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IAS 28 — Equity method: Share of other net asset changes

Date recorded:

The project manager mentioned the main points of the Exposure Draft and asked whether the Board wants to proceed in finalising the project.

Several Board members disagreed strongly with the proposal for many reasons.

One Board member pointed out that the proposal was not consistent with existing Standards saying that changes in equity which do not result from transactions with owners should be reflected in the statement of comprehensive income. He also disagreed with the proposed recycling and asked the staff to explain the difference between the proposed accounting method and OCI accounting. He was very concerned that this would lead to severe confusion. However, the main issue with the proposal is that 75% of responses in comment letters disagreed with the proposal. This vast majority could only be persuaded with stronger principles.

Another Board member agreed and said that there should be no situation in which something is recognised in equity only because the Board has no idea where else to put it. He also stated that his current preferred view is to recognise the change in OCI, however this view might change depending on the outcome of the project on the Conceptual Framework regarding OCI. He also pointed out that users preferred the OCI option.

It was proposed by one Board member to pause the project as it overrides the views of the majority of respondents and of the Interpretations Committee which also recommended not finalising the project.

The question was raised how to deal with the existing diversity in practice if the project would be put on hold.

The Board member replied that she would rather live with the existing diversity in practice than finalising the project.

Several Board members agreed to pause the project in order to develop further examples and investigate further on the project.

One Board member, however, said that while 75% of responses disagreed with the proposals it should not be ignored that this means 25% do agree with the proposal. Therefore, pausing the project is the wrong signal and could be perceived as a lack of leadership by the IASB. He also pointed out that postponing the project could mean that it will take five to six years until the project will be back on the agenda.

Another Board member agreed and saw the problem not within the proposal but with the application of the equity method. She also mentioned that the existing diversity in practice is not acceptable and therefore proposed to finalise the ED as proposed.

There was a lively discussion around the proposal made by the IFRS IC  to recognise other net asset changes in profit or loss of the investor when the ownership interest in the investment is reduced and at cost if the ownership interest in the investment increases. Under this approach, call options entered into by the investee over its own equity (e.g. share-based payments) are excluded from the scope. The Board found that this option is not acceptable as it would interfere with share-based payment accounting. However, the alternatives to recognise the changes in OCI or in profit or loss could be acceptable.

After taking a vote, only 8 Board members agreed to proceed with the proposals, which was not sufficient to make a decision. The chairman therefore recommended postponing the discussion until the next Board meeting and asked the staff to proceed with the two remaining options (OCI and P/L) as the option provided in the ED as well as the IFRS IC option were discarded during the discussion. The chairman pointed out during the discussions that it is not advisable to put the project on hold and that the problems need to be addressed.

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