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IFRS 10 — Sale of a single asset entity containing real estate

Date recorded:

Background

The Committee received a submission about whether an entity shall apply requirements in IFRS 15 or IFRS 10:B98 if an entity, as part of its ordinary activities, enters into a contract with a customer to sell real estate through selling the equity interest in a single asset entity that is a subsidiary. The submission also asks how the resulting gain or loss from the transaction be presented.

Staff analysis

The staff analyse that IFRS 15 scopes out contracts with customers that fall within the scope of IFRS 9 or IFRS 10 and as such the entity shall account for the transaction under IFRS 10—i.e. loss of control of a subsidiary. Based on the analysis of consistency with similar requirements in other IFRS Standards, the staff analyse that the resulting gain or loss from the transaction shall be presented as net in one line item in the statement of profit or loss instead of component parts of the gain or loss in separate lines.

Staff recommendation

The staff recommended that a tentative agenda decision be issued stating that the Committee's concluded that IFRS Standards provide an adequate basis for accounting for such a transaction.

Discussion

In respect of Question 1, overall, most of the Committee members agreed with the staff analysis and found it is hard to dispute with the result. A Committee member expressed his view that he can only accept this accounting outcome if there is no narrow scope amendments to IFRS 10 and IFRS 15. However, they found that in practice many companies are not following the same treatment as in the staff analysis as the preparers of financial statements see through the corporate wrapper and focus on the substance of the transaction – i.e. disposal of the real estate in the ordinary course of business. They are not convinced of the different accounting outcome for acquisition of these subsidiaries with real estate (treated as asset acquisition) and disposal, and consider such treatment does not reflect the economic substance of the transaction or provide useful information. A few Committee members, on the other hand, considered transactions of disposing entities and disposing assets have economic differences and therefore it is reasonable to have different accounting treatment. Most of the Committee members suggested in the meeting that there is a need of standard-setting to avoid different accounting treatment for transactions essentially and economically the same as a result of something only driven by legal form.

The Chair expressed her sympathy with the situation and she said she saw there are other cases with different answers just because of the existence of an entity in the middle. The Chair said if the next step is standard-setting, it is not a small standard-setting exercise. The Committee would need to draw a distinction about what types of transactions to cover. At the same time, a Committee member said that the same arrangement is found for solar farms or wind farms, however it is hard to define the "asset" to be derecognised because there is a license and buildings.

In respect of Question 2, a Committee member is not convinced that the wording in IAS 1:34 and analogy to other standards is clear enough to go to the conclusion of "net presentation".

On the basis that most Committee members tend to agree with the technical analysis of Question 1 in the staff paper and the practical situation, the Chair concluded by suggesting the Board to consider narrow scope standard-setting to address this type of transactions and simultaneously issuing the tentative agenda decision based on the staff analysis. The issuance of the tentative agenda decision can help communicate to the Board to facilitate the standard-setting process. At the same time, the standard setting should involve careful consideration of the determination of the substance of the transactions in order to avoid inconsistencies of practices among different entities.

In terms of wording, a Committee member found the statement 'subsidiary established sometimes before entering into the contract' in the tentative agenda decision is not providing useful information and suggested removing it.

A majority of the Committee members voted and agreed with the technical analysis of Question 1, while the staff will work further on Question 2.

The Committee agreed with the tentative agenda decision with respect to Question 1, however, they disagreed with the tentative agenda decision with respect to Question 2. Consequently, the tentative agenda decision will not be published in its current form and will be redeliberated at a future meeting.

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