Amendments to IFRS 1 First-time Adoption of IFRSs–Cost of an Investment in a Subsidiary

Date recorded:

Comment Letter Analysis

The staff introduced their analysis of comments received on the IASB's Exposure Draft of Proposed Amendments to IFRS 1 First-time Adoption of IFRSs - Cost of an Investment in a Subsidiary (ED). The analysis is available in the Observer Notes Section of the IASB's website (Agenda Paper 10A).

The staff was merely asking for the Board's initial views on the comments received and accordingly no decisions were made at this meeting.


Deemed cost

This exposure draft proposes to allow as deemed cost the carrying amount of the net assets calculated under IFRSs of the subsidiary or its fair value.


The option to use fair value was widely supported.

Regarding the option of using carrying amounts, many respondents preferred deemed cost to be the carrying amount of the net assets calculated in accordance with previous national GAAP either instead of or in conjunction with the relief offered in the ED. The main reason for opposing was that the approach in the ED does not allow for the inclusion of goodwill in the carrying amount of the net assets because to do so would be tantamount to recognising internally generated goodwill. The respondents raised the concern that this may result in a write down of the investment in subsidiaries on transition to IFRSs. This write-down may present such an adverse taxation and/or legal scenario - particularly in its effect on profits available for dividend distributions - that many entities will continue to opt out of adopting IFRSs for their separate financial statements.

The following alternative approaches to determine deemed cost were proposed by constituents:

  • (a) Cost under previous national GAAP
  • (b) The higher of the previous GAAP carrying amount of the investment and the net asset value (as determined under the provisions of the ED)
  • (c) The net asset value of the subsidiary (as determined under IFRSs) with historical goodwill included
  • (d) The net asset value of the subsidiary (including goodwill) included in the consolidated financial statements

One Board member acknowledged that the 'goodwill issue' is a valid point that should be considered further. However, the majority of Board members seemed not to support any of the alternative approaches. Particularly with regard to methods (b) and (c) one Board member noted that the reason for developing the relief was difficulties in determining cost. In his view the alternative approaches indicate that entities are in the position to determine cost and therefore these entities would not need the relief. There appeared to be general consent for this view.


Determining pre-acquisition profits

This ED proposes a simplified approach to determining the pre-acquisition accumulated profits of a subsidiary for the purpose of the cost method in IAS 27.

The staff expressed the view that many respondents consider the reason for the problem to be a fundamental flaw of IAS 27 (that is, the cost method) rather than to be a first-time adoption issue. These respondents suggest that IAS 27 be amended to permit dividends from subsidiaries to be treated as investment income, subject to an impairment test of the value of the subsidiary in the parent's accounts and consideration of whether the dividend is, in substance, a return of capital invested.

The Board accepted a proposal of senior staff to investigate whether consequential amendments to IAS 27 would be a useful approach. The staff was asked to prepare a paper for discussion at a future meeting.

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