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IFRS 5 — Issues relating to the requirements for scope and presentation in IFRS 5

Date recorded:

The Technical Manager introduced the agenda paper that addressed two issues which had been discussed over several meetings by the Interpretations Committee, two issues that had been discussed by the IASB but had been put on hold and three new issues that had not yet been discussed by the Interpretations Committee but would be the focus of this session.

The first issue concerned the question of whether certain cases of ‘loss of control of a subsidiary’ met the criteria for classifying the subsidiary as ‘held for sale’ under IFRS 5. The staff had analysed that it needed to be determined whether the loss of control over a subsidiary involved a sale plan. The absence of a sale plan would negate ‘held for sale’ classification in the staff’s view.

The staff had further analysed three cases that were identified by the submitter. If, in the case of dilution, the parent decided not to subscribe to new shares issued by the subsidiary, staff concluded that there had been a sale but that they would require additional facts to assess whether there had also been a sale plan. A call option held by a non-controlling shareholder constituted a sale plan in the staff’s view as it was a binding agreement. However, it could not be concluded that the sale would occur within one year and therefore it would not be classified as ‘held for sale’. In the case of a modification of the shareholders’ agreement, the subsidiary would also not be classified as ‘held for sale’ as no change in ownership interest had occurred in this case.

The staff concluded that IFRS 5 contained sufficient guidance on this issue and therefore recommended the Committee not taking it onto its agenda.

The Chairman said that a loss of control always led to a remeasurement at fair value. A classification as ‘held for sale’ under IFRS 5 would lead to an earlier fair value measurement. The Director of Implementation Activities agreed but said that IFRS 5 would only require fair value measurement if the fair value was below the carrying value. The Chairman agreed and said that in his view, the dilution case would be interesting as the amount of shares would not change. The Director of Implementation Activities replied that the analysis had been performed focusing on a deemed sale which was consistent with a previous agenda decision.

An observing IASB member said that IFRS 5 was unclear as to whether the driver behind the classification was a sale or if it was any loss of control. She said if it was any loss of control, the analysis in the agenda paper would be different. A fellow Board member said that in his view, IFRS 5 focused on sales and not on the loss of control. He disagreed with the staff’s interpretation that a decision not to subscribe to new shares was similar to a sale.

A Committee member agreed with that and said that a modification of a share plan was similar to the dilution as in both cases the entity had decided not to take any actions against the loss of control. In the case of the call option he said that the option in the fact pattern had an exercisable period of three years and therefore staff concluded that a sale might not be completed within one year. He asked whether the conclusion would change if the call option was only exercisable during one year.

Another Committee member disagreed with the staff’s conclusion that there was sufficient guidance in IFRS 5 with regard to whether an actual sale needed to occur. In his view there was no difference between a sale of shares in a controlled subsidiary and not subscribing to new shares issued by the subsidiary. In the case of the call option he said that it was not relevant when the call option was exercised as the loss of control had already occurred when the option became exercisable.

A fellow Committee member agreed and proposed amending IFRS 5 to make the accounting treatment on a loss of control without disposal consistent with the accounting treatment of a loss of control that involved a sale. In her view, the issues in the agenda paper were too specific for the Interpretations Committee to address. One Committee member agreed and said that IFRS 5 was applicable to disposals by sale or otherwise. He said it should be clarified what ‘otherwise’ meant. Another Committee member pointed out that the Basis for Conclusions on IFRS 5 stated that the loss of control was a significant economic event.

The Chairman concluded that many Committee members found IFRS 5 unclear which meant that a tentative agenda decision needed new analysis. He proposed to continue analysis on the issues before they were forwarded to the Board. The observing IASB members expressed agreement with this procedure.

The Chairman concluded that it was not helpful in his view to discuss the other issues at this point and suggested bringing all issues back to the Committee at the next meeting.

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