Equity Method

Date recorded:

Cover Paper (Agenda Paper 13)

The objective of the Equity Method project is to assess whether application questions with the equity method, as set out in IAS 28, can be addressed in consolidated and individual financial statements by identifying and explaining principles in IAS 28.

The purpose of this meeting was to continue discussion on possible alternatives to solve the application question ‘How should an investor recognise gains and losses that arise from the sale of a subsidiary to its associate, applying the requirements in IFRS 10 and IAS 28?’.

The question was first discussed in the September 2022 meeting and four alternatives were identified by the staff.

Perceived conflict between IFRS 10 and IAS 28—further considerations of applying the four alternatives (Agenda Paper 13A)

The objective of this paper was to:

  • Continue considering the four alternatives
  • Discuss further considerations including:
    • Whether ‘upstream’ and ‘downstream’ transactions should be affected in the same way when applying the alternatives
    • The disclosures in IAS 24 and whether they provide sufficient information about the transaction if Alternative 1 is selected.

The proposed alternative solutions can be summarised as follows:

Alternative 1—applying IFRS 10 to all contributions and sales

Alternative 1 would require an investor to recognise the full gain or loss on all contributions and sales of assets or businesses, regardless of whether they are housed or not in a subsidiary—under this alternative, no elimination entries requirements apply.

Alternative 2—apply IFRS 10 and then IAS 28 to all contributions and sales

Alternative 2 would require an investor to recognise a partial gain or loss on all contributions and sales of assets or businesses, regardless of whether they are housed or not in a subsidiary—under this alternative, the requirements of IFRS 10 and IAS 28 are both applied to the transaction.

Alternative 3—apply IFRS 10 depending on whether contributions and sales are an output of ordinary activities or not

Alternative 3 would require an investor to recognise:

  • A partial gain or loss on transactions in the scope of IFRS 15
  • The full gain or loss on transactions outside the scope of IFRS 15

Alternative 4—apply IFRS 10 for contributions and sales of businesses and IAS 28 for sales of assets

Alternative 4 would revive the 2014 amendment and would require an investor to recognise:

  • The full gain when a transaction involves a business
  • A partial gain when a transaction involves an asset

In the paper, the staff analysed two key questions to support determining which alternative to apply:

  • Whether ‘upstream’ transactions (e.g. sales of assets from an associate to an investor) and ‘downstream’ transactions (e.g. sales or contributions from an investor to an associate) should be affected in the same way when applying the alternatives
  • If yes, what are the potential implications for ‘upstream’ transactions?

The staff concluded that they should be treated in the same way given that exploring treating these differently would require assessing the conceptual nature of the equity method which is outside of the scope of the project.

The staff laid out the implications for upstream transactions in the paper.

The staff also analysed the requirements of IAS 24, in relation to Alternative 1, and proposed that if this was selected, an investor should be required to disclose the amount of the gain or loss arising from transactions between an investor and an associate.

The IASB was not asked to make any decisions in relation to this paper.

Perceived conflict between IFRS 10 and IAS 28—feedback summary of the outreach activities taken (Agenda Paper 13B)

This paper summarised the feedback received on the application question described above from accounting firms, the Accounting Standards Advisory Forum (ASAF) and the Global Preparer Forum (GPF).

The staff provided analysis on the following questions highlighted in the feedback:

  • Alternative 1—is not requiring elimination entries a move away from the equity method viewed as a one-line consolidation method?

The staff concluded that not requiring elimination entries is not a move away from the traditional view that the equity method is a one-line consolidation method

  • Alternative 2—are there new structuring opportunities associated with this alternative?

The staff concluded that applying Alternative 2 would not lead to new structuring opportunities. They acknowledge that these opportunities already exist but did not consider solutions to mitigate this to be viable as there is a risk of unintended consequences

  • Alternative 3—is it justifiable to introduce different requirements for sales to customers and to those that are not customers?

The staff concluded that, in developing IFRS 15, the IASB had differentiated between these transfers but required the IFRS 15 requirements for control and measurement to be applied to disposals under IAS 16, IAS 38 and IAS 40

  • Alternative 4—is it justifiable to introduce a distinction between the sale of an asset and of a business?

The staff concluded that accounting for disposals of assets and businesses should be aligned

The IASB was not asked to make any decisions on this paper.

IASB discussion

The papers were discussed together.

All IASB members supported narrowing the alternatives to only include Alternatives 1 and 2 in papers going forward. This was primarily on the basis of stakeholder feedback that these alternatives were simpler and reflective of the methods used in practice.

Several IASB members noted that they did not have concerns about the potential for structuring of transactions which was identified in the paper. This was primarily on the basis that where there are different structures that result in different accounting results, this is often due to the transaction itself being different. However, some IASB members still wanted to ensure that any differences in outcome for different transactions were for a valid reason.

A number of IASB members asked the staff to provide examples in a future meeting to demonstrate the different information obtained from using Alternative 1 versus Alternative 2. This was requested for an upstream and downstream transaction, as well as considerations of transactions not at arms length. It was noted that these could be used to help the IASB understand the value of the elimination adjustments proposed in Alternative 2 for users.

Some IASB members asked the staff to provide analysis of the impact of implementing Alternative 1 or 2 on preparers based on current levels of practice for each method. However, one IASB member highlighted the need to be careful about trying to apply the principles in IAS 28, which is the objective of the project, rather than simply codifying accepted practice.

In terms of the additional disclosures one IASB member commented that before deciding any new requirements the IASB should take a step back and ensure that these are necessary as part of the overall package given extensive disclosures are already required by IFRS 12.

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