Fair value measurement - Unit of account for investments

Date recorded:

During the February and March 2013 meetings the IASB was informed that questions had been raised about the unit of account for investments in subsidiaries, joint ventures and associates that are within the scope of IFRS 10, IAS 27 and IAS 28. That is because the measurement requirements for such investments in those standards refer to IFRS 9 which refers to fair value measurement of individual financial statements.  In particular, the question was whether those references to IFRS 9 should be understood to:

  1. refer only to the measurement basis of the investments (for example, fair value through profit or loss); or
  2. also prescribe the unit of account of those investments (i.e. the individual financial instruments that make up the investment).

At the March 2013 meeting, the IASB tentatively decided that the unit of account for investments in subsidiaries, joint ventures and associates was the investment as a whole rather than the individual instruments that make up the investment.  However, the IASB also tentatively decided that the fair value measurement of an investment composed of financial instruments quoted in an active market should be the product of the quoted price of the financial instrument (P) multiplied by the quantity (Q) of the instrument (i.e. PxQ).

At this meeting the Board set out to discuss:

  • whether IFRS 10, IAS 27 and IAS 28 need to be amended to clarify the unit of account for investments;
  • whether additional disclosure where required as a result of the decisions taken; and
  • what transitional disclosures are needed and what the effective date will be.

The Staff view was that the reference to IFRS 9 was intended to ensure that entities use the requirements in IFRS 9 when:

  • measuring investments at fair value through profit or loss, including the accounting for items such as any differences between the fair value at initial recognition and the transaction price; and
  • accounting for such investments in the entity’s separate financial statements (for example, either by measuring those investments at fair value through profit or loss or by making an irrevocable election at initial recognition to present subsequent changes in the fair value of those investments in other comprehensive income).

The Staff recommended not to amend IFRS 10, IAS 27 and IAS 28.  Instead, the staff proposed to amend IFRS 13 to clarify that investments composed of instruments quotes in an active market should be measured at PxQ.

The Board did not agree with the Staff recommendation.  The Board tentatively decided that it should amend IFRS 10, IAS 27 and IAS 28 making it clear in each of those standards that when an investment is measured at fair value and that investment is composed of financial instruments quoted in an active market, the investment should be measured at PxQ.  The Board also indicated that it would include cross references to IFRS 13 to indicate how the guidance in IFRS 13 relates to their decision. The Board decided that it would rather amend IFRS 10, IAS 27 and IAS 28 to keep the guidance that relate to investment entities and its measurement together in the relevant standards with cross references to IFRS 13.

During the IASB’s discussions in February and March 2013, no additional disclosures were proposed.  The Staff did not recommend providing additional disclosures given that IFRS 13 already has extensive fair value measurement disclosure requirements already. The Board agreed with the Staff recommendation.

The Staff also recommended that the proposed amendment should be applied prospectively (i.e. the effect of the change is recognised in the current and future periods affected by the change).  This would be akin to the treatment of a change in estimates under IAS 8.  Some Board members raised specific concerns with this approach citing that it would result in entities recording a gain or loss in profit or loss on application of the proposed amendment.  They did not believe it is appropriate for entities to effectively be penalised in their profit or loss account because the IASB clarified its intentions with regard to measurement of investment entities.  Some Board members believe that entities should be allowed to apply this amendment retrospectively similar to accounting for changes to accounting policies or errors. One Board member also raised the point that if IFRS 10, IAS 27 and IAS 28 were to be amended, the transition requirements in those standards that relate to investment entities should be considered, rather than creating a different precedent specific for this amendment.

The Board did not discuss the proposed effective date of the proposed amendment, it also made a decision during this meeting to further investigate the impact of the proposed amendment (if any) on the application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk.  The Board asked the Staff to prepare an agenda paper on this for a future meeting. Once the Board has finalised its discussions it will make a decision with regard to proposed effective dates.

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