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IFRS 1 - Cost of a Subsidiary in the Separate Financial Statements of a Parent on First-time Adoption of IFRSs

Date recorded:

Staff introduced the agenda papers for the Board meeting. The staff noted that an exposure draft of proposed amendments to IFRS 1 was released in January 2007, and following redeliberation by the Board, a revised exposure draft was released in December 2007. Comments closed in February 2008.

In summary, the staff indicated that the comment letters were broadly supportive of the proposals with the following two exceptions:

  • The requirement to test for impairment; and
  • The formation of a new parent.

The staff suggested to the Board that they did not intend to discuss the non-controversial aspects of the exposure draft, namely; deemed cost, inclusion of associates and joint ventures in the proposals, and the elimination of the cost method in IAS 27, as they believed these aspects could be finalised with a minor editorial changes. The Board agreed.

The staff then moved on to discuss the first of the controversial issues - presentation of dividends as income and requirement to test the investment for impairment.

Staff noted that respondents were split as to whether dividend receipts should always be presented as income, however, respondents were nearly unanimous in their rejection of the Board's proposal to require impairment testing. The staff recommended to the Board to:

  • Retain the proposal that an investor shall recognise as income in its separate financial statements dividends receivable from a subsidiary, jointly controlled entity or associate; and
  • Modify the proposal to require an impairment test of the related investment such that the right to receive the dividend may be an indicator of impairment, particularly in situation where the amount of the dividend reduces the recoverable amount of the investment below its carrying amount in the investor's separate financial statements.

The Board agreed with the first proposal, and also agreed with the second proposal, with the exception that the second part of the sentence should be deleted as this would already be an impairment by definition. It was noted by one Board member that these proposals affect all dividends received, not just dividends from subsidiaries. The Board agreed.

The staff then moved on to discuss the second of the controversial issues - accounting for the formation of a new parent.

The staff indicated that comment letters expressed mixed views in relation to this proposal. Just over half of the comment letter supported the Board's proposal.

In light of the comments received the staff identified three approaches the Board could choose:

  • Approach A - proceed with the proposal in the ED to amend IAS 27 to require entities to use the carryover basis
  • Approach B - do not amend IAS 27 at this time. Wait and address the issue in the common control project.
  • Approach C - amend IAS 27 to clarify that entities may use either fair value or a carryover basis until the issue is addressed in the common control project.

It was also reiterated that the issue being addressed is within the separate financial statements. From the perspective of the group nothing has changed. Staff also noted that IAS 27 is currently being interpreted by many constituents as requiring fair value on the formation of a new parent. It was also clarified that the proposals being discussed did not impact on the ability of the parent to elect to apply IAS 39 fair value when accounting for an investment in a subsidiary. The proposals related only to how 'cost' is measured for such investments.

The Board voted in favour of Approach A (8 in favour). 4 Board members voted in favour of Approach C.

The staff then requested Board input into additional issues raised by the comment letters. The first issue raised was whether the amendment applies when preference shares (or similar securities) remain in the previous parent. A number of Board members sought clarification as to what was meant by this issue. It was clarified by the staff that in such a scenario the assets and liabilities of the group do not change and the relative ownership interests of the owners of the previous parent do not change. On the basis that it was clear that the relative ownership does not change the Board agreed.

A second issue to be addressed was whether the amendment should apply to intermediate holding companies. The staff indicated that they never intended for the amendment to apply to such entities. A number of Board members queried 'why not'? The Board did not support the staff proposal that the amendment should not apply to the formation of an intermediate parent company.

The third issue to be addressed was whether the amendment should apply when the new parent finances part of the share purchase with debt. One Board member noted that he could not see how you can finance an accounting entry. The Board agreed with the staff suggestion that the amendment not apply to the formation of a new parent that is financed partly with debt.

The Board then considered how the carryover basis should be measured when the previous parent has net liabilities or net assets less than the nominal value of the shares issued. The Board agreed that the entity should carryover whatever was recorded in the previous parent accounts.

The staff then moved on to issues relating to transition and effective date. The exposure draft proposed that all of the amendments be applied prospectively. Some respondents requested that the Board permit (but not require) entities to apply the amendments retrospectively. The Board did not agree that retrospective application for the amendments to IAS 27 was appropriate and voted to retain the proposal in the exposure draft to require prospective application.

By majority vote the Board decided that entities should be permitted to apply the amendment for new parent formations retrospectively.

The Board also decided that the effective date of the amendments should be 1 January 2009.

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