This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

IAS 27 — Investments in a subsidiary accounted for at cost

Date recorded:

IAS 27 Separate Financial Statements — Investments in a subsidiary accounted for at cost: Partial disposal (Agenda Paper 6A)

Background

The Committee received a submission about the accounting in an entity's separate financial statements for disposal of partial interest in a subsidiary that results in losing control of that subsidiary while the retained interest is subsequently accounted for applying IFRS 9 Financial Instruments. The submitter asks whether the entity: (a) can apply the election in IFRS 9:4.1.4 to present subsequent changes in fair value of the retained interest in other comprehensive income (OCI) rather than in profit or loss (Question A); and (b) presents in profit or loss or OCI any difference between the cost and fair value of its retained interest on the date it loses control of Entity B (Question B).

Staff analysis

In respect of Question A, the staff consider ‘at initial recognition’ in IFRS 9:4.1.4 refers to the date on which the entity begins to apply the requirements in IFRS 9 to its retained interest (i.e. the date on which it loses control of the subsidiary) and does not refer to the date it originally acquired the interest in the subsidiary. The requirements in IAS 28 Investments in Associates and Joint Ventures (IAS 28:22) on discontinuing the use of the equity method supports this view. Hence the entity may elect to present subsequent changes in fair value of its retained interest in OCI if the retained interest is not held for trading and the entity would make this irrevocable election on the date that it starts applying the requirements in IFRS 9 to its retained interest.

In respect of Question B, IFRS 9:4.1.4 specifies that the presentation election applies to ‘subsequent changes’ in fair value of an investment in an equity instrument––i.e. the changes in fair value that arise after initial recognition. Any difference between the cost and fair value of the retained interest at the date that the entity loses control does not arise after initial recognition of the retained interest applying IFRS 9. The entity shall present in profit or loss any difference between the cost and fair value of its retained interest at that date it loses control of the subsidiary.

Staff recommendation

The staff recommend the Committee not add the matter to its standard-setting agenda but publishes an agenda decision.

Discussion

A Committee member had concerns over the two different approaches for Agenda Paper 6A and 6B for very similar transactions. Another Committee member reiterated that the asset after the step disposal is not the same (i.e. a new asset that is without a controlling power while the old asset is a control holding) and it would therefore be appropriate to apply new accounting for the new asset at the initial measurement of that asset. The Chair suggested that the step disposal is a significant economic event that results in a change in measurement basis. Most of the Committee members agree with the staff recommendation not to add this matter to its standard-setting agenda.

A Committee member suggested adding the words "the retained interest is eligible for the presentation election in paragraph 4.1.4 of IFRS 9" in the section dealing with whether the entity presents in profit or loss or OCI any difference between the cost of the retained interest and its fair value on the date of losing control of the investee.

Decision

The Committee decided to adopt the proposed wording in the tentative Agenda Decision subject to the above change.

IAS 27 Separate Financial Statements — Investments in a subsidiary accounted for at cost: Step acquisition (Agenda Paper 6B)

Background

The Committee received a submission about the accounting in an entity's (Entity X) separate financial statements for a step acquisition of a subsidiary (i.e. Entity X's initial interest in an investee (Entity Y) was accounted for applying IFRS 9 Financial Instruments, and Entity X subsequently acquires additional interest in Entity Y and obtains control over Entity Y).

The submitter asks how Entity X determines the cost of its investment in the investee on the date it obtains control of Entity Y. In particular, the submitter asks whether the cost of the investment in Entity Y is the sum of: (a) the fair value of the initial interest on the date Entity X obtains control of Entity Y, plus the consideration paid for the additional interest (FV as deemed cost approach); or (b) the consideration paid for the initial interest when Entity X acquired the initial interest (original consideration), plus the consideration paid for the additional interest (accumulated cost approach). (Question A)

Following Question A, if Entity X applies the accumulated cost approach, the submitter asks how Entity X accounts for any difference between (i) the fair value of the initial interest on the date it obtains control of Entity Y and (ii) the original consideration (Question B). The submitter also asks whether the conclusion would differ depending on whether Entity X, before obtaining control of Entity Y, measures its initial interest: (a) at fair value through profit or loss; or (b) at fair value and applies the presentation election in IFRS 9:4.1.4 to present in OCI subsequent changes in fair value of the initial interest.

Staff analysis

In respect of Question A, the staff consider by applying the analogy in IAS 27:11B(a) (i.e. when an entity ceases to be an investment entity, the entity shall account for an investment in a subsidiary in accordance with IAS 27:10), the fair value (and not the original cost) of the investment in the other entity is deemed to be the consideration paid at the date of the transaction or event. Accordingly, the fair value as deemed cost approach shall be applied. In contrast, the staff observed an alternative way to read the requirements. Entity X might consider that the step acquisition transaction simply involves acquiring an additional interest in Entity Y while retaining the initial interest. By applying the definition of 'historical cost' in the Conceptual Framework as the 'purchase price' or 'consideration paid', Entity X considers each acquisition of an interest in Entity Y to be a separate transaction and determines the cost of its investment in Entity Y as the consideration paid for the initial interest when Entity X acquired that initial interest, plus the consideration paid for the additional interest. In respect of Question B, Entity X recognises any difference between the fair value of the initial interest in Entity Y and its original cost as income or expense in profit or loss, regardless of whether, before the step acquisition transaction, Entity X had presented subsequent changes in fair value of its initial interest in profit or loss or OCI because the election in IFRS 9:4.1.4 to present changes in OCI applies only to ‘subsequent changes in fair value’. Accordingly, Entity X presents the difference in profit or loss.

Staff recommendation

In respect of Question A, the staff consider whether to develop a narrow-scope amendment to address how an entity determines the cost of an investment acquired in stages. The staff observe that (i) it did not have evidence to assess whether the application of the two acceptable approaches to determining cost of an investment in a subsidiary acquired in stages would have a material effect on those affected; and (ii) the matter could not be resolved without also considering cross-cutting implications for IAS 28 Investments in Associates and Joint Ventures with respect to measuring an investment in an associate or joint venture acquired in stages at cost. On balance, the staff recommend the Committee not to undertake standard-setting to address this matter but publish an agenda decision. In respect of Question B, the staff conclude that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine its accounting. Accordingly, the staff recommend the Committee not to undertake standard-setting to address this matter but publish an agenda decision.

Discussion

During the discussion, one Committee member suggested that fair value as deemed cost approach, which is consistent with Question A, is more preferable and would provide more useful information. If another option is allowed (i.e. accumulated cost approach), there will be significant diversity in practice. One of the Committee members said preparers should have to look at IFRS 3 even for separate financial statements. Some other Committee members considered fair value as deemed cost approach is more consistent with the tax treatment in their particular jurisdictions. One committee member considered standard-setting is necessary (to state the differences in treatment between separate financial statements and consolidated financial statements and it is not appropriate to have different thoughts for similar transactions (i.e. step acquisitions and step disposals)). A majority of Committee members agreed with the staff analysis that an entity can apply either approach in the accounting for the step acquisition in the separate financial statements.

Decision

The Committee decided not to add this matter to its agenda and to adopt the proposed wording in the tentative Agenda Decision

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.