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IASB proposes amending six standards to clarify the unit of account for investments in subsidiaries, joint ventures, and associates

  • IASB (International Accounting Standards Board) Image

Sep 16, 2014

The IASB has issued an exposure draft (ED) of proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28, IAS 36, and IFRS 13. The ED proposes to clarify that the unit of account for investments in subsidiaries, joint ventures, and associates is the investment as a whole. It would also add an illustrative example to IFRS 13. Comments on the ED are due by January 16, 2015.

Background

In developing IFRS 13, Fair Value Measurement, the IASB intended to prioritize Level 1 inputs in the fair value hierarchy. However, the Board did not expressly state that those inputs should be prioritized even when they do not correspond to the unit of account of the asset being measured (the investment as a whole). Consequently, the Board received questions about the unit of account for investments in subsidiaries, joint ventures, and associates, as well as questions about the fair value measurement of such investments when the investments are quoted in an active market. Similarly, the IASB received questions about measuring the recoverable amount of cash-generating units (CGUs) on the basis of fair value less costs of disposal when the CGUs correspond to entities that are quoted in an active market.

To address stakeholders’ concerns, the IASB has issued ED/2014/4, Measuring Quoted Investments in Subsidiaries, Joint Ventures, and Associates at Fair Value (Proposed Amendments to IFRS 10, IFRS 12, IAS 27, IAS 28, and IAS 36, and Illustrative Examples for IFRS 13). The ED proposes to confirm that the unit of account for investments in subsidiaries, joint ventures, and associates is the investment as a whole; however, it provides that the fair value measurement of quoted investments in subsidiaries, joint ventures, and associates should be the product of the quoted price multiplied by the quantity of financial instruments held, without adjustments. The ED also proposes to align the fair value measurement of a quoted CGU with that of a quoted investment. Further, the ED proposes to include an additional example in IFRS 13 to illustrate the application of the portfolio exception in IFRS 13.48 to a net risk exposure of Level 1 financial assets and financial liabilities.

 

Suggested changes

The proposed amendments would modify existing standards as follows:

  • IFRS 10, Consolidated Financial Statements — The proposed amendments specify that when an investment entity has an investment in a subsidiary that is quoted in an active market, its fair value should be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investment, without adjustment.
  • IFRS 12, Disclosure of Interests in Other Entities — The proposed amendments define the fair value of an investment in a joint venture or associate that is quoted in an active market as the product of the quoted price multiplied by the quantity of the financial instruments that make up the investment, without adjustment.
  • IAS 27, Separate Financial Statements — The proposed amendments clarify that when an entity accounts for its investments in subsidiaries, joint ventures, and associates at fair value and those investments are quoted in an active market, their fair value should be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investments, without adjustment.
  • IAS 28, Investments in Associates and Joint Ventures — The proposed amendments provide that when an entity measures its investments in associates or joint ventures at fair value and those investments are quoted in an active market, their fair value should be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investments, without adjustment.
  • IAS 36, Impairment of Assets — The proposed amendments clarify that when CGUs are investments in a subsidiary, joint venture, or associate that is quoted in an active market and their recoverable amount is determined on the basis of fair value less costs of disposal, the fair value would be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investments, without adjustment.
  • IFRS 13, Fair Value Measurement — The proposed amendments include an example that illustrates the application of the exception in paragraph IFRS 13.48 to a group of financial assets and financial liabilities whose market risks are substantially the same and whose fair value measurement is categorized in Level 1 of the fair value hierarchy.

 

Dissenting opinion

One IASB member voted against issuing the ED. He believes that the product of the quoted price multiplied by the quantity of the financial instruments should not be used to measure the fair value of investments or to determine the recoverable amount of CGUs. Given the IASB’s conclusion that the unit of account should be the investment as a whole instead of the individual financial instruments that make up the investment, he maintains that the unit of account used for the fair value measurement should also be the investment as a whole rather than the underlying financial instruments. In his view, an entity should measure the investment’s fair value by either using another valuation technique or adjusting the Level 1 input to reflect the price differences between the investment as a whole and the underlying individual financial instruments.

 

Effective date and transition

The ED does not propose an effective date. For the proposed amendments related to quoted investments, the IASB suggests mandatory application from the beginning of the year in which the amendments are first applied. For the proposed amendments related to the measurement of CGUs, the IASB suggests prospective application.

 

Additional information

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