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Primary financial statements

Date recorded:

Income and expenses from integral associates and joint ventures (Agenda Paper 21)

Background

The Board gave the staff permission to start the balloting process for the Exposure Draft (ED) in July 2019. The staff identified an issue during this process, which is how to classify, in the statement of profit and loss, income and expenses from investments in integral associates and joint ventures, other than the share of profit or loss from these investments.

Staff analysis

The staff believe that gains and losses from disposal or impairment of integral associates and joint ventures should be classified together with the share of profit or loss from investments in integral associates and joint ventures. This is because this approach is consistent with the Board’s general approach to classifying income and expenses from investments in associates and joint ventures. Presenting those in the operating category would disrupt users’ analyses of operating margins as the revenue line does not include revenue from associates and joint ventures.

Classifying only the share of profit or loss from integral associates and joint ventures outside the operating category would distort user’s analysis of the operating margin. Users of the financial statement would want to analyse returns on these investments separately.

Lastly, the classification of income and expenses in the statement of profit or loss was not developed based on a concept of control.

Staff recommendations

The staff recommend requiring entities to classify income and expenses from integral associates and joint ventures in the integral associates and joint ventures category of the statement of profit or loss.

The Board should also specify that income and expense from integral associates and joint ventures include, in addition to the share of profit from integral associate and joint ventures, impairment losses and reversal of impairment and gains or losses on disposal of integral associates and joint ventures.

Board discussion and voting

The Board believe that it is important to clarify why there is a distinction between profit and loss items from integral and non-integral associates and joint ventures. This is because investments from integral associates and joint ventures should not form part of investing activities if it generates economic benefits in combination with the other assets of the entity. Accordingly, any impairment losses, reversal of impairment losses and gains or losses from disposal of integral associates and joint ventures should be presented in operating activities as part of the long-term assets of the entity.

Many Board members support the staff’s position in this paper because it is consistent with the positions of previous agenda papers. However, some Board members are not in favour of drawing a distinction between profit and loss items from integral and non-integral associates and joint ventures because such distinction cannot always be made faithfully.

The staff agreed to redraft and recirculate the paper to the Board for and to include, in the Basis for Conclusions, their rationale for making this distinction.

When asked to vote, 13 Board members voted in favour of the staff’s recommendations.

Correction list for hyphenation

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