IAS 27 Consolidated and Separate Financial Statements - Formation of a new parent entity

Date recorded:

Paragraph 37 of IAS 27 Consolidated and Separate Financial Statements requires investments in subsidiaries to be accounted for in the separate financial statements either at cost or in accordance with IAS 39 Financial Instruments: Recognition and Measurement. This might be a potential accounting impediment to entities adopting a more prudentially sound corporate structure, as would be required in some jurisdictions to reduce risk exposure.

In such reorganisations, a new non-operating holding company is established for an existing group, which becomes the parent of the existing parent, issuing new shares to the shareholders of the previous parent. No change in the actual or relative ownership interests nor the assets and liabilities of the group takes place.

At present, the term 'cost' used by IAS 27.37 is being interpreted as requiring a newly formed parent entity to measure its investment in the previous parent at fair value, that is at the fair value of the existing group. This would usually differ from the previous cost figure in the separate financial statements of the previous parent and require a remeasurement. The staff had asked the IASB to consider making a limited amendment to IAS 27 to remove this impediment by exempting such new parents from the requirements of IAS 27.37, particularly as the consolidated balance sheet of the new group will be the same as before the reorganisation.

Some Board members argued that fair value measurement in the separate financial statements of the new parent was of little utility to users, which had been corroborated by staff research. Primarily, no transaction of economic substance had really taken place as there had been no change in ownership, there had only been a change of legal structure ('change of name'). It was suggested such transactions could be dealt with by the IFRIC or within the project on common control transactions and that the treatment should be consistent with that for other common control transactions.

Some Board members were worried that the amendment proposed by the staff was limited to a specific type of transaction. One Board member questioned whether there really was no transaction and assumed that there were other factors involved in such transactions, like changes in the risk structure of groups, not captured by the staff. Other Board Members questioned whether such transactions were really covered by IAS 27.37, but staff outlined that this was how IFRSs were being interpreted at present. It was argued that the IASB should be practical and that no fair value accounting should be required if there really was no transaction.

After some discussion, the chairman called for a vote on whether there should be an exemption for such transaction and whether the staff should draft requirements specifying the use of carryover values (no fair value uplifts) for such transactions. Ten Board members were in favour.

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