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Amendment to IFRS 1 - Cost of Investment in a Subsidiary

Date recorded:

At the June 2007 meeting the Board discussed issues raised by constituents in response to the Exposure Draft of Proposed Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards - Cost of an investment in a subsidiary (ED). The Board asked the staff to prepare an analysis considering the possibility of amendments to the ED and IAS 27 Consolidated and Separate Financial Statements.


Deemed cost

Regarding paragraph B5(a) of the ED respondents pointed out that in many jurisdictions entities currently show a carrying amount that reflects cost including intangible assets and goodwill not currently recognised in the subsidiary's financial statements under IFRSs. The use of the net asset option could result in a significant reduction to their initial cost on transition to IFRS because such intangible assets and goodwill would be stripped out of this cost figure. This may result in an adverse taxation and/or legal scenarios.

The Board discussed the following alternatives regarding the net asset option (in both cases the fair value at transition date option in paragraph B5(b) would be retained):

Alternative 1:

Calculate deemed cost based on the amounts of the underlying assets and liabilities of the subsidiary in the consolidated financial statements at the date of transition to IFRSs. Accordingly the deemed cost would include intangible assets and goodwill related to the subsidiary.

Alternative 2:


Calculate deemed cost based on the amounts under previous GAAP.

The Board had a thorough debate and was nearly equally split between the two alternatives.

Board members in favour of alternative1 noted that this alternative would be consistent with the exemptions provided for business combinations in IFRS 1. In addition, they believed that this alternative would not be burdensome as the amounts would have to be determined for consolidation purposes anyway. One Board member responded that this would not be the case for (intermediate) parents that do not prepare or are not included in consolidated financial statements.

Other Board members noted that alternative 2 is also consistent with the exemption provided to restating business combinations in IFRS 1. These Board members believed that it would be the simplest way to respond to the issues faced by constituents and would be readily accepted. Board members in favour of alternative1 raised the concern that alternative 2 might result in a 'cost' that has low information content, in particular in situations where nominal/par values were used to measure cost (such as the merger relief in the UK).

No final conclusion was reached, however, eight Board members indicated that they could accept alternative 2 and six indicated that they could accept alternative 1. Two Board members were not present.


Scope of the exception

The Board unanimously agreed to extend the deemed cost exemption to initial measurement of investments in associates and interests in joint ventures on transition to IFRSs.


The cost method in IAS 27 (dividends)

Constituents suggested amending IAS 27 to permit pre- and post-acquisition dividends received from subsidiaries to be treated as investment income, subject to an impairment test of the value of the subsidiary in the parent's accounts in accordance with IAS 36 Impairment of Assets.

The Board agreed to the constituents' suggestion and decided to remove the definition of the cost method from paragraph 4 of IAS 27. Accordingly all dividends from subsidiaries would be treated as a return on investment and presented in investment income. The Board noted that under the fair value option all dividends would result in a reduction of the fair value while under the cost option a dividend would be an indication that the investment may be impaired.

Next steps

Given the extent of changes to the ED as currently drafted, the Board agreed to re-expose the ED. The Board decided to ask the large accounting firms for informal feedback on the practicability of the intended changes. After that the staff will draft the re-exposure for discussion at a future meeting.

In addition, the amendments to IAS 27 will be exposed separately.

In July the Board directed the staff to draft an amendment to IAS 27 to clarify that paragraph 37 does not apply to the formation of a new parent entity for an existing group when there are no changes in substance resulting from the revised organisation structure. The Board decided to also expose this issue separately in the proposed amendments to IAS 27.

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