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IAS 27 — Non-cash acquisition of a non-controlling interest

Date recorded:

Background

In June 2012, the IFRS Interpretations Committee received a request for guidance on the accounting for the purchase of a non-controlling interest (NCI) by the controlling shareholder when the consideration includes non-cash items.

The submitter asked the Interpretations Committee to clarify whether the difference between the fair value of the consideration given and the carrying amount of such consideration should be recognised in equity or in profit or loss. The submitter asserted that according to paragraph 31 of IAS 27 Consolidated and Separate Financial Statements the difference described should be recognised in equity, whereas applying IFRIC 17 Distributions of Non-cash Assets to Owners by analogy the difference should be recognised in profit or loss.

The submitter asked the Interpretations Committee to resolve this apparent conflict between IAS 27 and IFRIC 17.

In the September meeting, the Interpretations Committee tentatively decided not to add this issue to its agenda, because the existing IFRS requirements provide sufficient guidance. The difference between the carrying amount of NCI and the fair value of the consideration given should be recognised in equity. The difference between the fair value of the consideration given and the carrying amount of such consideration should be recognised in profit or loss in the controlling shareholders’ consolidated financial statements.

Two comment letters were received on the tentative agenda decision.  Both of the respondents agreed with the tentative agenda decision not to add the issue to the Interpretation Committee’s agenda and with the reasons provided in the tentative agenda decision.

The Staff recommended that the Interpretations Committee should finalise its agenda decision not to add the issue to their agenda.  The Staff also asked the Interpretations Committee whether they had any comments on their proposed wording in the final agenda decision.

One of the Committee members noted that the sentence “the difference between the fair value of the assets transferred and their carrying amount arises from the derecognition of those assets” was not accurate.  This member noted that usually when you calculate a gain on the disposal of an asset one would look at net proceeds or the fair value of the consideration received less carrying amount.  Hence this member noted that she believed the wording in the proposed final agenda decision should be the “difference between the fair value of the consideration received and the carrying amount of the asset transferred”. This would be the “equation” that would need to be followed to calculate the gain in profit or loss.  This Committee member provided an example to illustrate her point as to how she thought the guidance should read.  She provided an example of acquiring NCI by giving a building.  Hence two things are happening – acquisition of NCI and disposal of a building.  When disposing of the building in a non-cash transaction, the gain/loss on the disposal of the building would be calculated by looking at the fair value of the consideration received (i.e. the fair value of the NCI) less the carrying amount of the building.  This approach was shared by a few Committee members.

A discussion followed as to when entries would be made within equity and profit or loss with differing views shared by the Committee members.  One Committee member suggested that it may be useful to include in educational materials some application examples so that users can better understand the mechanics of the accounting treatment proposed.

One Committee member noted that there were three measurements that were being dealt with in the paper:

  • Carrying value or the NCI
  • Carrying value of the assets
  • Fair value of the transaction

He said that it appeared that some of the Committee views being shared were that the difference between the carrying value of the assets and the fair value of the transaction would go through profit or loss and the difference between the carrying value of the NCI and the fair value of the transaction would be recognised in equity.  He noted that this conclusion was the issue that the Staff were trying to get across in their paper and hence maybe the wording needs to be amended to provide this conclusion but there was no need to become involved in how to determine the fair value of the transaction.  He mentioned that maybe the penultimate paragraph of the proposed agenda decision could amended.  This view was shared by another Committee member.

One Committee member agreed with the Staff proposal not to add the issue to the Interpretation Committee agenda however he suggested that the wording of the proposed final agenda decision could be enhanced by stating the difference between the fair value of the assets transferred and their carrying amount arising from the derecognition of the assets is covered by other standards dealing with the derecognition of the assets.

Another Committee member noted that the differing views of the Committee members maybe warranted that the Staff go back and look at the issue in a bit more detail.

Another member noted that the Committee were overcomplicating the issue.  He mentioned that both of the comment letters agreed with the reasons provided in the tentative agenda decision and hence the proposed final agenda decision should stay as it is.  Another member agreed with this Committee member.

The Chair brought the discussion to a close noting that he saw three views emerging:

  1. The Committee were overcomplicating matters and the wording of the proposed final agenda decision should remain as it is.
  2. The penultimate paragraph of the proposed final agenda decision should be altered in light of the discussion.
  3. More work needs to be performed by the Staff on this issue.

 

The majority of the Committee members tentatively agreed that the proposed wording of the final agenda decision should remain.

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