Equity method

Date recorded:

Agenda paper 13 - The Equity Method of Accounting- Project plan and methodology

The project manager introduced the agenda paper. She said that the staff recommendation was that:

a) the IASB should undertake a limited-scope research project that would seek to address application problems arising from the equity method requirements set out in IAS 28 Investments in Associates and Joint Ventures;

b) the methodology for the limited scope research project would assume that:

(i) control was the appropriate basis for determining the reporting group;
(ii) associate and joint venture entities were not part of the group and therefore their assets and liabilities should not be recognised separately in the financial statements; and
(iii) the equity method would seek to account for the investment of the asset as a whole.

c) the limited-scope project should include the work currently being undertaken by the Interpretations Committee on developing a narrow-scope amendment to IAS 28, including deferring the application date of the amendment issued in September 2014 IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011): Sale or Contribution of Assets between an Investor and its Associate or Joint Venture;

d) the IASB should assess separately the equity method of accounting as applied to subsidiaries in separate financial statements;

e) the IASB should consider the need for a wider research project on the equity method of accounting after the Post-implementation Reviews of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities

She mentioned that the IASB was currently balloting a draft Exposure Draft (‘the ED’) Elimination of Gains or Losses arising from Transactions between an Entity and its Associate or Joint Venture (Proposed amendments to IFRS 10 and IAS 28). She said that there was a concern that progressing with the ED while simultaneously reviewing equity method accounting could result in two changes to IAS 28 in a relatively short period of time. Such a sequence of two successive changes could arise if the proposals set out in the ED turn out not to be consistent with the findings from the Equity Method of Accounting project. She also mentioned that the amendment in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures issued in September 2014 raised concerns related to a conflict with IAS 28.  The staff therefore noted that the IASB could defer the application date of the September 2014 amendment to prevent the requirements of IAS 28 from potentially being changed twice in a short period of time.

There was general agreement expressed by the Board for the staff recommendations. However, there were some concerns raised regarding the assumptions on which the staff would work on the narrow scope amendments.

Some Board members were of the view that it would be important to first address the issue of whether the equity method was consolidation in one line or a measurement element. The project manager and the Senior Director for Technical Activities responded that at this stage it was not necessary to address the topic; they also mentioned that investors were more concern about the relationships between an entity and its associate or joint venture rather than the meaning of the equity method. There were concerns regarding the use of different assumptions and definitions for the equity method when it was used for associates/joint ventures versus the concept of the equity method for investments in subsidiaries in separate financial statements.

There were concerns raised by the Board about not allowing IFRIC to conclude on its analysis by taking over the topics in the narrow scope amendments. The concerns were focused on the timing and potential delays in reaching decisions. Another concern was raised because it was pointed out that measurement of an associate should be different than measuring a joint venture because entities commonly have significant transactions with their joint ventures and there would be opportunities for structuring.

There was general agreement in setting aside the application of the equity method for investments in subsidiaries.

The Chairman called a vote and the majority of the Board members approved the staff recommendation as follows:

a) To undertake a limited scope research project – 9 votes

b) The assumptions to be considered in the research project – 9 votes

c) The limited scope project would include the work being currently undertaken by IFRIC - 11 votes

d) To assess separately the equity method of accounting as applied to subsidiaries in separate financial statement- 10 votes

e) To consider the need for a wider research project on the equity method of accounting after the Post-implementation Reviews of IFRS 10 IFRS 11 and IFRS 12 wider research project – 12 votes

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