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IASB finalizes amendments on sales or contributions of assets between an investor and its associate/joint venture

  • IASB document Image

Sep 11, 2014

The IASB has issued "Sale or Contribution of Assets Between an Investor and Its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)." The amendments address a conflict between the requirements in IAS 28, "Investments in Associates and Joint Ventures," and those in IFRS 10, "Consolidated Financial Statements." Specifically, they clarify that in a transaction involving an associate or joint venture, the extent of gain or loss recognition depends on whether the assets sold or contributed constitute a business. The amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted.

 

Background

IAS 28 currently requires gains and losses resulting from transactions between an entity and its associate or joint venture to be recognized in the entity's financial statements only to the extent of unrelated investors' interests in the associate or joint venture. However, IFRS 10 requires full profit or loss recognition when a parent loses control of a subsidiary. In considering the conflict, the IASB concluded that a full gain or loss on the loss of control over a business should be recognized regardless of whether the business is housed in a subsidiary. At the same time, the gain or loss resulting from the sale or contribution of a subsidiary that does not constitute a business as defined in IFRS 3, Business Combinations, to an associate or joint venture should be recognized only to the extent of unrelated investors' interests in the associate or joint venture.

In developing the amendments, the IASB focused on the conceptual basis for the requirements in IFRS 3, under which the gain or loss of control is treated as a significant economic event that triggers remeasurement and the recognition of gain or loss. In addition, the Board considered whether all sales and contributions between an investor and an associate should give rise to fully recognized gains and losses. Although this approach was viewed as conceptually more robust, the Board concluded that it was too broad for a narrow-scope project. Therefore, the Board decided to require gains or losses from transactions between investors and associates to be fully recognized only when a sale or contribution of assets constitutes a business.

 

Amendments

The amendments to IAS 28 provide for the following:

  • The requirements related to gains and losses resulting from transactions between an entity and its associate or joint venture are amended to apply only to assets that do not constitute a business.
  • Gains or losses from downstream transactions between an entity and its associate or joint venture that involve assets constituting a business must be recognized in full in the investor's financial statements.
  • An entity must consider whether assets sold or contributed in separate transactions constitute a business and should be accounted for as a single transaction.

The amendments to IFRS 10 provide for the following:

  • The general requirement to fully recognize a gain or loss on the loss of control over a subsidiary does not apply to a subsidiary that does not contain a business if the loss of control is the result of a transaction involving an associate or a joint venture that is accounted for under the equity method.
  • Gains or losses resulting from such a transaction are recognized in the parent's profit or loss only to the extent of the unrelated investors' interests in the associate or joint venture. Similarly, gains and losses resulting from the remeasurement at fair value of investments retained in any former subsidiary that has become an associate or a joint venture accounted for under the equity method are recognized in the former parent's profit or loss only to the extent of the unrelated investors' interests in the new associate or joint venture.

 

Dissenting opinions

Three IASB members voted against issuing the amendments. One member opposed introducing another accounting difference whose application depends on the definition of a business because the line between a business and a collection of assets is frequently unclear, is often based on judgment, and represents an interpretation challenge in practice. Two members said that the amendments do not fully address the concerns they were intended to remedy.

 

Effective date

The amendments are effective for annual periods beginning on or after January 1, 2016. Earlier application is permitted.

The IASB has decided that the amendments should apply prospectively to transactions that occur in annual periods beginning on or after the effective date because it believes that the benefits of comparative information would not exceed the cost of providing it.

 

Additional information

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