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Equity Method

Date recorded:

Application questions selected and proposed next steps (Agenda Paper 13)

This paper provided an update on the application questions identified within the scope of the equity method. The application questions were grouped in the following topics:

  • Increases and decreases in an investor’s interest without a change in significant influence
  • Recognition of losses
  • Transactions between an investor and an associate
  • Transactions between two associates
  • Share of other changes in net assets
  • Impairment
  • Initial recognition
  • Contingent consideration

The staff have noted that they have encountered difficulties in identifying underlying principles when the application questions involve the application of IAS 28 paragraph 26 (i.e. the interaction of the principles in IAS 28 with other IFRS Standards, such as IFRS 3 and IFRS 10).

The requirement in paragraph 26 of IAS 28 pre-dates the issuance of IFRS 3 and IFRS 10, hence the staff would like to perform research to understand the implications of differences between the principles in IAS 28 and other IFRS Standards, arising from the Board’s business combinations and consolidation projects before addressing the application questions within the scope of the project.

The staff proposed the following next steps for future Board meetings:

  • Present the research on the implications of differences between the principles in IAS 28 and other Standards
  • Present to the Board the analysis of the application questions in the paper
  • Highlight to the Board other application questions that would not be addressed in the project

The staff asked the Board the following questions:

  • Does the Board agree that the staff should first perform research to understand the implications of differences between the principles in IAS 28 and other IFRS Standards arising from the Board’s business combinations and consolidation projects before considering the application questions within the scope of the project?
  • Does the Board have any other comments on the direction of the project or proposed next steps?

Board Discussion

The Board was asked if they had any questions on the application questions. No specific concerns or comments were raised on this.

One Board member specifically pointed out that the paper states that IAS 28 does not provide specific guidance on contingent consideration. It was requested that a disciplined approach is required on deciding when to apply the business combination model. It will be important to understand the transaction in which the contingent consideration was recognised and whether that transaction was within the scope of the IFRS 3 requirements. 

The Board was then asked if they agree with the staff approach to the project. The Vice-Chair stated that she did not disagree but was not sure how helpful the research would be. However, the majority of the other Board members agreed with the staff’s approach. One Board member requested that in addition to analysing the relationship between IAS 28 and IFRS 10 and IFRS 3, the relationship with IFRS 9 should also be analysed.

One Board member requested that the staff examine in their analysis in which circumstances the acquisition method was applied, i.e. does the acquisition method only apply to transactions where significant influence or joint control is gained or also to transactions in which there is a change in ownership interest without moving in or out of significant influence. The answer to this question would help define the population of questions and understand when it is appropriate to refer to IFRS 3.

Board decision

All 12 Board members voted in favour of the staff’s recommendation.

Related Topics

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