IAS 27 Separate Financial Statements — Investments in a subsidiary accounted for at cost: Step acquisition (Agenda Paper 4B)

Background

In September 2018, the Committee discussed 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) that was accounted for applying IFRS 9 before control is obtained, 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, plus the consideration paid for the additional interest (accumulated cost approach) (Question A). Based on the definition of 'cost' in various IFRS Standards, the Committee agreed that the existing requirements in IFRS Standards could result in the application of either of the above approaches.

In addition, 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. The Committee agreed that 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.

The Committee agreed not to add this matter to its standard-setting agenda and to adopt the proposed wording in the tentative agenda decision.

In the comment letters received most respondents agree with the Committee's rationale and conclusions in relation to Question A but two respondents disagreed. On the other hand, some respondents consider whether developing a narrow-scope amendment is appropriate. The staff consider that respondents have not provided any new information to assess whether the application of these accounting standards would have a material effect on those affected and the matter could not be resolved without also considering cross-cutting implications for IAS 28 Investments in Associates and Joint Ventures to initially measure an investment in an associate or a joint venture at cost. Accordingly, the staff recommend the Committee not undertake standard-setting at this time.

With regards to Question B, two respondents agree with the Committee's decision not to add the matter to its standard-setting agenda. Two respondents disagreed but the staff consider the basis of its conclusion have been set out in the September agenda paper.

Staff recommendation

The staff recommended finalising the agenda decision as published in IFRIC Update in September 2018 subject to certain changes set out in the staff paper and editorial changes.

Discussion

With regards to Question A, some Committee members questioned whether standard-setting is required given the two possible accounting treatments. Some other Committee members considered it is clearly interpreted based on existing IFRS requirements including the IAS 8 hierarchy.

Subject to some editorial changes, the Committee decided, by a majority vote, to finalise the agenda decision.