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Agenda Proposal: Amendment to IFRS 1

Date recorded:

with respect to determining cost of subsidiaries in separate financial statements of a parent

The IASB considered a proposal to prepare an amendment to IFRS 1 First-time Adoption of IFRSs to address problems in the separate financial statements of the parent.

  • Initial cost. In some cases it is difficult to determine the initial cost of an investment in a subsidiary in the separate financial statements of a parent, in accordance with IAS 27 when an entity adopts IFRS for the first time. This difficulty has been highlighted by the use of merger relief accounting in the United Kingdom and other countries. Under merger relief accounting, any shares provided as consideration for the purchase of an investment in a subsidiary are recorded (for the purposes of cost) at their nominal value. This nominal value is not cost in accordance with IAS 27, which requires that the cost be stated initially at the amount of consideration paid.
  • Post acquisition dividends. IAS 27 requires that the initial cost is adjusted for any dividends paid out of pre-acquisition reserves, and impairments. When the cost of investment is restated under IAS 27, on transition to IFRS, the pre-acquisition retained earnings would also need to be restated accordingly in order to determine which distributions are a recovery of the initial investment. This would require a reconstruction of pre-acquisition reserves under IFRS. Constituents argue that the related compliance burden has led to many entities choosing to prepare the separate financial statements of parent entities in local GAAP rather than in accordance with IFRS.

These issues had been raised to the IFRIC. The IFRIC referred them to the IASB on the grounds that this is not a matter of interpretation, the standards are clear and do not provide any basis for granting the relief sought.

The staff stated that preparing the amendment would not consume excessive resources. The Board concurred and agreed to add this project to its agenda. It was noted that, although an amendment to IFRS 1, the amendment would not affect the stable platform (because it applied only to separate financial statements) and would help IFRSs gain wider acceptance.

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