Identifying the principles in IAS 28 Investments in Associates and Joint Ventures (Agenda Paper 13)

The purpose of the paper was to discuss the principles identified in the analysis of IAS 28. The Board was not asked to make any decisions.

Role of principles: The objective of identifying the principles is to provide the Board with a toolbox that can help the Board to address application questions. It is not suggested that the principles are incorporated into IAS 28.

Identifying the principles: The staff reviewed IAS 28 and its Basis for Conclusions to identify the principles. On completion of the review the staff have identified missing principles.

The paper summarises the principles identified and examples of application questions which it may address. 

Principles identified in IAS 28:

• ‘Power to participate’ is an investor’s shared power to affect changes in, and to access net assets
• Application of the equity method includes an investor’s share in the associate’s or joint venture’s net asset changes in an investor’s statement of financial position
• An investor's share of an associate’s or joint venture’s net assets is part of the reporting entity
• Fair value at the date that significant influence or joint control is obtained provides the most relevant information and faithful representation of an associate’s or joint venture’s identifiable net assets
• An investor recognises changes in an associate’s or joint venture’s net assets. An investor recognises the share of changes in net assets that it can currently access
• An investor’s maximum exposure is the gross interest in an associate or joint venture
• When an investor has a decrease in its ownership interest in an associate or joint venture and continues to apply the equity method, it reclassifies amounts previously recognised in other comprehensive income
• An investor:
  • Applies IFRS 3 and IFRS 10 if it obtains control of an associate or joint venture
  • Applies IFRS 9 if it no longer has significant influence or joint control but retains an interest in a former associate or joint venture
  • Recognises a gain or loss and reclassifies amounts recognised in other comprehensive income on the date that significant influence or joint control is lost

Missing principles: The staff believe there are application questions that cannot be addressed by the principles identified above. IAS 28 does not address the following application questions:

• The investor’s accounting for the share in the investee’s other net asset changes
• Purchases or other increases in the investor’s ownership share that do not result in obtaining control of the investee.

The staff suggested that the missing principles could be developed by analogy to existing principles identified in this paper with the judgement as required when developing an accounting policy applying IAS 8.

The staff asked the Board members if they have any comments on the principles identified, whether the Board members consider that there are any other principles in IAS 28 and whether the Board members agree with the suggested approach for the missing principles.

Board discussion

Board members believed that this is a relevant and important issue. Board members believed that ‘cost’ needs to be defined prior to moving forward with this project as it will be fundamental to answer a number of questions. Board members are aware that this is an area of debate in the market and it is a non-trivial point that needs to be resolved.

In addition, IAS 28 does not define ‘Investment in Associates’. It is likely that it means equity or equity-like investments rather than short-term debt or trade finance, however it is not clarified in IAS 28. 

Board members wanted to clarify to those following this project that the principles defined will not be incorporated in the text of the Standard. If the words were added to the text, preparers would need to reassess all previous accounting under this Standard against those principles, which is not the objective of the project. These principles are simply a toolbox to assist the Board in answering the application questions.

One Board member asked for the definition of gross interest and whether in any circumstances it may be higher than net interest. The staff said that they had not considered this but will take this away to see if they need to develop a definition.

In relation to the missing principles, Board members clarified the approach with the staff to confirm that they are not standard-setting, but are looking to other standards for guidance to create principles to assist in answering the application questions. The staff agreed and Board members had no further comments.