8% in an entity that otherwise had only investors with a maximum of 1% each might give significant influence. The 8% investment would nonetheless be accounted for under IFRS 9, which had no special guidance for strategic investments. He therefore suggested thinking about a separate standard for equity investments.

A Board member said that analysts were unhappy with the one-line consolidation for joint ventures as it meant a loss of information. IFRS 12 and segment reporting made up for this loss somewhat but nonetheless there was discontent.

One Board member said the focus of the project should be on application issues, and, maybe, a change to the existing requirements was necessary to eliminate intercompany transactions. He objected to changing to fair value measurement for such investments as fair value was very subjective and difficult to calculate. A fellow Board member agreed and said that there was no big problem with the equity method in his view but some little problems that might need to be addressed.

The Chairman concluded that a majority of the Board members did not see a big problem, so he recommended to Staff to keep the scope limited.

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