Project objective and approach (Agenda Paper 13)

Background

The Board has decided to undertake a limited-scope project to address the application problems within IAS 28.

Staff recommendations

The staff recommended that the Board confirms the objective of the research project as being:

“To assess whether application problems with the equity method as set out in IAS 28 Investments in Associates and Joint Ventures, can be addressed in consolidated and individual financial statements by identifying and explaining the principles of IAS 28.”

and the project approach to be:

• “(i) identify application problems and decide which problems the project will address; 
• (ii) address the application problems by identifying and explaining the principles that underlie IAS 28. Identifying and explaining the principles that underlie IAS 28 will allow the Board to develop new requirements (or application guidance) which will amend the Standard.”

Scope of project

The staff recommended that the project focus initially on application problems related to transactions between an investor and an associate or joint venture.

The Board was asked to decide on which application problems to address in the project at a future date. The staff believe that the application problems addressed should be based on whether they can be resolved efficiently and effectively without fundamentally rewriting IAS 28 or amending other IFRS Standards, whether they affect consistent application of IAS 28 and the importance of the matter.

The staff recommended resolving the application problems by amending IAS 28 or adding application guidance, based on principles underlying IAS 28, which improves the usefulness of financial information. However, IAS 28 has no clearly defined principles and therefore it will be necessary to identify and explain the principles.

The staff did not recommend that the project attempt to develop solutions for each application problem individually nor do they recommend a fundamental review of the equity method. This would require more time and resources and could result in substantive changes to the financial statements.

Timing of the project

In 2015, the Board deferred work on the equity method project until it had assessed feedback from the Post-implementation Review of IFRS 11. This first phase of this review is now complete and one matter which the Board has decided to examine further is relevant to the application of the equity method: ‘how to account for certain transactions that result in changes in ownership interest that alter the relationship between an investor and an investee’. The staff suggest starting work on the equity method project now in order to combine work in relation to these two projects.

The staff asked the Board whether they agree with their recommendations.

Board discussion

Board members had qualified support for the staff’s proposals. Overall, there was agreement with the objective to resolve the application problems and that in order to resolve the application issues, the underlying principles of IAS 28 need to be articulated. Board members also agreed with the approach to focus on consolidated and individual financial statements first and the separate financial statements at a later date.

The two major concerns raised were in relation to identifying and explaining the principles in IAS 28 and the scope of the project.

Currently, there are no principles in IAS 28 and if principles are created to retrofit the Standard, this may cause wider issues then initially intended and preparers may have to consider accounting judgements previously made. A cost-benefit analysis would need to be performed to assess whether this is the best approach. One suggestion made was to develop the articulation of principles only for the open application issues.

In order to create the principles, it was suggested that it would be useful to speak to investors to understand what information they get from the equity method. This information would provide clarity around how to solve the application issues as the Board would understand what the equity method is trying to achieve. It would also be useful to understand what information investors feel they are not getting about joint ventures and associates in the disclosures. The post-implementation review of IFRS 10–12 would be a good opportunity to obtain information which will help with this project.

One Board member raised a concern raised by investors as part of the Primary Financial Statement (PFS) project where the requirement is currently to report in a single line the share of profit/loss from equity method accounted investments as a post-tax number but then aggregate it in the pre-tax number. It was concluded that this was outside the scope of the PFS project and therefore he requested for it to be included within this project. In addition, he recommended to the staff to read the comment letters from the PFS project which may provide useful information in relation to this project.

The other issue raised was around the application issues. It may be difficult to assess whether it is possible to solve the application issues without creating the principles and therefore it may be an iterative process rather than a sequential process. It may also cause application issues which have already been addressed to be reopened. 

It was concluded that it would be important for the staff to perform the feasibility work to assess whether this project would be possible and this initial assessment would need to be done sooner than normal for this type of project. If it is concluded that it is feasible, then the scope of the work should be assessed to see if this is a narrow-scope project or a wider project.

Board decision

A majority of 12 (out of 13) voted in favour of the project objective. A majority of 11 (out of 13) voted in favour of the project approach.