Cover paper (Agenda Paper 13)

The objective of the Equity Method project is to develop answers to application questions about the equity method, as set out in IAS 28, using the principles derived from IAS 28 where possible.

The purpose of this meeting was to ask the IASB to decide how to answer the application question relating to the assessment of impairment: Does an investor assess a decline in fair value in relation to the original purchase price or the carrying amount at the reporting date? The IASB also discussed whether to expand the project’s scope for five of the application questions that were not selected but are considered resolved by its tentative decisions.

This paper was not discussed.

Towards an Exposure Draft—Impairment of investments in associates (Agenda Paper 13A)

The purpose of this paper was to ask the IASB to consider how to resolve the application question relating to the assessment of impairment: Does an investor assess a decline in fair value in relation to the original purchase price or the carrying amount at the reporting date?

IAS 28:40 requires an investor to apply IAS 28:41A-41C to determine whether there is objective evidence that its net investment in an associate or joint venture is impaired. An investor tests its net investment in an associate for impairment in accordance with IAS 36.

The net investment in an associate is impaired if there is objective evidence of impairment from one or more events that occurred after the initial recognition of the net investment and that loss event has an impact on the estimated future cash flows from the net investment that can be reliably estimated. IAS 28:41A-41C list the indicators that provide objective evidence of impairment. IAS 28:41C states that a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.

IAS 28:3 requires that the investment in the associate is measured at cost at initial recognition, however cost is not defined. At its April 2022 meeting, the IASB tentatively decided that an investor would measure the cost of an investment, when an investor obtains significant influence, at the fair value of the consideration transferred, including the fair value of any previously held interest in the associate. The application question in this paper asks if an investor (applying IAS 28:41C) should assess if there is objective evidence of impairment by comparing the fair value of an investment to the carrying amount of the net investment in the associate at the reporting date instead of the cost on obtaining significant influence.

Staff recommendation

The staff recommended that the IASB propose amendments to IAS 28:41C to change the term ‘cost’ to ‘carrying amount’, to add an impairment indicator when a purchase price (per share) for an additional interest, or a selling price (per share) for part of the interest, is lower than the carrying amount (per share) of the net investment in the associate at the date of the purchase or sale of that interest, and to remove the term ‘significant or prolonged’.

IASB discussion

All IASB members agreed with the staff recommendation to change the term ‘cost’ to ‘carrying amount’.

Several IASB members agreed with the staff recommendation to add an impairment indicator when a purchase price (per share) for an additional interest, or a selling price (per share) for part of the interest, is lower than the carrying amount (per share) of the net investment in the associate at the date of the purchase or sale of that interest. A few IASB members stated that it is a good and clear indicator of impairment if the fair value is lower than the carrying amount and that investors must consider it. A few IASB members asked the staff to reconsider the drafting and wording of the recommendation and suggested not using the words ‘per share’ as it may include consideration to other factors such as a significant control premium. They discussed that alternate terminology can be considered to clarify the intent is for a like-for-like comparison. A few IASB members did not agree with the staff recommendation and suggested that there must be an event that acts as an indicator of impairment.

Several IASB members also agreed with the staff recommendation to remove the term ‘significant or prolonged’. A few IASB members mentioned that this was a legacy term and that the term itself is not defined and was difficult to apply. Some IASB members also noted that these terms should be removed as they are not consistent with the staff recommendation on adding an impairment indication when the fair value is lower than the carrying amount. A few IASB members did not agree with the staff recommendation. They mentioned that this may result in an impairment test being required in each reporting period when the fair value would be lower than the carrying amount, along with bringing challenges in determining the fair value, especially for unlisted associates. Several IASB members noted that it was important to consider and clarify, as needed, that the impact of removing these terms, especially for companies that have an investment in unlisted associates, was not to have an additional exercise on determining fair value of the associate each reporting period unless there was an event or trigger for an impairment indicator.

IASB decision

All IASB members voted in favour of the staff recommendation to change the term ‘cost’ to ‘carrying amount’ and to add an impairment indicator when a purchase price (per share) for an additional interest, or a selling price (per share) for part of the interest, is lower than the carrying amount (per share) of the net investment in the associate at the date of the purchase or sale of that interest. 12 out of 14 IASB members voted in favour of the staff recommendation to remove the term ‘significant or prolonged’.

Towards an Exposure Draft—Implications of applying the IASB’s tentative decisions to application questions that were not selected (Agenda Paper 13B)

At its March 2021 meeting, the IASB agreed the process for selecting application questions to be in the scope of the Equity Method project. The IASB also agreed the selection of application questions is an iterative process. As the project progresses, answers could be found to application questions that were not selected or conversely answers found could raise new application questions.

The purpose of this paper was to ask the IASB:

• To discuss the staff’s analysis of the implications of its previous tentative decisions to the following five application questions that were not selected:
  • How does an investor determine the initial carrying amount of an investment in an associate?
  • An investor, with a previously held interest in an entity, acquires an additional interest and obtains significant influence. Does the initial measurement include the original purchase cost of the previously held interest or the carrying amount of that interest applying IFRS 9?
  • How does an investor account for the associate’s issuance of shares?
  • Is there double counting when an investor sells an item of property, plant and equipment to an associate and leases it back? (IFRS 16 requires to recognise only the amount of gain or loss that relates to the rights transferred whereas IAS 28 requires to adjust for the investor's portion of gain or loss)
  • Does an investor eliminate its portion of gain or loss in a downstream transaction against the transaction gain or loss or the share of the associate’s profit or loss?
• To decide whether to expand the project’s scope for these five application questions
• Whether the IASB agrees with the staff’s approach to identifying whether its tentative decisions in the project to date have any unintended consequences

Staff recommendation

The staff recommended that the IASB expand the project’s scope by adding the five application questions that are considered resolved by its tentative decisions.

IASB discussion

All IASB members agreed with the staff recommendation to add the application questions if they have already been discussed and resolved. One IASB member mentioned that the Basis for Conclusions should also explain how these application questions were considered and resolved.

IASB decision

All IASB members voted in favour of the staff recommendations.